I first became aware of TechStars a couple of years ago and was totally inspired by their documentary videos. If you haven’t heard of TechStars, watch Mark Suster in the below interview. In one sentence, TechStars helps entrepreneurs take their idea and build a real business out of it by giving them mentoring, office space, and $18,000. In exchange for that, they take a small ownership percentage of the company.

They are similar to another incubation program called Y Combinator, and the two of them have had tremendous success so far. If you’re interested in the consumer web, startups, or building a community of entrepreneurship, this is a must watch interview.

The guests are:

– David Cohen (@davidcohen – http://www.davidgcohen.com)
– Dave Tisch (@davetisch – http://www.davidtisch.com)

How did you decide to TechStars, what were you doing before?

(See this page for a history on the companies David started).  David Cohen had been an entrepreneur, and felt that angel investing sucked and wanted to make it better. David had started 3 companies (one was acquired by a Silicon Valley Company, another aquired by a Boston company, one was a total failure). All three were built in Boulder.

Did you start angel investing on your own?

David didn’t really know what he was doing, had done a couple of deals but had wanted to spend more time with companies. He felt that he could do a better job at angel investing.

How did you approach Brad Feld about getting started?

It took about 5 months to get a meeting with Brad. David had never met Brad, and ended up getting one of his random meetings. He went in for a 10 minute meeting, told him what he wanted to do, and that he was putting in $100,000 of his own money. He told Brad that he was looking for his help as a sponsor, invest, and promote it. Within 10 minutes, Brad said “I’m in it, I love it”.

Give us one tip on getting a meeting with Brad Feld.

Brad has slots in his calendar for “random meetings”. Be patient, and be persistent about getting on his calendar. They’re intended just for the situation I was in. In order to make the most of it, make it easy for him. Email his office, go to them to help set it up. Don’t ask for too much.

The original idea, what was it?

It was a couple of bullet points on a piece of paper. “What if we got 10 companies, here in Boulder, all at once? What if we got the whole community working with them, and then bring a room full of investors to see what happens?”.

This was In 2007. Y Combinator had started in 2005, and that served as a lot of motivation for the model that David proposed to Brad.

Was Y Combinator some of your insiration?

Definitely. The first question was “Can I do Y Combinator in Boulder?” The answer was no from Paul Graham. He never got a meeting with him, even though he reached out to Paul.

Does Paul view TechStars as competition?

“Yeah, I think so”. The twist that TechStars puts on it is that they get the whole community involved to rally around the companies.

What was the first batch of companies like?

First program in 2007, 8 came from outside of Boulder, and half of them stayed in Boulder. 7/10 got funded, 5 or 6 have been aquired by now. “Total success”. They have since repeated the model each and every year. The state of Colorado is starting to notice what they’re doing, but the city hasn’t noticed. They’re interested in getting more flower shops.

Dave Tisch, you led the first rollout in New York City. How did you get involved?

David Tisch’s last gig was running the internet group for KGB. He was doing B2B stuff in America, launched 4 new businesses, M&A, and spun out a group. They had trouble innovating within a big company, so he left.

He spent a couple of months studying TechStars, Y Combinator, and did a lot of research into the model and how it all worked. He saw that there was a need for that type of structureand program in NYC. However, he rEalized it was very hard and wouldn’t be able to do it all by himself. He attended a conference in Boston (Angel Boot Camp), and approached David Cohen. He saw him sitting all by himself in a corner of a room, and went up to him to ask him why TechStars wasn’t in NYC.

What got you excited about TechStars?

“The breadth of the community engaged around the startups in Boston and Boulder”. The leaders in the community were all involved, and felt that if the same thing could be organized in NYC it would fill a huge need and be “magical”.

Was there something about the model that made you want to do TechStars?

“I had worked for bad people at a bad organization”. He wanted to work with “good” people, in a group that he admired. He felt that from looking into TechStars, that Brad and David Cohen were the most “clean, good, well intentioned people”. “These guys have done amazing things and to be able to associate with them would be really special”. He feels that the positive intention behind TechStars is very powerful.

If you have a multi-location business, you want to perfect the model in a single location and then spread. How do you avoid losing operational focus and degrade the brand quality by expanding too quickly?

Cohen: It was always about quality. They slowly and methodically wanted to expand. Boston was a great place to do it second because Brad had a ton of connections (he went to MIT). He feels that they have expanded to the right markets and don’t see them expanding much further in the near future.

How does someone choose the city (if you don’t live in NYC, Boston, Boulder, or Seattle)?

There are a bunch of reasons:

  • The mentors in each city are different.
  • Each mentor has a different areas of expertise.
  • The communities in each city are different.
  • Each person really wants to be in a particular city, so it can be somewhat self selecting.

What is so exciting about the model?

If you engage the spectrum of people across the entrepreneurial industry (entrepreneurs, VCs, angels, service providers), and inject new energy, you’ll come out with some magical experiences. If you surround the right people with the right network, it sets the experience apart.

To say that you have to be in the valley rubbed them the wrong way. There are a ton of great companies in the Valley, but you can build great companies in lots of other places. You can do it when you have support, and they wanted to give companies that support system.

How is NYC going? What have you learned?

Dave has been blown away by the level of engagement from the community. He got 40 mentors to sign up, and was blown away with the names on the list. Fred Wilson, Dennis Crowly, Chris Dixon, just to name a few. He thought to himself, “If these guys actually come and engage, what a magical thing they’ll be able to do”. Today, that initial number of 40 mentors has grown to 110. 95 mentors show up during the program, 70 pick one company to work with directly., and they’re devoting time on a weekly basis to help.

One of the things you offer is access to people who can make a difference.

What hasn’t worked as well as you would have wanted?

Dave Tisch: My ability to scale to working with each of the teams. it’s incredibly time consuming and the companies depend on your time and advice.

What is a day in the life of Dave Tisch like?

  • Before work: Two breakfast meetings with a potential mentor, sponsor, or a business development person.
  • At work: Meeting with 3-5 of the companies to get an update on the progress they’ve been having. In the beginning:
    • Determine if what you’re building is right
    • Determine if the product marketing is right
    • Determine how to get customers
  • At the end, it’s:
    • Are you going to raise money?
    • From who?
    • At what valuation?
  • At work: working with other people interested in getting started with the program (for example: BloomBerg, Digital Ad Agencies, etc).

Have New York or the other markets had a particular focus?

There’s definitely no rule dictacting which market a company has to be located within. However, each city has things that it is more well known for. Boston, for example, is well known for medical companies. Those companies probably wouldn’t get into NYC. A big part of the selection process is asking “how can we help this company” in that particular market.

Why did we pick a particular company? Sometimes it’s the people, the space, or what the mentors have interest in.

Tisch: Some of the sweet spots of NYC:

  • Adtech
  • Finance
  • Fashion
  • Retail
  • Community based (playing to population density)
  • Location based startups

For Seattle, a social gaming company might work better than it does in NYC. “We pick companies that resonate most strongly with the community and the mentors”.

What has been a top 2 or 3 success story?

One example: SocialThing was purchased by AOL. It wasn’t a huge exit, but it was a life changing event for the founders. Matt, one of the founders, went on to found SimpleGeo and raised significant VC. He started in TechStars and is now angel investing in TechStars companies. The community builds upon itself.

Another example: SendGrid has raised about 6 million dollars, and will be a force in the email space. They’re on an absolute tear.

Time will tell what the biggest successes are, but 7 or first 20 companies have exited.

Is there one company that has raised more financing than others?

Orbotix has raised 6 million, sendgrid has raised 6 million. Occipital is an example of a company that has raised no venture capital (no angel, either). Click here for a list of all of the companies and how much they’re raised.

If you were giving advice to someone in Omaha, who wants to setup their own innovation center, what advice would you give them?

Do it and get the best mentors possible involved. Make sure the community is supportive, willing to roll up their sleeves, and get involved. “How do we take this company from an idea” to generating revenue. You need to have a leader in the location that will be happy to produce a 1x result.

Is it important to have ties to NYC, Silicon valley, media companies in New York?

“If you look at why TechStars is a leader in the space, it’s because of the network”. There are 70 alumni companies, mentors in each market, and you can take advantage of the full network. “You’re only one degree of separation away from almost anyone in technology”. Even from when it first started, it had a guy like Brad Feld to bring a sense of community from day one.

Lesson: in order to be successful in any org, you need the “doer” and the sponsor. You need the person who’s willing to do the work, and a person to raise awareness. They call it the “David” and the “Brad”.

Companies that came to NYC to participate: Google, Amazon, Twitter, LinkedIn, Facebook, Microsoft , Foursquare, just to name a few.

Do we over-hype companies coming out of TechStars?

2,000 companies apply and they pick 40 (that’s a 2% acceptance rate). It’s hyper-competitive, and that helps the companies. When there are incubators everywhere, you can run the risk of over hyping companies that won’t be able to raise a venture round. At the top of the space that TechStars sits in, they don’t need to over-hype, the companies are that great.

Describe what the economic model is. What are entrepreneurs giving up in exchange for the mentoring and access to the network?

You get $6,000 per founder. Up to $18,000 for the company in exchange for about 6% common stock equity. That’s not what the companies are worth coming in, they’re looking for the intangible benefits.

Outside of the money and the equity, are the intangibles worth it?

They’re not really coming in for the $6,000 per founder. Two companies came into the program with revenue, and they didn’t need the money. Ultimately, the money is to provide an incentive to live the area and break even during the program.

Does your program do follow on investments?

TechStars does not do follow on investments, but a lot of the mentors might.

Seattle, Boston, Boulder, all do a single program (13 week programs). NYC does 2 a year. Why?

The quality of applications was so tremendously high they felt they could sustain two programs. They had a final group of 30 companies that could have gotten into the program, and they had to pick a list of 11. Also, every 6 months in NYC you see a completely different type of companies.

Before announcing the second program, they went to the mentors to make sure they could handle the commitment. They went and asked them to do one of the two programs a year, and they got responses saying “I’d love to do both”. They knew then it would work twice a year.

How do you get in?

Actually starting to make progress on your business is the way to do it. Share the vision and your passion, and your commitment to it is paramount.

There is an optional video component to the application, and most companies do it.

We look for a source of passion (not just money) in their application. What’s driving them?

Does Brad have a super majority vote? Do you?

There’s a secret selection committee in each market. Nobody has a absolute decision power. The director has influence, and David Cohen has influence in the selection committee.

In New York City, what did you look for? What got you excited?

We evaluate:

  • team first
  • team second
  • team third

Then market, then idea. They look at the product, where you’re at. They look at the team and ask: “Why are you working together, what have you done in the past?”.

Does it matter whether you’ve gone to Priceton or Yale? How do they demonstrate they’re high potential?

Show you’ve done something in the past to show drive and passion for an activity. For example: Starting a business in college, starting a fraternity, or innovating within your organization. Demonstrating that you’ll be able to execute on your product vision and goals.

What should people think about the physical space about what works and what doesn’t with an incubator?

Getting the mentors to drop by, (location matters). We don’t force the companies to work in the space, but they do because they want to engage with the network and the community of people stopping by.