+ Techstars recently announced a string of executive departures and program closures – including termination of the Seattle program, one of its oldest and most successful.
+ Despite similar beginnings, Techstars chose a different strategic path than Y combinator – those changes compounded over time to strengthen YC and weaken Techstars.
+ This post offers an insiders’ view of some of the key strategic decisions that led to Techstars’ decline.
Techstars is – or was – one of the world’s best startup accelerator programs. Founded in Boulder not long after Paul Graham ran his first cohort at Y combinator, Techstars eventually operated dozens of programs around the world, some under the Techstars brand, but over time and increasingly, in cooperation with corporate partners.
We at Founders’ Co-op know the Techstars system well: our partnership created the Techstars Seattle program back in 2010 and ran it for a decade; we also helped to create and run two corporate Techstars programs: an early and short-lived program in support of Microsoft’s Azure ecosystem, and another in cooperation with Amazon, focused on the Alexa developer community.
We were saddened, but not completely surprised, by the recent string of bad news coming from Techstars’ Boulder headquarters. Headcount reductions and executive departures aren’t exactly news as we unwind 15 years of zero interest rates and the many asset bubbles those policies helped to inflate.
But we were caught off guard by the decision, announced just today, to cancel the flagship Seattle Techstars program. Not just because we created and led it for many years, but because Techstars Seattle is also the source of many of Techstars’ most successful and celebrated successes; Seattle program alumni like Remitly, Outreach and Zipline are regularly held up as evidence that Techstars can produce billion-dollar outcomes for both founders and investors, something that has happened less and less often in recent years.
Seattle is also the only Techstars city that is home to two of the Magnificent Seven, the tech bellwethers that continue to drive the lion’s share of public company value creation. Apart from Seattle-based Amazon and Microsoft, all the rest (Alphabet, Apple, Meta, Nvidia and Tesla) are based in the Bay Area. These companies are global magnets for technical talent eager to work on the most advanced and highest-impact technology products in the world. Not coincidentally, they also serve as training grounds for some of the world’s most successful startup founders.
Although we haven’t been on the inside at Techstars for several years, we grew up with the program and have watched with growing dismay as it drifted away from its original focus on founders. This post is an attempt to unpack the changes we observed both during and after our time with Techstars, to draw out potentially useful lessons about how things might have gone differently.
In the Beginning: Champions of the Local Startup Ecosystem
Techstars launched its first program in Boulder in 2007. Just two years later, in 2009, we worked out a deal to create the Techstars Seattle program, with our first program running in 2010.
From the beginning, we were deeply committed to Techstars’ “give first” ethos and mentorship-driven approach to startup investing. We also had a strong incentive to make our program successful: despite the shared branding and core values, each Techstars program was funded and owned by the mentor and investor community in the city in which it operated.
As Managing Directors of Techstars Seattle, we raised a series of funds from mostly local LPs, including participation from some of our best-known local VC firms, as well as many of the mentors who worked with the founders during and after each program. In simple terms, the local LP community owned 70% of the fund economics, the Managing Director owned 20% and Techstars owned 10%; we also paid Techstars a $50K annual fee to support the program’s back-office operations.
This tight alignment of incentives and shared values among investors, mentors and program leadership in the Seattle ecosystem created a powerful flywheel effect, stitching together our previously disparate community of startup supporters and creating an open, legible way for high-performing founders from across the region to access the best that Seattle had to offer.
The result was a series of exceptional Seattle program cohorts, including not just the “unicorn” outcomes listed above, but hundreds of millions of dollars in venture financings and liquidity events deep into the roster of participating teams, year after year. It’s fair to say that the Seattle startup community would not be where it is today without Techstars.
Compromising for Cash
When Y combinator moved from Boston to the Bay Area – without doubt the dominant market for venture backed tech innovation in the world – Techstars began to see itself as the “YC for everywhere else”. Rather than compete for the #1 market, Techstars made a virtue of supporting nascent startup ecosystems in the other major tech and financial hubs in the US, and eventually, around the world.
This was a fantastic strategy in terms of impact, raising the bar for startup excellence in key startup ecosystems and opening up access to the Venture Capital financing market to founders who couldn’t or didn’t want to relocate to the Bay Area. But it also created two big problems for Techstars as a business: cash flow and brand identity.
Even when run on a shoestring (as we did in the early days), running an accelerator costs money: not just the investment capital for the participating founders, but also rent for offices, stipends for program staff, and the hosting and event costs of an intensive three-month, face-to-face program with dozens of founders and hundreds of mentors. Supporting the growing roster of programs also required more administrative overhead to solve legal issues, track investments and support cross-program communications and learning.
Bottom line, Techstars needed cash. And since the program-based fund model didn’t provide it, Techstars started looking within the local ecosystems in which it operated.
It began with an effort to extract “sponsorship” dollars from local service providers: the lawyers, accountants, recruiters and PR firms that cater to startups. But for every sponsor who agreed to write a check, there were a dozen other vendors who were equally or more qualified to support the teams in the program. What did we owe our sponsors, and did that put us in conflict with our commitments to give founders the best possible advice, and to never waste their time?
The next logical step was to go up-market and look for financial “partners” among the many corporations struggling to keep up with the pace of technological innovation during the go-go ZIRP years. Techstars was attracting many of the world’s best founders, surely some of those founders would be interested in solving problems faced by these large corporations?
It’s not hard to see where this all leads: from a principled beginning, laser-focused on helping the world’s best founding teams achieve the best possible business and financial results, soon the Techstars system began to play host to mandatory, sponsor-led “education” sessions for participating teams. Next, entire accelerator programs were created on behalf of corporate partners, promising them access to cohorts of world-class founders eager to listen to their needs and use their APIs.
Both ideas started with good intentions, with Techstars working hard to select values-aligned partners and set the right expectations, but halfway through a program and after a multi-million dollar investment, the tone would inevitably shift the moment the partner suggested they might not be getting their money’s worth.
Killing the Golden Goose
Organizations become what they’re staffed and led to do. As Techstars invested in centralized sales and support functions for its valuable and demanding corporate customers, the headquarters organization ballooned, driving additional needs for short-term revenue to fund the growing headcount. And the culture inevitably shifted, from a passionate commitment to founders and the entrepreneurial journey, to a system focused on generating cash from paying corporate customers, with the promise of “innovation” on their terms.
The final straw came when it became clear that many of the new programs and MDs were struggling to raise their own, local funds. In response, Boulder made the unilateral decision to pull that function away from all the local markets, making investment capital more readily available to new programs, while also allowing the central organization to capture the fee income on Assets Under Management (AUM) across the entire system.
This may have made sense from a corporate capitalization and cash flow perspective, but the net effect was to eviscerate the incentive system that had attracted high quality Managing Directors to run programs, and had bound together investors and mentors in each local market in the shared work of sourcing and supporting the highest-potential founding teams.
After this change, MDs still earned a portion of the returns from each program, but no longer had a mechanism to share program economics with their community via investment in the local fund. The autonomy and sense of ownership that attracted outstanding local entrepreneurs in the first generation of Managing Directors (many of whom now run their own funds) quickly devolved into a demanding but low-paying job, with a steadily-growing set of requirements from headquarters to carry water on behalf of the central organization.
Gradually, Then Suddenly
Brands and organizations decay slowly; it can be hard for outsiders to see the weakness until it’s readily apparent to all. But customers are smart, and all of Techstars’ customers eventually saw what was happening, and acted accordingly.
The first to spot the weakness were startup founders. Their ambition and acute realism made them sensitive to the clear shift in Techstars’ priorities, away from serving founders and toward the “corporate innovation” business. With dozens of programs scattered around the globe, often in partnership with second-tier brands, and in locations with little to no native startup ecosystem, it was hard to say exactly what the Techstars brand stood for anymore, but it clearly wasn’t “helping entrepreneurs succeed”. While Techstars wanted founders to see Techstars as a single thing, smart founders realized that their outcome and ROI depended entirely on the MD and specific program they participated in.
At the same time, Y combinator remained laser-focused on dominating the world’s #1 startup geography (the Bay Area) and delivering value for its core customer, the most exceptional founding teams in the world. As YC racked up highly visible startup success stories and sweetened their funding offer, Techstars struggled to keep pace. (YC suffered its own excesses at the height of the bubble, growing class sizes and drifting up into the growth investing business, but under the leadership of Garry Tan have acted quickly to refocus and rightsize in support of their core mission).
The next important group to spot the weakness in Techstars’ strategy was the investment community. Startup investing is a power-law business – a very few extraordinary success stories drive returns and cover the losses of the many failed attempts. As Techstars’ track record fell further and further behind YC, their investor sales pitch of “buying an index of the global startup ecosystem” fell flat. Even during the frothiest period of the ZIRP bubble they struggled to hit their fundraising targets, further weakening their capacity to support their growing overhead.
The last to spot the problem, but from Techstars’ perspective the most essential, were the corporate innovation groups who had provided most of the cash for Techstars’ rapid growth. Unsurprisingly, the world’s best founders don’t particularly care about the problems of any given corporation, and startup investors don’t care to babysit corporate execs or attempt to teach them the foreign ways of entrepreneurship. Churn among Techstars’ corporate customers started high and only accelerated, creating a “leaky bucket” problem for the company’s growth strategy. Add in a global pandemic, and then a rapid deflation of the global asset bubble, and the writing was on the wall: no matter what business Techstars’ corporate partners happened to be in, “innovation” quickly dropped in priority as soon as the startup threat receded and more urgent financial priorities beckoned.
Slowly, inevitably, Techstars’ bet on corporate customers at the expense of founders came home to roost.
Old Lessons, and Simple Ones
The story of Techstars’ rise and accelerating fall is neither unique nor surprising. When interest rates are too low for too long, capital flows toward riskier assets that offer the promise of higher returns. Technology startups can produce rapid growth and high margins at scale; investment intermediaries that offer access to these returns have an easier time raising capital during bubbles; the question becomes: what do they do with it once they have it?
As the YC example shows, Techstars had the opportunity to build one of the world’s top investing platforms for technical founders in every major tech hub outside the Bay Area. But in their rush to occupy that “everywhere else” market, Techstars cut strategic corners to generate near-term cash flow, creating a path-dependent trajectory to their current outcome. By making corporate funders, and not startup founders, their primary customer, Techstars built a centrally-controlled sales- and operations-driven culture that made startups the product, not the customer. As soon as the top tier of startup founders figured out that YC had their interests at heart in the way that Techstars once had, but no longer did, the game was over.
It’s hard to prove a counterfactual, but imagine that Techstars had stuck with its original model: a loose but values-aligned federation of career startup investors, each responsible for building the highest-performing investor and mentor community in their respective markets, but sharing information, best practices and back-office infrastructure. As it was in the beginning, 90% of the economics were sourced from, and returned to the local markets, but Techstars accumulated its 10% profit-sharing strip from each market, plus an overhead charge that allowed them to invest not in ever-growing sales and operations teams, but rather in high-quality software tooling and infrastructure that served the entire network.
This model wouldn’t have grown as quickly, and would have required much greater selectivity in the markets in which it operated. It would also have required more patience from the owners of the network itself, but would have been much more likely to serve their long-term goal of massive value creation over time.
We’ll never know the answer, but if YC serves as a fair proxy for the type of scaled impact and durable value creation that startup accelerators can create, Techstars offers an object lesson in the strategic cost of losing sight of your core customer in the relentless pursuit of growth. Techstars was and is an organization founded by great humans, and its current struggles are shared with many once-promising startups that flew too close to the sun in an era when wings were cheap.