The Real TechStars of New York

Investors Wonder About the Future of TechStars New York

Some locals are wary that TechStars New York will maintain its prominence, but CEO David Cohen dismisses concerns.
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Photo: Edward Reed (via Inc.com)

At any startup accelerator, Demo Days are a relentlessly upbeat affair–a parade of promotional pitch decks and stats about market size that somehow always reach up into the billions. But in New York City, Techstars’ biannual showcase takes the cake.

Founded in Boulder, the program launched in New York in 2011 (just as the startup scene cried out for tent poles to rally around) and easily fills auditoriums. Companies often announce “soft-circled” funding or even that the round has already closed. Mayor Bloomberg even called the number of investors who fly to New York to check out presentations, “proof positive that the TechStars is going to change this world and certainly change America and this city.”

Or as TechStars mentor Joel Spolsky put it before introducing one of the startups at Webster Hall: “Time to get my company oversubscribed.”

However, some investors and entrepreneurs have expressed concerns about whether the spring 2013 class of TechStars New York will yield the same financial windfall–and the same amount of interest from potential applicants.

Part of the worry is related to the Series A crunch and fears of funding cliffs and falling valuations. Economic conditions are unlikely to support the accelerator boom we’ve seen over the past couple years. “We grew too fast,” Paul Graham wrote this month, announcing that Y Combinator, the mother of all incubators, would reduce the number of startups in its program from 84 down to 50. And that was after downgrading the investment per company from $150,000 to $80,000. Under the headline, “We know accelerators are headed for a shakeout — but do they? “PandoDaily recently pointed out, there are “at least 100 such programs churning out thousands of startups a year and the expectation that 90 percent of them won’t return their money.”

“I’m not sure why you’d say there’s an overall constriction based on one data point on the opposite side of the country,” TechStars founder and CEO David Cohen retorted by email when we brought up changes at Y Combinator as a sign of things to come for other accelerators. “The fact that TechStars is in NYC, offers more funding than Y Combinator, has an awesome alumni and mentor network right there means that more startups from the area will likely apply,” he said. (In exchange for 6 percent equity, TechStars invests $18,000 per company and a $100,000 convertible note.)

Mr. Cohen noted that New York’s first program raised $24.2 million including follow on rounds, where the second program raised $13.8 million and the third raised $11.6 million. As for whether the next class will see as much investment, he said, “Time will tell.”

But in interviews with Betabeat, local sources also listed specific concerns related to the management of TechStars New York, which recently saw a changing of the guard. David Tisch, who rose to prominence in his role as managing director of the program, stepped down in August to focus on investing through Box Group, his boutique angel fund, which has already seen a number of exits including GroupMe and just this week Behance.

Betabeat has learned that Adam Rothenberg, a director at TechStars for the past two years, has also left the program and will likely be working on investments through Box Group as well. Both Mr. Tisch and Mr. Rothenberg declined to comment for this article.

In November, rather than announcing a permanent replacement for Mr. Tisch from within the New York ecosystem, TechStars shipped in an interim managing director from the Boulder: Nicole Glaros. Ms. Glaros, a serial entrepreneur, comes equipped with plenty of relevant experience. She’s run five previous TechStars’ programs and will be living here.

So far, the absence of a hometown cheerleader like Mr. Tisch doesn’t appear to have affected applicant interest. Mr. Cohen told Betabeat that the April program already boasts 735 application with a month to go before the deadline. “My guess is we’ll break another record–which has happened every year since inception. As you know our acceptance rate is around 1% nationally, and we’ve seen 1200-1400 applications in the past in NYC for 10-12 spots. This doesn’t seem to be slowing down,” he said.

Mr. Cohen will be “very hands on with this program as usual,” he added, noting that TechStars cofounder Brad Feld “will be spending extra time with this program as well.”

However, those familiar with TechStars New York noted an unusual aura of silence around this program’s candidates. “It’s still a big mystery. Rumors usually spread like wildfire within the TechStars community,” said one source, noting that around this time insiders typically know who is applying.

A couple of sources wondered if there was difficulty in finding a permanent replacement because of the way managing directors, who get a cut of TechStar’s equity in companies, are compensated. Details offered are always hazy in terms of whether the position requires a buy-in. “There is limited salary at best for the position, but there are PLENTY of great people in NYC who can make this work,” one TechStars mentor told Betabeat.

Mr. Cohen dismissed speculation about compensation, adding that although no offers have been made, TechStars has “heavy inbound interest in the role.” Including other cities, TechStars boasts 17 exits overall. “In the past it’s helped us attract high quality people such as Katie Rae, Jason Seats, Andy Sack, Nicole Glaros, Luke Beatty, and David Tisch in the past, and I don’t expect that will be a concern at all.”

Then there are some more pressing issues related to the startups themselves. One angel investor attributed skepticism about this class of companies’ ability to raise to the success rate of previous graduates. “TechStars bets on a category and hopes they can shape the startup,” the investor explained. “People that invest after TechStars do it with the assumption that they’ve been vetted.” However, the investor said, some graduates, “get the money and don’t understand that it’s money to build a business–or at least get LAUNCH. Where’s Wander? How long has it been that they’ve been in beta?” Bondsy, another much-hyped startup, is also still in beta.

The investor also wondered if the lessons learned during the program were enough to prepare them for life outside the accelerator’s bubble. “They teach them all this crazy shit about pitching that’s not applicable in the real world. When going for your next round after TechStars, you can’t go with your 10-slide TechStars deck and a promise that you’re going to produce.”

Mr. Cohen pointed out that TechStars New York has already had one exit from its first class: ThinkNear, a hyperlocal ad company that was acquired for $22.5 million by Telenav in October. “We’re talking about 2011 here, last year,” Mr. Cohen said in response to those concerns about the caliber of companies. “I wonder what sort of success people expect in that timeframe, now that it’s the end of 2012?” It’s often mentioned that Y Combinator, which was started in 2005, depends on a handful of blockbusters for its returns, including Dropbox, Airbnb, and Heroku.

Mr. Cohen encouraged anyone with questions or concerns about the upcoming program to reach out to him. There is an upcoming recruiting event, TechStars for a Day, scheduled for January 10th. The event will feature talks from Ms. Glaros, Mr. Spolsky and Thrillist and Lerer Ventures cofounder Ben Lerer. “Most importantly, it’s a chance for us to spend time with interesting companies who want to learn more about TechStars.” To get an invitation, startups have to apply before the January 4th early deadline.

Follow Nitasha Tiku on Twitter or via RSS. ntiku@observer.com