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Comment by tptacek | Hacker News Reader

This is a surprisingly good post. The title made me think it was going to be yet another startup flounder crowing, but it's actually a pretty thoughtful critique of the whole Techstars Chicago program.

The "100+k for 7-11% equity" analysis is particularly damning.

I think they're taking the "Techstars accepts 1% of applications" thing much too seriously. Presumably, only a tiny fraction of the inquiries they get are from serious teams.

Also: I've been to 1871 a couple times, and I got exactly the same vibe these people got. I know some people with solid companies working out of there, but the space is practically the archetype of the "startup playing house" idea Paul Graham likes to write about. It's particularly sad because it's located in Chicago, where it's easy to get an inexpensive office lease.

Later: the equity math is apparently not as damning as it sounds, or, perhaps, not damning at all.

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Let me give it a try with the math.

TS initially gets 6% (for $18k, but that's irrelevant). The founders also take the $100k convertible notes at $3M cap and 20% discount.

Say the company closes a round of $1M at $3M pre = $4M post, i.e. the investors get 25%.

For me, it's always easier to think about shares. Say the initial pool is 1,000,000 shares, split in 940,000 to the founders, and 60,000 to TS. Pre-money, 1 share costs $3, and the investors get 333,333 shares, that are added to the pool.

TS has 20% discount, that makes the price $2.40. With $100k, TS can buy 41667 shares, that are also added to the pool. Overall, there are now the following shares: 940,000 to the founders, 101,667 to TS, 333,333 to the investors, so they respectively own 68.36%, 7.39%, 24.24%.

(Note: this may be a simplification, meaning that the investors can possibly work on pre-post to have exactly 25%, which means both the founders and TS will have a little bit less.)

Skipping the details, let me add a few more examples.

- Round of $1M at $4M pre = $5M post, i.e. the investors get 20% => founders 73.25%, TS 7.27%, investors 19.48%.

- Round of $500k at $1.5M pre = $2M post, i.e. the investors get 25% => founders 66.35%, TS 10.12%, investors 23.53%.

In conclusion, $100k for 7-11% equity seems pretty reasonable.

Edit: fixed formatting

Edit 2: I didn't take into account interests on convertible notes. (If the company raises after 1y and interests are 10%/y, then TS can actually buy shares for $110k, thus 45833 shares.)

I was initially put off by the "Well, in 8 years, why haven't they had a big (>100M) exit?" in the beginning; I figured it was more of the kind of silly entitled bubble talk I've been seeing elsewhere.

The equity analysis you pointed out as well as the description of the LoI stuff made me reconsider that position, and by the end of the article I was glad I read it. It wasn't quite the muckraking I was expecting, and instead was a decent exploration of when a fit with an accelerator just didn't exit.

Matasano never did the incubator/accelerator thing, right?

As for the 8 years and no exits, it should be noted that the average time to a successful acquisition is 7 years, 8.25 for IPO. Reference: http://techcrunch.com/2013/12/14/crunchbase-reveals-the-aver.... There are a few TechStars companies that are doing really well and should exit for >100M. SendGrid comes to mind.

Also, I think the section regarding TechStars success makes an assumption mistake:

"The national rate of failure for startups is 75-90%. So lets say it was a good year and Techstars Chicago received a 1000 applicants/startups to choose from. You know based on national averages that 750-900 of these companies will fail. That leaves 100-250 that will succeed. Techstars is only taking 1% of applicants, which is 10 startups. Unless Techstars is picking poorly, they are selecting companies that are positioned for success from day one. These startups would most likely succeed with or without Techstars."

The common assumption that 75%-90% of startups fail is usually regarding venture backed startups, not people who fill out the TechStars applications. I would wager that the if you looked at the failure rate of anyone who had an idea they wanted run through an accelerator, the failure rate would be much, much higher. What you should benchmark TechStars against VC performance.

(Disclaimer: I went through TechStars.)

What are some break-out companies that have gone through Techstars Chicago? It doesn't take 7 years to see who's doing well, right?

Techstars in Chicago is actually less than 2 years old. Excelerate labs was 2 years old at the time it joined Techstars, so the oldest company connected to that city is less than 4.

Also important to control for cohort size. These are 10 company classes. A 100 million+ breakout seems to be somewhere between a 1 in 100 and a 1 in 50 occurrence.

Ok, point taken, but is the answer that there aren't any break-out successes from TS Chicago yet?

Given that I work with our cloud program and in Austin I'm not as intimate with the alumni from Chicago, but one that I am personally fond of is http://www.giveforward.com/

They've crowd-funded over 125 million dollars toward medical expenses for people in need.

I'm a Chicagoan and and as jaredmck mentioned, there aren't any breakout successes. However, there are a number of companies are gaining steam like FoodGenius, Simple Relevance, and TempoIQ. Here's a link to the legacy Excellerate Portfolio: http://exceleratelabs.com/portfolio/

I think it's safe to say that's the answer - SpotHero is doing quite well and just raised a $4.5M series A, GiveForward as mentioned has crowdfunded a good amount of money for people's medical bills, and FeeFighters sold to groupon relatively early on. None of these are "breakout successes" to the tune of a 100M valuation, however.

Chicago startup scene has not generated a ton of hits, but there have been a few notable successes. But there are also a lot of solid companies that will probably make money for investors. You have to realize that there are very few Facebooks, AirBnBs and Ubers in total and most of them are by definition in SV. So you would expect relatively few out of Chicago at this point

What are those solid companies? SpotHero?

http://www.crunchbase.com/organization/excelerate-labs/inves...

Specifically on the exit stats GrabCAD (Boston TS company from 2012) was acquired for 100 million -

http://betaboston.com/news/2014/09/16/product-design-startup...

And the real answer to this is that getting large exits takes a long time. Unless I'm mistaken YC, which is older than Techstars and has 50% more portfolio companies, has 3 exits over 100 million, OMGPOP, Heroku and Twitch. Granted the last one was a big one.

YC also has 4 companies with public valuations over 1 billion: Machine Zone, Stripe, Airbnb and Dropbox

Techstars should see some other big exits over time with SendGrid (couldn't find actual current valuation) and DigitalOcean ($153M Valuation in 3 years) to name a few

Also Localytics (TS Boston 2009) is well positioned for a big exit or IPO: http://www.crunchbase.com/organization/localytics

(Disclosure: Hackstar in 2009, Founder in 2010)

Nope, we didn't take a dime of funding (but our business isn't compatible with funding).

The exit analysis is the first thing I think of when I think of Techstars, too. Ostensibly, the reason to sign on with an "incubator" is that the connection you get would enable you to obtain rapid growth. But I can't think of good examples of companies where that's happened.

I worked out of 1871 and was seriously helpful in connecting with some good people. That said - there's a ton of open environment space where it's easy to get distracted and pulled into conversations if you don't have noise canceling headphones and your "don't bother me face" on.

That said - I think Excellerate Labs (before Techstars bought them) had a serious hand in getting several startups off the ground. The tech scene in Chicago specifically is newer (so companies are younger) which means less exits, but I think if you watch the Chicago scene for a bit - that's going to change very soon.

That said - good analysis here. Good to see a founder not just jumping at the opportunity for funding "just because it could."

Sure. I hope you don't hear me suggesting that anyone who works out of 1871 must be playing house.

Didn't YC also invest their small amount for 7% equity and then throw a convertible note on top of it? Has this changed with the new deal?

Yes - this has changed. See http://blog.ycombinator.com/the-new-deal

I think this was a terrible post, it was inaccurate on several points, and the ones it was not were largely things that are 'table stakes'. Complaining about being on the VC track coming out of an accelerator, or having a convertible note is like complaining about graduating college with student loan debt. They then proceeded to extrapolate what going through the program wouldn't do for them, without any experience going through the program. I've been through it, it was fantastic, they are confused or wrong about most of their points.

I completely respect that you are in the bootstrap your business camp, and that 1871 isn't your scene. But this post has confirmation bias written all over it. TS Chicago has been a boon to many of the companies that went through it, and that is the only measure of success anyone should care about.

You're the face in my brain when I write things like "I hope nobody sees me saying everyone who works at 1871 is playing house". I know you aren't.

Frankly: I am skeptical of all but the first tier of startup accelerators, and I am especially skeptical of startup accelerators based in Chicago, a locale not conducive to funding. One argument the post made that I'm confident is correct is that the accelerator model, when it ever makes sense, does so only when the company is on a trajectory towards raising funds.

I also find the idea that Excelerate charges more than YC to be jarring. It shouldn't be controversial to say that YC is the more impactful of the two programs.

I won't get in to fundraising in Chicago in a public forum, but you aren't hearing me argue. That said, fundraising typically only requires a warm intro. Techstars alums can get to pretty much anyone in the country. Our fundraising was not held back by access, it simply required purchasing plane tickets. I should shut up though, our Series A lead ended up being a new firm in Chicago, and they are great.

Again, if you aren't planning on fundraising, don't go through an accelerator. They are seed stage investment vehicles. Once you take investor money the clock starts ticking on an exit. Perhaps that should be in bold print somewhere, but we all read HN, this should be fundamentally understood by everyone.

I would counter argue that Excelerate/TS isn't expensive, given the stage that they come in they are severely diluted by the time you raise an A, and they have a business to run. I think you could make an argument that YC is by comparison cheap, not a bad thing considering their track record.

You should let me buy you coffee sometime to make up for being dismissive of TS. :)

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