White House Startup Investment Coincides with Sweeping Changes for TechStars, Y Combinator, Other Incubators: A Road to Recovery, or Another Bubble?
It’s been an unforgettable seven days for tech entrepreneurs—as if somebody poured startup juice into the nation’s water supply.
First President Obama dedicates a good chunk of his State of the Union address to the virtues of high-tech innovation and entrepreneurship. Then Russian investor Yuri Milner and Silicon Valley super-angel Ron Conway pair up to offer $150,000 investments, on very attractive terms, to every startup taking part in the Y Combinator venture incubator program, now and in the future. Then yesterday, the White House unveils its Startup America initiative, including $2 billion in matching capital for early-stage startups, as well as separate mentorship and incubator programs for cleantech startups and veterans. And then TechStars founder David Cohen announces that he’s basically open-sourcing the four-city TechStars operation—including its legal documents and mentorship and investor network—to independent startup accelerators in 12 more cities in the U.S., plus five in other countries.
And that’s only the highlight reel.
It’s like America has gone startup-crazy. To an extent that would have been inconceivable during the post-dot-com haze of 2002-2005 or the economic crisis of 2008-2009, entrepreneurs—obsessive visionaries who take enormous risks, often with other people’s money—are suddenly the new culture heroes, and the organizations that fund them are being showered with new (or redirected) resources.
Maybe it’s impatience with a sluggish economic recovery that isn’t translating into more jobs. Maybe it’s an awareness of the accumulating impact that Google, Facebook, Twitter, mobile gadgets, and other products of the innovation machine are having on culture and communication. Or maybe policymakers are finally listening to the stories we journalists have been telling for years about the power of private funding to spur the entrepreneurship that fuels high-growth companies.
Whatever the case, the last week has witnessed a series of private announcements and public policy changes that magnify the opportunities—and potentially the risks—for budding entrepreneurs. As a society, we have placed a much bigger bet this week on early-stage startups, in both real financial terms and in the more gossamer realm of hopes and expectations. The outcomes are bound to be both energizing and occasionally discouraging.
Amidst all this, it seemed only appropriate to see Jesse Eisenberg, who played the creator of the world’s most valuable startup in The Social Network, hosting last weekend’s edition of Saturday Night Live—with help from the real Mark Zuckerberg. (Whose company, by the way, yesterday announced that as part of the Startup America program, it will host 12 “startup days” in 2011 to give engineering support to early-stage companies.)
The State of the Startup Union
The Obama Administration has directed much of the last week’s media narrative on entrepreneurship, starting with the president’s State of the Union address on January 25. Viewed live by 43 million people, the speech introduced a new tag line—“winning the future”—and made the case that the country’s greatest asset in an increasingly competitive global economy will be its tradition of free-enterprise-driven innovation, supported by taxpayer-funded technology R&D and education. “What America does better than anyone else is spark the creativity and imagination of our people,” Obama said.
The president went on to set specific innovation goals, such as extending 4G wireless coverage to 98 percent of Americans by 2016, building high-speed rail lines that serve 80 percent of the population, and converting 80 percent of electrical generation to clean fuels by 2035. He put the spotlight on two specific technology startups—Michigan-based Luma Resources, which makes solar shingles, and Pennsylvania-based Center Rock, which built the drilling equipment used to rescue the Chilean miners. And he called for business-friendly policy changes such as a lowering and leveling of corporate tax rates. Overall, the address is likely to go down as one of the most technology-focused in the history of presidential speeches. “This is our generation’s Sputnik moment,” the president said. By the end of the speech, Obama had used the word “technology” eight times, “innovation” nine times, and “future” no less than 15 times.
The president drove home many of the same themes about “winning the 21st century” in a speech the next day in Manitowoc, WI. Obama suggested he’d picked this working-class town on Lake Michigan for the followup speech because one of the Sputnik satellites crashed on a street there in 1962. (A true story—there’s a little marker in the pavement where it hit. The fact that Wisconsin will be a swing state in the 2012 elections may have had something to do with the decision too.)
But both speeches, it turned out, were just preludes to yesterday’s Startup America announcement. Many months in the making, the launch event at the White House focused on concrete ways to increase government and private-sector investment in startups as a path toward economic recovery. (A White House press release about the event repeatedly paired the word “startup” with the adjective “job-creating.”) The event brought together the president’s top economic advisors and business leaders like AOL co-founder Steve Case, who will chair a new private sector initiative called the Startup America Partnership.
The administration and its private sector partners offered a surprisingly long list of commitments. (Feel free to skip this list, but it’s actually a lot more succinct than the official one.):
• $1 billion from the Small Business Administration in matching capital for investment funds that support startups in underserved communities.
• Another $1 billion from SBA in matching capital for early-stage startups crossing the so-called “Valley of Death” between seed funding and serious venture funding, especially outside the existing innovation hubs of California, Massachusetts, and New York.
• Proposed extension of a bill eliminating capital gains tax on certain investments in small business.
• A planned summit led by Treasury Secretary Timothy Geithner on simplified access to capital for small businesses.
• Four new private startup accelerators, funded by the Department of Energy and the Advanced Research Projects Agency-Energy (ARPA-E), to support 100 clean energy startups.
• Two new business accelerators, funded by the Department of Veterans Affairs, to support veterans launching new businesses.
• A fact-finding tour by administration officials to identify federal processes that are burdensome to entrepreneurs and target them for elimination.
• More “DC-to-VC” summits on healthcare IT investing, led by the Department of Health and Human Services.
• $12 million to launch the “i6 Green Challenge,” a Commerce Department program to fund proof-of-concept centers focusing on environmentally sustainable regional development.
• New fast-track patent application examinations for entrepreneurs at the U.S. Patent & Trademark Office.
• Formation of the Startup America Partnership, an alliance of entrepreneurs, investors, companies, universities, and foundations supporting high-growth startups, with seed funding from the Kauffman Foundation and the Case Foundation.
• New programs for young entrepreneurs from the Network For Teaching Entrepreneurship, funded by Ernst & Young, the Pearson Foundation, Google, and New Markets Education Partners.
• Expansion of the Blackstone LaunchPad, a five-year, $50 million entrepreneurship program already active at two universities in Detroit, to universities in five more cities.
• A new virtual entrepreneurship curriculum called the “Artists & Instigators Practicum” at the University of the Arts in Philadelphia.
• $1 million from the U.S. Chamber of Commerce for K-12, college, and post-graduate entrepreneurship education programs.
• A new Virtual Incubation Network at community colleges, led by the American Association of Community Colleges and funded by the Charles Stewart Mott Foundation.
• A new TechStars Network extending the mentorship-driven model developed by the TechStars venture incubator program in its four existing cities (Boston, Boulder, New York, and Seattle) to 15 more regional accelerators.
• More support for the Massachusetts-based MassChallenge startup competition from the Blackstone Charitable Foundation, the Fallon Management Company, MassMutual, Johnson & Johnson, and Microsoft. (Greg reported on the details of MassChallenge’s plans yesterday.)
• A doubling in size of Astia, an accelerator program for women-led startups, with new funding from AOL, the Althea Foundation, Fenwick & West, Moss Adams, and Silicon Valley Bank to match previous funding from the Kauffman Foundation. (I’ll have more to say about Astia in an article next week.)
• $200 million in new capital for U.S. companies from Intel Capital.
• $150 million from IBM for entrepreneur coaching and mentorship programs.
• $4 million from HP for its Learning Initiative for Entrepreneurs.
• 12 to 15 “Startup Days” organized by Facebook to help early-stage entrepreneurs build software that integrates with the Facebook Platform.
• A new Entrepreneurship Center in New Orleans— a collaboration between the Deshpande Foundation, The Idea Village, and Tulane University.
• A new national initiative from Cleveland, OH-based venture development organization JumpStart to support regional innovation and entrepreneurship programs, funded by the John S. and James L. Knight Foundation and the Surdna Foundation.
• $10 million in new grants to entrepreneurs over the next five years from the National Collegiate Inventors & Innovators Alliance, with support from the Lemelson Foundation.
To be fair, many of these initiatives were underway well before yesterday’s event at the White House. And some are simply business as usual: It’s Intel Capital’s job to invest hundreds of millions of dollars every year, to name one example. The Obama Administration’s role here has largely been to scour the country for compelling examples of investment in entrepreneurship and use the president’s bully pulpit to spotlight and promote them.
But some of the efforts may be going forward on a faster timetable thanks to White House encouragement. For example, Fortune reporter Dan Primack wrote yesterday, based on a conversation with TechStars co-founder Brad Feld, that the administration’s initiative “helped accelerate” the decision to launch the TechStars network—of which I’ll say more below. “Ultimately the important point of this initiative is that entrepreneurs are being heard,” writes Kauffman Foundation vice president Lesa Mitchell, who was at the White House ceremony, in a guest post for Xconomy today.
Shock Waves from Y Combinator Announcement
One of the surprises about yesterday’s White House event was the absence of any Bay Area tech celebrities. Yes, commitments were made by big Silicon Valley companies like HP, Intel, Google, and Facebook, but the momentum behind the Startup America Partnership seems to be coming from places like Washington, DC, where Steve Case’s foundation is based, and Kansas City, home to the Kauffman Foundation. As much as Silicon Valley investors and entrepreneurs complain about government under-investment or over-regulation, they’re remarkably content to operate within the Bay Area bubble, where the conceit is that all the resources, knowledge, and connections a technology entrepreneur might need are arrayed along the 101 and 280 freeways.
And there was a big story over the weekend to fuel this solipsism. As TechCrunch first reported on Friday, Digital Sky Technologies CEO Yuri Milner and SV Angel founder Ron Conway have joined to create Start Fund, a new venture fund that’s offering $150,000 in convertible debt to each of the 40 startups participating in the winter 2011 term at Mountain View, CA-based Y Combinator, probably the nation’s most famous startup incubator.
What’s remarkable about this offer is its blanket nature—startups are eligible for the money simply by virtue of getting into the Y Combinator program—and its lax terms: Milner and Conway aren’t asking for a valuation cap, an agreement that would guarantee them a fixed minimum stake when the startups go out to raise additional venture capital. (If a startup went on to raise $3 million on a $15 million valuation, for example, Start Fund’s $150,000 note would convert into a 1 percent equity stake. On a $30 million valuation, Start Fund would get 0.5 percent.)
Milner and Conway unveiled their offer to a gathering of Y Combinator startups Friday evening, and most of the companies in the current batch have already accepted, YC founder Paul Graham told Dow Jones VentureWire today. Graham called it a “no brainer” for startups to take funds offered on such easy terms.
In the grand scheme of things, 40 investments of $150,000 each adds up to only $6 million. That’s a small investment compared to the amounts venture firms routinely dole out to growing life sciences, infotech, and energy companies, and it’s also small compared to many of the other entrepreneurship initiatives unveiled this week. But the move had Silicon Valley entrepreneurs and investors buzzing over the weekend, in part because Milner and Conway apparently intend to make the same offer to all future YC companies. The prospect of an automatic $150,000 Start Fund investment—nearly 10 times the size of the stipend that Y Combinator itself offers to startups—is likely to alter the calculations of both entrepreneurs considering applying to the incubator program and the angels and venture capitalists competing to invest in them.
For entrepreneurs, the Start Fund investments could provide enough capital to extend the post-YC runway for six months to a year, thereby reducing the pressure to 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.
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