When a company is particularly confident in the product it makes, it often offers a money-back guarantee upon returning that item, which can then be resold at a slightly discounted rate. This offer is a tad more difficult to justify if you’re an incubator program whose “product” is a three-month crash course in how to build a successful startup.
However, that isn’t stopping Techstars from doing it anyway. Last week the incubator group announced that it would begin offering a new “equity-back guarantee” to any company that goes through one of its programs in 2015. When a startup gets accepted into a Techstars’ program, it gives up 6 percent equity in exchange for access to the network of Techstars alumni, coaching and advisement from a mentor in that network, and an $18,000 seed investment, with the opportunity to take on $100,000 in convertible debt.
“What we’re offering goes beyond just entry in the incubator program. We’re giving companies access to our entire network, which, yes, can be very valuable to a startup that doesn’t have many connections [to Silicon Valley or other tech hubs],” Techstars cofounder and managing partner David Brown told me in an interview at the group’s annual FounderCon event in Austin, Texas.
Brown explained that the “equity-back guarantee” wasn’t necessarily done just because Techstars is confident in its programs (even though the group is). The guarantee was to help sell startups that might already be up and running but finding that they’re hitting a wall for one reason or another, despite some success on their own.
From this perspective, Techstars’ new guarantee makes a lot of sense. Techstars already combs through hundreds of startup applications before deciding on just a handful (10 to 15 companies), so it’s quite confident in the invitations it sends out. What the guarantee might do, though, is entice startups that have never considered joining a Techstars program because they might already have some traction and wonder if its worth giving up part of the company at this point.
“We can’t invite the ones that don’t apply,” Brown told me.
Of course, Techstars does have a blemish on its record that makes this deal all the more meaningful. Last year the company decided to terminate Techstars New York managing director Eugene Chung just two weeks before the program’s demo day event. Exactly why Chung was let go hasn’t been publicly discussed, but parting ways with a managing director that close to a big event where you’re pitching to potential investors may have soured some startup founders’ opinions of the program in general. An equity-back guarantee deal would definitely help to dispel doubts.
But Techstars has a lot to brag about on its own, independent of the new guarantee. The incubator has seen 483 startups graduate from the program, with 45 of those startups seeing an exit. It’ll be interesting to see if the new guarantee elevates the quality of the companies that get invited to Techstars incubator programs in 2015.