Techstars now offers an equity-back guarantee to startups. Smart, desperate or too much money chasing too few good opportunities?

From our newsletter sent on 9/4/2014.

Note: updated to better reflect how the Techstars equity back guarantee program works.

Techstars now offers startups going through their program an equity back guarantee. Essentially, companies still give up equity but can negotiate it down afterwards if they were dissatisfied with their Techstars experience (as reported by Dan Primack). Is this the beginning of freemium AaaS (Accelerator-as-a-Service)?

We chatted with a few folks in the investment ecosystem about this in the AM. Here’s some common questions or comments:

  • This is proof of the accelerator power law. In other words, there is Y Combinator and everyone else.
  • This seems desperate. Or perhaps TS is just making more money from the franchise model (running accelerators for corporations)?
  • Is this just a sign that there is too much money chasing too few opportunities?
  • Is this going to force lesser accelerators to follow suit?
  • This is entrepreneur-friendly being taken to foolish extremes.

Personally, we’re looking forward to when a VC invests money but only takes equity for their “value add”. That will be official bubble territory.

What do you think about Techstars’ move?  Smart, desperate or something else?

  • Jesse Leimgruber

    It looks like the arrangement is an opt-out type deal. They take the equity first but you can get it back. Either way, companies are worth much more when they leave an accelerator, so giving them the opportunity to get back some equity with no legal recourse seems quite silly. Most successful companies are on the path to being unicorns when they leave an accelerator. I can’t imagine that the investors in those companies would advise them to let TS keep the equity.

    There must be more too this…

  • CB Insights

    Jesse — Thanks for reading and for the comment. One point about your comment that “Most successful companies are on the path to being unicorns when they leave an accelerator.”

    That’s hardly the case. While YC has several unicorns ($1B+ valuation) companies, most of the other accelerators have yet to achieve that.

    Are we misunderstanding your comment?

  • jseats

    Investing is a multi-play game versus a single play game. In other words reputation matters over a long period of time. Yes a single company could decide to take back their equity but obviously that would be very short term optimized move. Our historical perspective is that the great founders we’ve invested in over the last 7 years continue to benefit from Techstars on their subsequent companies and the very best founders realize this as soon as they engage with Techstars. We are focusing entirely on the longest term relationships with these individuals. In this context, putting our equity where our mouth is just isn’t a risk.

  • Jesse Leimgruber

    You’re right, few $1B exits have come from accelerators. I’m studying at Stanford so I know a number of YC companies quite personally and have gone through two accelerators. At least in my experience, you can tell (with reasonable confidence) whether or not a company has a chance at positive returns by the time the accelerator finishes.

    You might not be able to difinitively pick the winners, but you can narrow the playing field.

  • Jesse Leimgruber

    I understand the value of the TechStars network and I’m sure you will get applicants from equity-sensitive founders that you wouldn’t otherwise get.

    Put it this way: If I was investor looking to invest in a TechStars company, and I was ready to write them a $8M Series A at a $25M Valuation… I can’t imagine that gaining back a few percentage points wouldn’t come up in the discussion.

    If Sequoia is ready to write a check to a TS company that they believe is going to be a unicorn… you’re risking losing the equity in one of your potential unicorns.

  • http://www.4044walnut.com Anand Sanwal

    You should become a VC “if you can tell (with reasonable confidence) whether or not a company has a chance at a large exit by the time they finish.”

    :)

  • jseats

    I get the point Jesse. Here are four things to consider

    1- The decision to recalibrate the equity exchanged for the program is a point in time option. The decision must be made at the end of the program. Even in the examples of the largest unicorns, the tension you are describing would not occur from a timing stand point.

    2- Repeated point. Investing is a multi-play game. A VC who values a long term relationship with us and wants to continue to have great access to our deal flow is unlikely to suggest such a thing.

    3- There are many mechanisms that a late/large investor or board can use to manipulate the cap table. Giving my house keys to an acquaintance should not materially increase the likelihood of my house being robbed. Someone is either a thief or they aren’t.

    4- We aren’t merely offering to founders that they take as much of the equity as they *want*. It’s not a gift. We are asking founders to make a reasoned assessment of the value and if something seems out of whack then we have an opportunity to make things right.

  • Jesse Leimgruber

    If you ask anyone that finished an accelerator, I assure you (at the very least) they will be able to divide the class up into two categories. Those that have a low chance of raising, and those that have a high chance of raising.

    If you spend 3+ months with people, and you are able to judge their progress relative to their peers, you are almost certainly going to have better insight than a VC that sees a flowery pitch highlighting all the great things about the company.

    I’m happy to share my predictions of the current YC class & Alchemist class as I am well acquainted with both.