20VC Techstars Founder, David Cohen on Scaling Techstars Ventures and Investing In Uber, Twilio and Sendgrid

Summary Notes


In this episode of the 20 Minute VC, host Harry Stebings interviews David Cohen, founder and managing partner at Techstars, a leading startup accelerator with impressive statistics: 762 companies with 90% active or acquired, and over $2 billion in funding raised. Cohen, a serial entrepreneur with successful exits such as Pinpoint Technologies and earfeeder.com, shares insights on the early success of Techstars, the strategy behind his first fund Bullet Time Ventures, and the importance of being valuation-sensitive and disciplined with investment sizes. He also discusses the venture model's inefficiencies, particularly the gap between angel investing and venture capital, and the potential of 'big boring' industries. The episode touches on Cohen's personal investment philosophy, the significance of instinct in seed investments, and the story behind his investment in Uber. Harry also promotes Lisa mattresses' social mission and VC Unlocked, a program for aspiring investors.

Summary Notes

Introduction to David Cohen

  • David Cohen is the founder and managing partner of Techstars.
  • Techstars has 762 companies with 90% active or acquired and over $2 billion raised.
  • David Cohen is also a serial entrepreneur with successful exits including Pinpoint Technologies and earfeeder.com.

"So joining me today is David Cohen, now David, the founder and managing partner at Techstars."

The quote introduces David Cohen and his role as the founder and managing partner at Techstars, setting the stage for his insights on venture capital and entrepreneurship.

Techstars' Success

  • Techstars' accelerator programs began in 2007.
  • Early success indicated by three acquisitions within a year of the first program.
  • The success of the program was measured by the ecosystem impact, angel investing activity, and professionalization of angel investing.

"Well, within a year of the first program in 2007, there were three acquisitions, and they were all relatively small."

The quote highlights the early indicators of Techstars' success, with several acquisitions of companies from the first accelerator program, demonstrating the effectiveness of their model.

Creation of Bullet Time Ventures

  • Bullet Time Ventures was created as a small fund to follow on investments in companies from Techstars' programs.
  • The fund was a response to the opportunities presented by successful accelerator programs.
  • David Cohen and Brad Feld discussed the idea of creating a fund to capitalize on these opportunities.

"So bullet time is really just the Techstars fund."

This quote explains that Bullet Time Ventures was essentially the initial investment fund associated with Techstars, aimed at providing follow-on funding for promising startups emerging from their accelerator.

Fundraising for Bullet Time Ventures

  • David Cohen invested his own money and raised funds from friends and mentors.
  • The initial fundraising target was self-imposed at $5 million to limit risk.
  • Raised $2.5 million quickly, with the first investments in notable companies like Twilio and Uber.
  • The fund size eventually reached the $5 million cap as market conditions improved.

"I raised two and a half million almost instantaneously. A couple of weeks intros from Brad."

This quote reflects the swift success in the initial fundraising efforts for Bullet Time Ventures, emphasizing the trust and interest from investors familiar with Techstars and the broader VC ecosystem.

Investment Strategy

  • The investment strategy was influenced by mentorship from experienced investors like Brad Feld and Jason Mendelssohn.
  • Techstars had an "insight advantage" due to their deep understanding of companies in their ecosystem.
  • Early investments included companies like SendGrid and Sphero, which were part of the Techstars network.

"Under the mentorship of amazing people like Brad that you mentioned, his partner, Jason Mendelssohn, and others that I had learned from."

The quote highlights the role of mentorship in shaping David Cohen's investment strategy and the value of the insights gained from being closely involved with the companies in the Techstars ecosystem.## Consistent Investment Strategy

  • Importance of having a consistent investment strategy for angel investors and scaled angel funds.
  • Consistency and sticking to the strategy are emphasized over the specifics of the strategy itself.
  • The strategy employed was to invest early at low prices with a maximum of one follow-on investment of the same size.
  • This approach was modeled after successful angel investors and mentors.

We had lived with them for three months. And it really comes from this learning that as an angel, and this was really just a scaled angel fund, it's about having a consistent strategy and just sticking to it.

The quote emphasizes the importance of consistency in investment strategy, learned from experience with a scaled angel fund.

Valuation Sensitivity and Check Size Rigidity

  • The speaker was valuation sensitive and maintained a rigid check size in investments.
  • Despite the notion that valuation doesn't matter if you're investing in a 'rocket ship' company, the speaker believes in the importance of reasonable prices.
  • Maintaining discipline is challenging with abundant capital in the market.
  • The original fund had a $50k check size and an average pre-money valuation investment of $2.8 million.
  • Returns are directly affected by the investment valuation.

That statement where I still am? I think there's plenty of great companies that are being built and funded at reasonable prices.

The quote reflects the speaker's ongoing belief in the importance of valuation sensitivity and finding reasonably priced investment opportunities.

Portfolio Diversification

  • The importance of portfolio diversification for angel investors is highlighted.
  • Concentrating investments in a few companies increases the risk of loss.
  • The speaker's fund aimed for 50 investments to achieve desired diversification.
  • Discipline in investment strategy helps avoid overcommitment to 'hot deals' that may not work out.

You have to have enough portfolio diversification to where if you're concentrated in just a few companies as angel, the stats are pretty clear you're going to lose.

This quote stresses the statistical likelihood of failure without sufficient diversification in an angel investment portfolio.

Time Management and Value Addition

  • Time becomes more limited as investment portfolios grow.
  • Techstars scaled their infrastructure with the growth in capital, expanding the team to 150 people.
  • The organization's structure allows for efficient time management and value addition to investments.
  • Focus shifts to companies that show value and where the most capital is invested.

We're fortunate at Techstars today. So we went from that $5 million fund. Today we're over $300 million in managed capital, but we have 150 people in the organization.

The quote highlights how Techstars has scaled its team in parallel with the growth of managed capital, allowing for better time management and support for portfolio companies.

Scaling Operations and Moving Upstream

  • Techstars' decision to scale operations and move upstream in funding was data and opportunity-driven.
  • The organization operates 25 accelerators annually and has a large network of mentors and alumni.
  • The goal was to deploy more capital efficiently, even if it meant lower return multiples.
  • Techstars positions itself as a syndicate partner for VCs funding Techstars companies, participating in larger funding rounds without leading them.

Clearly we sort of proved early on we're good seed investors. The Techstars funds perform well. The question is, could you then get more capital to work?

This quote explains the rationale behind scaling operations, leveraging Techstars' proven track record as seed investors to manage more capital.

Evolution of Investment Decision Making

  • Investment decision-making changes based on available capital and the current fund strategy.
  • The speaker reflects on past decisions and the need to justify them to limited partners and institutional investors.
  • An example provided is DigitalOcean, which Techstars invested in but did not heavily invest in subsequent rounds.

Well, I think it's a function of the capital you have available and the strategy of the fund in place at that time.

The quote indicates that investment decision-making is contingent on the available capital and the strategic objectives of the fund at any given time.## Decision-Making in Venture Capital

  • Venture capital decisions can be influenced by the amount of capital available.
  • At times, venture funds may pass on opportunities due to a mismatch with their strategy or insufficient capital to invest meaningfully.
  • Hindsight can cause regrets in venture capital, but decisions are made based on the information and resources available at the time.
  • Adjustments in investment strategies can occur as capital under management changes.

The company came out hot with its next round and obviously has done really well, didn't match the strategy at that moment in time, and didn't really have enough capital under management to make that decision make sense.

This quote explains that a venture fund passed on an investment because it did not align with their strategy and they lacked the capital to invest significantly.

Pattern Recognition and Startup Potential

  • Venture capitalists develop pattern recognition skills to identify potential successful startups.
  • Living with companies for an extended period, such as three months, provides valuable insights.
  • Initial interactions can be a strong indicator of whether to invest.
  • Seed stage investments may rely heavily on instinct, while later-stage investments require more consensus among partners.

No, I still think that we have all this signal coming from the system. Right. We're living with these companies for three months.

David Cohen emphasizes the importance of close interaction with startups to assess their potential.

Venture Capital Due Diligence

  • Due diligence is essential in evaluating market dynamics and other factors before investing.
  • However, over-analysis can lead to missing out on good investment opportunities.
  • In seed investments, excitement from one partner may be enough to proceed, whereas later stages require more agreement.

Due diligence you do to really look at the market dynamic or whatever can quickly talk you out of stuff.

David Cohen suggests that extensive due diligence can sometimes prevent investors from making what could have been successful investments.

Uncapped Notes

  • Uncapped notes are generally avoided by David Cohen, with only one exception in his career.
  • Analysis shows that uncapped notes can significantly lower investment returns.
  • Caps in investment notes can protect the return on investment when companies raise subsequent rounds at higher valuations.

If you go back and play the data that I have, and we do this sort of retrospective analysis all the time, had all the investments we've done been uncapped notes, it's something like a five x lower return.

David Cohen explains that uncapped notes have historically led to lower returns on investments based on retrospective analysis.

Big Boring Companies

  • David Cohen has a preference for investing in large, established industries that are not typically seen as exciting.
  • Industries like banking, insurance, and transportation offer significant opportunities due to their size and the flow of money, despite being overlooked by many entrepreneurs.
  • These industries often have outdated software, presenting opportunities for innovation and disruption.

Big boring is the idea that there's industries that are not sexy to most of the entrepreneurs that might listen to something like this, right?

David Cohen describes his interest in large, established industries that many entrepreneurs might find uninteresting, highlighting the investment potential in these areas.

Future Big Boring Markets

  • Some big boring markets tend to remain stable over time.
  • There is still significant potential for innovation in industries like transportation and banking, especially with emerging technologies like blockchain.
  • These markets are characterized by their size and the potential for disruption due to outdated systems.

They tend to stay the same. That's what makes them boring. People don't view them as new. They're so big and so much money flowing through them.

David Cohen discusses the enduring nature of big boring markets and their potential for innovation despite being perceived as unchanging.

Venture Capital Inefficiencies

  • The venture capital industry is proficient at deploying capital and assisting with strategy at certain stages.
  • Seed stage investing by traditional VCs often results in failure due to the different nature of the game.
  • There is a growing professionalization of angel investing, and a need to better organize the segment between angel and venture capital investing.
  • The concept of "seed at scale" is introduced as a segment that requires further definition and organization within the private equity pyramid.

Nobody really has a name for that segment. So I think that segment gets named seed at scale, whatever it is, and can be organized much better.

David Cohen identifies a segment within the private equity market that lacks clear definition and organization, suggesting the term "seed at scale" for it.

Origin of the Uber Investment

  • Ryan Graves' involvement with Uber began through his interaction with Techstars Boulder as a mentor.
  • His insightful feedback on companies and alignment with the "give first" philosophy led to a connection with David Cohen.
  • The story of how Ryan Graves joined Uber highlights the importance of networking and mentorship in the venture ecosystem.

He and I went for a beer afterwards. He gave me feedback on the ten companies, and I thought it was incredibly insightful.

David Cohen recounts his meeting with Ryan Graves, emphasizing the value of the feedback and insights Graves provided on the companies at Techstars Boulder.## Investment in Uber

  • David Cohen was the first employee and operator at Uber, initially known as Uber Cab.
  • Uber's goal was to revolutionize transportation by making it more convenient.
  • David Cohen invested $50,000 in Uber during a bar discussion, although he initially requested $100,000.
  • He has since limited his involvement, allowing the company to grow independently.

"I said I was in sitting on that bar stool. I think I asked for $100,000 because at the time, I think that was the sort of up leveling that we were trying to do in that fund. And I got 50. It's fine. I took 50."

This quote explains David Cohen's initial investment in Uber, highlighting his decision-making process and the amount he invested.

Realization of Uber's Impact

  • David Cohen recognized Uber's potential through personal experiences and milestones.
  • He was moved by drivers' stories about how Uber positively impacted their lives and enabled them to start their own businesses.
  • The moment Uber reached a million drivers was significant for David Cohen.
  • Uber's valuation at three and a half billion dollars was a turning point, despite concerns of it being overvalued.

"There were a couple for me, and this is what's so gratifying about being an investor."

This quote reflects David Cohen's gratification in witnessing Uber's growth and impact on individuals and the economy.

Concerns about the Industry

  • David Cohen is worried about the industry's focus on fame and storytelling over actual performance and hard work.
  • He hopes for a shift towards rewarding genuine contributions rather than just loudness or good storytelling.

"I'm very concerned about the health of the long term dynamic where entrepreneurs and investors value fame and boisterousness over shut the hell up and do a great job and help the company."

This quote highlights David Cohen's concern about the current state of the industry and his desire for a change towards valuing real performance.

Bullet Time Ventures' Success

  • David Cohen feels that Bullet Time Ventures has not yet fully realized its potential.
  • He acknowledges the paper returns and the success in raising funds, but emphasizes the importance of tangible financial returns.

"I'm not there yet. There's so much paper return."

This quote conveys David Cohen's humble perspective on the success of Bullet Time Ventures, implying that there is still work to be done.

Reading and Information Consumption

  • David Cohen's favorite book is "Soul of Money," which influences his thoughts on business and spending.
  • He no longer subscribes to newsletters, relying on social media to stay informed.
  • Mattermark is highlighted as a useful source for curating interesting content in his field.

"Soul of money can't remember the name of the author, but because it really makes you think about why we're all in this business in the first place and how what you spend on is really who you are and what you worry."

This quote reveals the impact "Soul of Money" has had on David Cohen's philosophy regarding money and business.

Morning Routine and Productivity

  • David Cohen tries to avoid work in the first hour of the day, focusing on family.
  • He recommends asynchronous voice communication tools like WhatsApp or Voxer for productivity.

"I try not to work for the first hour or so of the day. I really try to focus on my kids and my family."

This quote emphasizes the importance David Cohen places on family time in the morning as part of his daily routine.

Investment in Kinexis

  • Kinexis received an investment from David Cohen during a $5 million funding round.
  • The company, based in Cincinnati, has a client list resembling the Fortune 500.
  • Kinexis focuses on diversity and supply chain, with potential for broader impact.
  • The investment was influenced by the relationship built with Rod through his "give first" attitude.

"It's a company that's in Cincinnati. It's off the radar, doing incredibly well."

This quote explains David Cohen's investment in Kinexis, underscoring the company's success and potential in the supply chain industry.

Techstars' Mission and Gratitude

  • David Cohen expresses pleasure in being part of Techstars and its impact on the startup world.
  • He shows appreciation for the opportunity to participate in the podcast.

"Anytime. I'll keep listening. And it's always a pleasure."

This quote conveys David Cohen's enthusiasm for engaging with the podcast and his commitment to the Techstars community.

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