A New Era for TechStars?

In investing circles, it’s said that you never raise a second seed-stage fund, because lousy results get you washed out of the business, while good ones land you a larger fund.

The same may well apply to startup “accelerators.” David Cohen, the CEO and cofounder of the successful incubator TechStars, has just raised a separate, $28 million fund that he can invest however he likes and for which he is the sole GP.

In a blog post last night, Cohen characterized the new fund as “28 million more ways to help startups.” But it begs the question: is this the beginning of the end of TechStars?

Certainly, it’s hard to imagine today. The program — which invites 10 to 12 applicants into a 90-day program, giving them $18,000 and access to investors and mentors in return for 6 percent of their companies — has taken off like a wildfire since its 2006 start. Created in Boulder, the program has since expanded into Seattle, New York, Boston, and San Antonio, Texas, where designated regional managing directors now pore over a collective 4,000 startup applicants each year.

It’s no mystery why so many are clamoring for entree. Every startup is given weekly access to 10 mentors from the investing and entrepreneurial community. (Venture capitalist Fred Wilson and entrepreneur Dennis Crowley are past participants.) Along with their $18,000 starting capital, each team is also given a $100,000 convertible note – money that TechStars provides through a $27 million fund it raised last year from a number of venture firms.

More important, perhaps, the startups eventually present to hundreds of investors, who still eagerly pile into the “Demo Day” that closes out every TechStars program. As Cohen told me outside a San Francisco networking event yesterday, “Where else in three months’ time can you get 100 meetings with amazing people, and [the ability to later] walk into a room with 500 to 700 investors, all of whom are looking at your startup in the same moment? If that doesn’t increase the value of your company by 6 percent, something is wrong.” (Cohen says nine of roughly 100 TechStars alums have been acquired, adding that while “none were billion dollar exits,” they’ve “fed the investors who were there early.”)

Still, while TechStars has done much to foster new entrepreneurship, traces of mission creep are evident. Cohen says, for example, that TechStars is “trending slightly” toward admitting greater numbers of serial entrepreneurs versus first timers — and that it’s even seeing growing interest from people who have served as mentors. Several former mentors have already switched hats, in fact, including Tim Wolters, who founded four software and SaaS companies before entering into the TechStars program with his newest startup, RoundPegg, and Marcello Calbucci, who’d founded two small startups over the years, and  whose newest startup, EveryMove, was a TechStars Seattle company last year.

“On average, you’ll see more success with an experienced entrepreneur; that’s just my feeling on it,” says Cohen (who is, after all, running a business with TechStars).

Yet a much bigger concern for TechStars and Cohen might simply be the stunning number of copycat programs to emerge. At least 40 groups have turned directly to TechStars for an “open-sourced” version of its program. (“We essentially put TechStars in a box, say here’s what we do; feel free to copy it,” says Cohen, adding that TechStars has no ownership stake in other organizations.) Countless other unrelated accelerators and incubators have emerged, too, including more than two dozen in L.A. alone.

Asked if so many accelerators aren’t making entrepreneurship a bit too easy, Cohen acknowledges that “the programs coming along now are maybe skimming off the next level” of founders. But he insists that any mentorship approach, even “ones that don’t work, and most won’t work,” are “additive. They’re going to encourage entrepreneurs and give them real experience even if those companies fail, so they can make a life decision about whether entrepreneurship is for them.”

It’s a generous view. It’s also one that Cohen’s friend, economist Paul Kedrosky, disagrees with wholeheartedly.

“The reality is that both the supply of quality startups and the supply of quality coaches is so finite that we’ll test the limits fast, if we haven’t already,” says Kedrosky, who believes “there is almost certainly a higher and more productive use for [many of the individuals applying to such programs]. There will be a lot of people who waste a lot of time.”

Indeed, while Kedrosky believes TechStars in particular “has found a productive niche” and is “run by a great guy who totally gets this stuff,” he sounds unsurprised when I tell him that Cohen just raised a venture-size fund that he plans to invest in TechStars companies, as well as in entirely unrelated startups.

Helping fuel young startups is “noble,” says Kedrosky. But “you can work just as hard, for more money, when you have a real fund. It’s a cold, economic calculation,” he shrugs.