January 15, 2007
TechStars: Angel Funding as For-Profit Philanthropy
Posted by Victor Fleischer

TechStars, similar to Y Combinator, is launching this summer in Boulder.  Brad Feld has the details. 

Form of investment.  At first glance, it's an odd financial model.  Founders get up to $15,000 to start a company.  TechStars takes 5% of the common equity, with none of the special rights one associates with traditional venture capital investments.  No board seats, no liquidation preference, no redemption rights.  As Darian Ibrahim has pointed out, the contrast between the form of investment in angel funding and the usual form of VC investment is puzzling. 

Non-financial benefits.  Of course, it's really about the non-financial aspects of the deal.  The founders get some office space, server space, and spend the summer in Boulder with access to some of the best human capital in town, both through educational sessions and informal networking and advice.  The investors get to know some promising entrepreneurs, and they may have an early edge on participating in the next stage of venture financing.  (Query whether TechStars takes a right of first refusal.)  They may find talented programmers and designers to place in another portfolio company.  And, of course, you never know if one of these companies may make it big. 

For-profit philanthropy.  From the founders' perspective, this is a vast improvement on the "friends and family" round.  From the investors' perspective, it's probably better understood as "for-profit philanthropy" rather than investment.  The time commitment is impressive, and it really does seem to be motivated by a desire to give something back to the community.      

Branding?  Surprisingly, I don't see this as a branding move by the investors.  These guys are already well-known, well-connected, and well-respected in Boulder.  There is some branding going on, though:  they are branding Boulder as an attractive alternative to Silicon Valley.  If Boulder can lure a few talented twenty-something entrepreneurs away from California for the summer, I bet many of them stay.                                                                                             

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