White House Startup Investment Coincides with Sweeping Changes for TechStars, Y Combinator, Other Incubators: A Road to Recovery, or Another Bubble?

2/1/11Follow @wroush

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spend time fundraising during the incubator program and making the program’s climactic “Demo Day” event, where startups do their best to impress potential investors, far less critical. It could also open up the incubator program—which has traditionally attracted male college graduates or dropouts in their early 20s with minimal living expenses—to a more mature set of entrepreneurs who have homes and families.

In an informal poll on the YC news aggregation site Hacker News, 18 percent of entrepreneurs considering applying to Y Combinator said the Start Fund offer made them more likely to apply; 50 percent said they would have applied anyway. So it seems likely the Start Fund offer will increase the competition to get into Y Combinator.

Speaking of competition, most investors aren’t quite as thrilled as entrepreneurs about Start Fund’s offer. Whether or not Milner and Conway’s move is a wise investment strategy—a point being debated vigorously in the blogs and comment sections—there’s a perception that Start Fund will lock up deals and make it harder for other investors, especially those with less money to throw around, to get stakes in YC startups. There’s also concern that the Start Fund money will give YC companies leverage to demand even higher valuations than those they’ve been floating recently, or to skip angel-stage funding altogether and go straight to Sand Hill Road. Dave McClure, founder of the micro-VC fund 500 Startups, told Jason Calacanis’s Launch newsletter that the Start Fund move will force other investors—and other incubators—to raise their game. The easy money at Y Combinator “probably pressures investors and other programs to differentiate,” McClure said.

TechStars Goes Global

And that brings us back to the last big piece of incubator news this week: TechStars’ decision to expand. Unlike its previous expansions to Boston, Seattle, and New York, the seed-stage venture network won’t be cloning its formal mentorship program to more cities this time, but will instead help other accelerators copy its model.

TechStars co-founder David Cohen, who was at the White House yesterday, said in a blog post that the organization has been deluged of late by requests for advice from other groups hoping to replicate TechStars’ model, which is built around mentoring relationships between the admitted startups and experienced entrepreneurs in each TechStars hometown. (If there’s one key difference between TechStars and Y Combinator, it’s that YC companies are advised primarily by Paul Graham, while TechStars companies get plugged into a larger local community.) Cohen said TechStars has spent “countless hours” responding to the requests, which apparently inspired the incubator network to get a little more systematic. After taking about six months to document its own processes, Cohen said, TechStars is now ready to share its best practices with seed accelerators everywhere.

The TechStars Network—which will be managed by Jenny Boyd, a former manager at the microfinance platform Kiva—initially includes organizations in 12 U.S. cities, spanning the country from Providence to Seattle and from Chicago to New Orleans. (TechStars has also found takers in Dublin, Singapore, Madrid, Copenhagen, and Cambridge, UK.) Network members will have access to the legal documents TechStars has prepared to help startups get off the ground, as well as its methods for recruiting mentors and streamlining access to investors, Cohen says. “What this means for aspiring entrepreneurs is that there will be more high quality seed accelerators in more places, with more mentors, and more support for them,” Cohen writes.

Perhaps caught up in President Obama’s spirit of lofty goal-setting, Cohen said that the TechStars Network aims to extend mentorship and support to 6,000 entrepreneurs over the next three years and help build startups that create 25,000 new jobs by 2015. It’s the rare investor who dares to draw a straight line between supporting entrepreneurs and supporting economic growth—but TechStars seems to be morphing from a traditional incubator into something more like a multinational startup factory, conscious of the hopes many local and national governments are placing in technology and entrepreneurship.

Having allowed the Obama Administration to put them in the spotlight this week, entrepreneurship advocates now face real pressure to deliver. All these accelerators, matching grants, competitions, and entrepreneurship centers need to yield some home runs within the next few years, in the form of new high-growth companies that really do put people back to work and increase the nation’s competitiveness. Indeed, given the scale of the new entrepreneurship movement, it’s reasonable to ask for a few new Genentechs or Googles or Facebooks, and perhaps for the revival of flagging regional economies like Detroit’s. The risk, if these things don’t happen, is that the nation’s current infatuation with tech entrepreneurs and entrepreneurship will come to be seen as its own kind of bubble. And given the shortage of other options right now for rebooting the national and global economy, that would be truly unfortunate.

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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  • AndrewW

    StartUpAmerica is just more useless public relations and cheerleading. Of course we should encourage start-ups, but it is much more important to seek breakthroughs.

    Energy is a good example – DOE and private industry have spent $400 billion in the last 20 years on R+D and financing for green technologies and yet we still haven’t found “clean, affordable electricity.” That’s the goal.

    During the last two years DOE (with Stimulus funds) has spent more than $30 billion on “development deals,” primarily for over-priced and under-performing wind and solar schemes. Most of these projects received 100% “loan guarantees” and those loans can never be repaid. They are grants.

    America (and the world) should get serious about finding a breakthrough by offering a $1 billion prize for a solution. DOE should hold an Energy Summit and review ALL potential solutions. We would either find a breakthrough or understand exactly where we are.

    It is delusional to continue to pretend that wind and solar can meet our energy needs – they never will. America has made progress because of competition and reward and now is a good time to remember that, Offer a PRIZE and let’s get busy seeking a real, sustainable solution.

  • http://www.backupify.com Rob

    I think it would be better if the government stayed out of startups. It’s best left to the private sector.

  • http://www.worldmotoclash.com Stanford Crane

    Has it occurred to anyone that we have a consumer based economy, but no real consumer VCs? Seems odd. A proper number for startup investment would be about $500M and span all industries and geographies. We live in a global community where helping business requires leadership, not the random walk approach.

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