David Cohen: Accelerators and Incubators Are More Than a Fad

The spread of incubators and accelerators in the past several years has had a profound impact on seed-stage investing. These cradles of innovation nurture a new generation of startups freely testing new Internet business plans and feeding the venture business with future Series A rounds.

At the center of this renaissance is David Cohen’s TechStars, which is now six years old and building a track record that shows, when done right, accelerators and incubators contribute powerfully to the venture ecosystem.

Co-founder Cohen says the trend is well beyond a fad. More than 700 now exist worldwide, with new ones sprouting up every day.

“Every major city in the world has at least one of these things,” he says. “I think generally that’s a good thing, even though they won’t all work.”

TechStars, with locations in Boulder, Colo.; New York; Boston; San Antonio, Texas; and Seattle, has admitted 174 companies into its programs over the years and reports on its website that 118 of them have gone on to raise $221.9 million in funding.

Cohen says TechStars is still learning about its long-term attrition rate, but that so far about 30% of companies fail after a period of time and about half achieve an exit of some sort. The rest still operate.

Overall, 144 companies remain active, while Cohen reports that 17 have failed. He points out that the ratio of failed to active startups is higher in its earliest days, as would be expected since companies in the later programs are just starting out.

Cohen says he is a proponent of accelerators and incubators publishing their track records.

“We just believe the market should demand these programs share their results so you can actually, as an entrepreneur, be informed about which decision you are making,” he says. “It should be open and transparent.”

VCJ had recently chatted with Cohen. Here is an edited transcript of the conversation.

Q: The number of incubators and accelerators has risen substantially in the past 18 to 24 months. Is this good or are we at some level of saturation?

A: When we hit about 200 accelerators globally everybody said, ‘Oh, my gosh!’ That’s when the bubble talk started. We’re now over 700 … around the world. Of course they won’t all be successful. But overall the [phenomenon of] folks who are investing money and trying to apply mentorship to help entrepreneurs is good.

Q: Do you see the expansion of incubators and accelerators continuing?

A: Yes. There is without a doubt one new program launching everyday in the world. Every day you hear about a new one, whether it is a corporate program or new geography. In places like Los Angeles, there are probably 10 or 12 of them.

Q: In this dynamic environment, is there change taking place to the incubator model?

A: We have not shifted it much [at TechStars, but] I see a lot of others shifting it. The dimension being shifted is the number of companies being funded in a batch. TechStars started with 10. We’ve always stayed in the nine-to-13 range. That’s a focus on quality. I see a lot of other programs saying, ‘well, let’s fund 50 or 100 at a time.’ People are sort of taking more shots on goal.

Q: What seems to be the attrition rate for startups at TechStars?

A: Every class may be different. And it’s pretty early. We’re only six years old. So it is hard to guess what the real loss rates will be. But it seems to be about 30% of the companies fail after a period of time and somewhere around half achieve some kind of exit. Some of them are still going at that point and it’s too early to tell.

Q: What return on investment have you experienced so far?

A: We know the first three years of TechStars are profitable funds on a cash basis with remaining upside. We know the model works from a financial standpoint. But we don’t disclose exact returns.

Q: Do the valuations we for incubated companies make sense today or are they too high?

A: In general, valuations are certainly at a high point. It’s summer for startups. I say that all the time. Winter is coming at some point. But that is the natural cycle. Whether a particular portfolio company is worth a particular value is always going to be debatable. Valuations are not a science; they’re an art and they’re a function of what the market will bear.

Q: How do you determine the right valuation?

A: It’s largely driven by the background of the entrepreneurs and the geography. Different geographies have different baseline valuations. The thing that seems to affect this the most is the experience level or the history of the entrepreneurs.

Q: Incubators and accelerators are experiments in their own right, just as the startups they fund are. Is there proof this experiment works?

A: At the high end of the market, with the leaders who are out there, there’s enough data that’s been published that show there are interesting companies coming out of these things. And there is interesting activity: acquisitions and funding events. The question is whether those things would have existed anyway.

Q: You’ve said before that the second-order effects of the incubator phenomenon are perhaps the most powerful. What do you mean by that?

A: While you can see there are interesting companies that find value in these programs and while you can see that they get funded and acquired and all that, what you don’t see are the startup community effects these programs have in teaching entrepreneurs about ‘venture-ship,’ that they give back over their lifetimes. [Incubators also are] empowering mentors to have a channel to work with high-quality, high-potential startups. These things have big impacts on startup communities.

I can tell you first hand it’s had a huge impact on Boulder, where we started. We are seeing new angel investors that weren’t here before and seeing connections built to Silicon Valley and New York. Those are the real benefits.



Co-founders: Launched in 2006 by David Cohen, Brad Feld, David Brown and Jared Polis.

How it works: TechStars operates as a mentorship-driven, seed-stage investment program. Ten companies per city take part in a three-month program in Boston, Boulder Colo., San Antonio, Texas, New York and Seattle. The companies each get $18,000 in seed funding. In addition, companies accepted into the program are offered a $100,000 convertible debt note by a group of VCs.

Mentors: Hayley Barna of Birchbox; Wendy Lea of Get Satisfaction; Jeff Clavier of SoftTech VC; Jennifer Lum of Apricot Capital; and Neil Blumenthal of Warby Parker.

Acquisitions: TechStars reports that, as of mid-September, 13 of its startups have been acquired and 17 have failed. Among the companies that have been acquired are Brightkite (bought by Limbo in 2009); Filtrbox (bought by Jive Software in 2010); Thinkfuse (bought by Salesforce in mid-2012); and oneforty (bought by Hubspot in 2011).