Each year, in four cities across the United States, 500 or more people apply to become one of 10 entrepreneurs chosen to be given some startup cash and three months of intensive mentoring from A-list company builders.
After 90 days of coaching, each entrepreneur is given the chance to pitch his or her idea to a group of real-life venture capitalists and angel investors hungry for an early look at the next Groupon.
If TechStars is American Idol for entrepreneurs, then its co-founder, Brad Feld, may be akin to Simon Cowell – although he hates the analogy.
I spoke to Mr. Feld about what it takes to make the main stage at TechStars, and his advice for entrepreneurs looking to attract outside capital.
Mr. Warrillow: I find the world of venture capital is a bit of a paradox. On one hand, venture capitalists claim to be looking for great entrepreneurs, but if they were really so good, why would they need your money? Shouldn't they be able to bootstrap their startup and keep all of the equity for themselves?
Mr. Feld: It's the interaction with the mentors that makes TechStars special. If TechStars' applicants are doing it for the money, that's stupid.
Mr. Warrillow: Okay, I understand the value proposition of TechStars is the mentoring, but I still don't see why any entrepreneur worth funding would want or need a venture capitalist's money.
Mr. Feld: From a venture capital perspective, I would make the same argument. A lot of what experienced entrepreneurs are looking for is the involvement and resources that come with the investors that are bringing the money. When we make an investment in a company, we're looking for entrepreneurs who want and value our involvement well beyond just the capital.
Mr. Warrillow: That sounds like expensive advice to me. Isn't it preferable to keep as much equity as you can until you have no choice but to seek outside capital?
Mr. Feld: Not necessarily. One of our portfolio companies is Zynga, who are the guys who make online games like Farmville and, more recently, Cityville, which is the fastest-growing online game ever. When we invested in the company, [Zynga co-founder and CEO] Mark Pincus had been funding it up to that point on his own.
He has actually never used the capital that he has raised on the operations of the business. In fact, the business has been self-funded. But what the capital allows him to do is have the courage to make bigger and bigger bets to enable Zynga to be the most dominant player in the market. So there are different motivations for why an entrepreneur would take money at any given point. The value of the people you get involved at the beginning of the business often far outweighs the economic benefits.
Mr. Warrillow: Does everyone chosen for TechStars get funded?
Mr. Feld. No. Occipital was started by Jeff Powers and Vikas Reddy. They tried to raise money coming out of TechStars but weren't able to, so they kept their burn rate really low – just the two of them – and shipped a product called Red Laser, which is a paid iPhone application that lets you scan a bar code and do comparison shopping to find out the least expensive place to buy whatever you are looking at.
Their business took off. They generated a couple of million dollars of revenue in the first year, hired a couple of people, and then sold the Red Laser application – not the whole company – to eBay for a substantial amount of money, which allowed them to take some money out and pay themselves for their hard work. They also left a substantial amount of money in the company to be able to build their business.
Their latest initiative is an iPhone application called 360 Panorama, which allows you to take panoramic images by pressing go and pointing the iPhone camera at any image you want a 360-degree view of.
Vikas and Jeff are a great example of founders who tried and failed to raise money, but, as entrepreneurs, they weren't going to let that stop them.
Wednesday: More advice from TechStars co-founder Brad Feld for startups.
Special to The Globe and Mail
John Warrillow is a writer, speaker and angel investor in a number of start-up companies. He writes a blog about building a valuable – sellable – company.