Not Just Seed: Techstars Accelerator Shifts to Accept More Mature Startups

Lisnr Inc. isn’t new to the startup game. The Cincinnati audio-beacon company has raised more than $4 million in venture capital, has 21 employees and expects to generate upward of $1 million in revenue this year, more than double the amount it got last year.

Yet on Monday, Lisnr is joining a startup accelerator that Techstars is running in conjunction with design and advertising firm R/GA. Accelerators traditionally have been intended for entrepreneurs just learning how to turn an idea into a business, not more established businesses like Lisnr.

Techstar still calls itself a “seed stage investment program” in its marketing materials, and it says it invests $18,000-$20,000 to get a 6% stake in the startups that go through its programs, an amount that is on the order of things for a seed investor.

But up to half of the hundreds of companies Techstars accepted this year are revenue-generating businesses, far from being just a couple of founders and an idea.

Techstars, one of the country’s first and largest accelerator programs, has been shifting this year to take in more mature startups, said David Brown, co-founder and managing partner of the accelerator.

“That’s new in the thinking [of Techstars]”, Mr. Brown said.

Techstars has been deliberately expanding its outreach and pool of applicants to companies that are well beyond seed stage.

“It is a trend that later stage companies are applying and seeing value in accelerators,” Mr. Brown said.

In this year’s Disney Accelerator, which Techstars runs together with The Walt Disney Co ., startups like Sphero Inc. participated. Sphero, which makes toy robots and other products, expects to have more than $20 million in sales, according to Paul Berberian, the company’s chief executive, who spoke in a recent Techstars promotional video.

Mr. Brown said that the proportion of revenue-generating companies that are going through Techstars programs has grown to roughly between 25% and 50% of this year’s participants.

In the R/GA Connected Devices accelerator, which is launching today, half of the companies have revenue, according to Nick Coronges, global chief technology officer at R/GA. “These companies are much further along,” Mr. Corognes said, comparing them to the Techstars-R/GA’s first batch of startups accepted last year.

“It will continue to increase,” Mr. Brown said of the proportion of revenue-generating startups in Techstars. In the first cohort in 2007, it was all very early-stage” companies, he said.

Mr. Brown added that the shift isn’t about replacing all of its companies with later stage ones, but about “diversifying.” It is also not about lacking quality pre-revenue companies, Mr. Brown said. He said that on average each Techstars program gets a thousand applications and has no problem choosing 10 quality ones.

The reason has more to do with the demand for Techstars’ programs and the financial benefit to Techstars of investing in less-risky companies, according to Mr. Brown.

Techstars was started in Boulder, Colo., by Mr. Brown, David Cohen, Jared Polis and Brad Feld, who is managing director at venture firm Foundry Group. It was one of the first startup accelerators around, following in the footsteps of Silicon Valley’s Y Combinator.

Techstars has since expanded to running its three-month immersion programs in Austin, Texas, Boston, San Antonio, Chicago, New York, Seattle and London. It also began teaming up with corporations, such as New York’s R/GA, as well as Disney , Barclays , Sprint and others, which pay Techstars to manage jointly run, themed accelerator programs. The one by R/GA, for example, is focused on startups in the connected devices sector.

Techstars typically takes a stake in its startups that implies that the total value of each company is $300,000. There’s some limited room for negotiation on these terms, according to several people.

Mr. Brown agreed that buying up stakes in later stage companies for such a small amount is financially beneficial for Techstars. But, he said, it isn’t a bad deal for startups.

Participating companies get access to corporate partners, as well as to the broad Techstars network of some 350 active alumni and current companies, and the many mentors the organization brings in to assist companies.

In addition, Techstars is beginning to offer an “equity back guarantee,” which means that after giving up 6% to Techstars and going through a program, any startup has three business days to ask for any of its stake back. The only caveat is that the startup has to explain why the value provided by Techstars wasn’t worth the price.

Would startups risk losing an important relationship if they claw back some or all of that share? “They don’t get kicked out of the club,” Mr. Brown said. “We won’t give them the evil eye when we see them.”

The equity-back guarantee was important to Rodney Williams, chief executive of Lisnr. (Officially, the guarantee takes effect for startups that participate in 2015 Techstars programs, but some have been given the offer this year, according to Mr. Brown.)

“From the very beginning we’ve been approached by different accelerators,” Mr. Williams said. “We turned down accelerator offers.”

But this time, Mr. Williams decided that the R/GA-Techstars deal was worth it, in great part because of the connections to RGA clients that Mr. Williams hopes to establish. “At the end of the day, this is going to help us drive revenue, get more customers,” Mr. Williams said. He is sending three people to work full-time out of New York for the duration of the program. Techstars startups are also offered an additional $100,000 convertible note when they join its programs from venture investors and others.

“After Demo Day, if the team doesn’t feel that the value of the program warrants 6%, we don’t have to give them 6%, we could give them four or one or zero. That’s a powerful statement,” Mr. Williams said.

Lisnr has specifically outlined “what success looks like come February,” Mr. Williams said. “If that is true, we will look at it as a good deal.”

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