20VC Techstars Founder David Cohen on Why Seed Investing Is A Different Asset Class To Venture, What Makes The Best And The Worst Board Members & Why Every Company Has To Have A Pessimist In The Room

In this episode of the 20 minutes VC, host Harry Stebbings interviews David Cohen, founder and Co-CEO of Techstars, a global network supporting entrepreneurs. Cohen discusses his journey from founding startups like Pinpoint Technologies to angel investing and eventually creating Techstars. He emphasizes the importance of integrity in founders, the role of 'pessimists' in a company's board for balance, and how early-stage companies should approach board formation and reserve allocation. Cohen also shares insights on capital formation challenges, the necessity of aligning internal attitudes for scaling, and his latest investment in Ordermark, highlighting his passion for infrastructure businesses. Additionally, the episode features promotions for Brex, a corporate card for startups, Terminal, a service for building remote engineering teams, and Cooley, a law firm specializing in startups and venture capital.

• Harry Stebbings introduces David Cohen, founder and co-CEO of Techstars.
• Techstars is a worldwide network that supports entrepreneurs.
• David Cohen has a history of successful investments, including Uber and Sendgrid.
• Prior to Techstars, Cohen founded Pinpoint Technologies and EarFeeder.

"I could not be happier to welcome back David Cohen, founder and co-CEO of Techstars, the worldwide network that helps entrepreneurs succeed."

The quote introduces David Cohen and highlights his role in supporting entrepreneurs through Techstars.

• David Cohen shares that he's been an entrepreneur for most of his life.
• He has had successes and failures with his startups.
• Cohen transitioned from being an entrepreneur to angel investing and then to creating Techstars.

"I've had one job interview in my entire life and I got that job and decided I never wanted to do that again. So I've been starting companies as an entrepreneur pretty much my whole life."

David Cohen emphasizes his lifelong commitment to entrepreneurship and his desire to avoid traditional employment.

• David Cohen discusses the "moment of integrity" when assessing founders.
• This moment occurs when a founder is confronted with a mistake or misstep.
• A founder's response in this moment reveals their values and trustworthiness.

"It's the first time you're asked about it. Let's say you're on a board and you're confronting a CEO about something. What they say in that moment of integrity is how you can really tell how a person will behave and their value."

The quote explains the concept of the "moment of integrity" and its significance in evaluating a person's character.

• Cohen suggests that mistakes are inevitable in entrepreneurship.
• The key is how founders own up to their mistakes and learn from them.
• Trust is essential, and it can be damaged if a founder is not forthcoming.

"We're all going to make mistakes. And in that moment of integrity, just owning that mistake, talking about what you learned from it is really key versus down the line, dealing with it a different way."

The quote underlines the importance of acknowledging mistakes and being transparent about them.

• Trust is foundational in the relationship between investors and founders.
• If a founder violates trust, it can challenge the relationship.
• Open communication, especially in difficult situations, is crucial for rebuilding trust.

"If I find out later that that trust was violated. Right. That's a challenge for our relationship."

Cohen points out the consequences of trust violations and their impact on investor-founder relationships.

• Cohen values having a "pessimist" in decision-making settings.
• This person is not merely a naysayer but a respected advisor who provides balance.
• The pessimist can be a general counsel, CFO, or a thoughtful board member.

"We were actually just debriefing on a situation that happened where we felt like we didn't have a pessimist in the room and it went wrong."

The quote highlights a real-world example where the absence of a critical voice led to a negative outcome.## Optimism in Entrepreneurship and Investment

• Entrepreneurs and investors share a common trait of optimism, which is necessary but can also be dangerous.
• Excessive optimism without a counterbalance can lead to poor business decisions and potentially the downfall of a company.
• It is important to have someone in the room who can provide a realistic perspective during strategic discussions.

"Investors tend to be optimistic, too. We wouldn't do this job unless we were unreasonably optimistic about good things that could happen."

This quote highlights the inherent optimism in the investment industry, which drives investors to pursue potentially lucrative opportunities despite the risks.

• Investors must believe in the founder's vision to justify their investment.
• Realism must be maintained to manage expectations and resource allocation as the company progresses towards its goals.
• There should be a clear separation between the optimism required to invest and the realism needed to guide a company's growth.

"If you don't believe in that optimistic vision and future, then why are you investing? You have to believe in that."

The quote emphasizes that belief in the founder's vision is a prerequisite for investment, serving as the foundation for any venture capital decision.

• Companies should establish a board as soon as possible, even with a small seed round.
• Boards should not be seen as overlords but as a group of smart, experienced people who can provide valuable insights.
• Entrepreneurs often mistakenly view boards as a threat to their control rather than an asset.

"I think that companies need to put it in as soon as possible."

This quote suggests that forming a board early in a company's lifecycle is beneficial and should not be delayed.

• A successful board supports the CEO and works for their success.
• Healthy dynamics and thoughtful construction of a board are crucial.
• Positive relationships and open communication among board members are key to supporting the company effectively.

"We worked for the CEO. And that's how we thought about it. We all had a job. We were there to be a resource to that person."

The quote explains the role of the board as being supportive of the CEO, rather than directive or controlling.

• Board members should start as listeners and evolve to contribute strategically through healthy debate.
• The value of being a board member comes from strategic input and the willingness to learn from and challenge others.
• Board members should speak less but make impactful contributions.

"I was a big listener. Right. I would really try to listen and understand and speak less often."

This quote reflects the speaker's initial approach to being a board member, emphasizing the importance of listening and understanding before speaking.

• New board members should bring unique value to the board and be proactive in offering help.
• It is important to know one's strengths and limitations, and to contribute where one is most effective.
• Confidently held misinformation is detrimental; board members should seek to be both confident and accurate.

"Don't screw it up now. Just be yourself. Look to help and recognize the unique value that you bring."

The quote advises new board members to be authentic and to focus on how they can specifically contribute to the board's success.

• The best board members possess deep knowledge in relevant fields and a willingness to educate others.
• High emotional intelligence is as important as business acumen for board members.
• Exceptional board members are adept at supporting CEOs through various challenges, including crises and leadership changes.

"Just really deep knowledge about software as a service and willingness to teach others."

This quote highlights the value of expertise and the willingness to share knowledge as traits of an exemplary board member.

• The use of convertible debt and safe notes is increasingly common in the startup world.
• These financial instruments are often used as bridges to future funding rounds.
• The terms of such notes should align with the company's progress and future prospects.

"The terms matching the story."

This quote implies that the conditions of financial agreements, such as convertible notes, should reflect the company's narrative and trajectory.## Investment Strategy and Terms Consistency

• Investors often hear pitches about impending large funding rounds and the need for a short-term bridge loan to reach that milestone.
• David Cohen emphasizes the importance of aligning investment terms with the entrepreneur's story about their funding future.
• He suggests using term structures to test the entrepreneur's confidence in their funding prospects.
• If an entrepreneur is confident about a future large valuation round, they should be comfortable with a reasonable cap on a note if the round doesn't materialize.

"Well, we've got this big round. We're going to raise ten or 20 million soon, and people are really interested and that's happening, but just need a couple of months of Runway to get there, and so we're raising a note for a million."

This quote illustrates the common scenario where entrepreneurs seek a bridge loan while suggesting a larger funding round is imminent. Cohen's strategy is to ensure the terms of the bridge loan reflect the confidence in the entrepreneur's story.

"Meaning if you don't raise that round, what happens? You're very confident that that's going to happen in, say, six months. Well, what happens if it doesn't? The terms should match that story."

Cohen highlights the need for investment terms to account for the possibility that the anticipated funding round might not occur, ensuring terms are in place for that eventuality.

• Bridge financing is often viewed skeptically as it may not lead to further funding.
• David Cohen believes that investors should consider bridge loans as if they were the only funding source and set terms accordingly.
• He suggests that a seed-stage company should raise enough capital for at least 18 months, preferably 24 months, to focus on building the business rather than constant fundraising.

"And so I always try to think of it as if I was funding this company in isolation and I was doing this today, and there's no other capital around the table, which is sort of how I'm closing with this type of note."

Cohen advises investors to approach bridge financing with caution and to set terms as if the bridge loan were the sole investment, to ensure it's reasonable and protective.

"But I think at the seed stage, I would look for a minimum of 18 months. I prefer two years, actually."

The quote emphasizes the recommended duration of Runway for a seed-stage company to avoid the distraction of frequent fundraising and focus on development.

• Techstars invests in a large number of companies annually, which requires a different approach to reserve allocation compared to traditional VC funds.
• For larger investments, Techstars reserves a one-to-one ratio, meaning for every dollar invested, another dollar is kept in reserve.
• The reserve strategy is adjusted over time and is considered a strategic part of Techstars' investment process.

"And we're generally co investment capital. So we're following along with the market, keeping our ownership, maybe increasing a little bit."

Cohen describes Techstars' approach to co-investment and reserve allocation, which involves following market trends while maintaining or slightly increasing ownership stakes.

"We actually reserve one to one. So for every dollar we put in, we keep a dollar in reserve, and then we, over time, sort of reallocate that as needed and think about our reserves as a strategic part of what we do."

This quote details Techstars' reserve allocation strategy for larger investments, highlighting the importance of reserves in their investment process.

• David Cohen reflects on the scalability of Techstars and considers how earlier capital formation could have been beneficial.
• He suggests that a clearer separation between Techstars' accelerator and venture fund functions might have been advantageous.
• Despite hindsight, Cohen focuses on moving forward and appreciates the value created for limited partners and investors.

"We today have sort of unified capital structure at Techstars, where it's just techstars, we have capital and we put it in the accelerator level at high velocity and then follow on."

Cohen explains the current capital structure at Techstars, emphasizing the high-velocity investment at the accelerator level followed by additional funding rounds.

"But I think separating that a little bit more and sort of owning the accelerator piece as part of what we do and then positioning to the market that we're more like a normal venture fund with seed and series, a follow on probably would have been a little bit different way to build the business."

Reflecting on the past, Cohen considers alternative strategies for capital formation and market positioning that might have been employed.

• Capital formation has been a constant challenge for Techstars, given the scale of investment required.
• Cohen notes the difficulty in managing capital needs over time, as it takes a while for investments to yield returns.
• He identifies capital formation and the management of capital inflows and outflows as key challenges faced during Techstars' growth.

"I think foundational sort of challenges probably would name two. One is capital formation."

Cohen acknowledges capital formation as one of the primary challenges encountered while scaling Techstars.

"You're just sort of always trying to figure out where's the capital going to come from to be at the scale that we're at."

This quote conveys the ongoing struggle of securing sufficient capital to support Techstars' extensive investment activities.## Global Scaling Challenges

• The process of scaling globally is complex and presents unique challenges.
• There is a need for alignment within the company regarding the desire for growth and expansion.
• The company's value of "quality before quantity" must be balanced with the ambition for increased quantity and global reach.
• Ensuring internal alignment on global expansion involves getting team members on board with doing business in various international locations.

But that is a challenge anytime you go for global scale.

This quote emphasizes the inherent difficulties in scaling a business globally.

We have a value which is quality before quantity. We want to do everything well, but we also want that quantity and we have this global ambition.

This quote highlights the company's core value of maintaining quality while also pursuing growth and global expansion.

• The company's growth from a small team to a larger workforce requires maintaining the original core values and family feel.
• Expansion necessitates internal alignment on the company's direction and the acceptance of growth as important.
• Aligning the team with the company's global ambitions is essential, especially as the business extends beyond local areas to international markets.

And as you get bigger and you do more, you have to be aligned with everybody internally that you want that and that that growth is important.

This quote speaks to the need for internal consensus on the importance of growth as the company expands.

• "The Soul of Money" is a recommended book that changed David Cohen's perspective on money and its impact.
• The book influences consumer behavior and philanthropic strategy.

Get the soul of money. I don't remember the author. Terrific book. That changed the way that I think about money and how I use it and how it impacts others.

David Cohen suggests reading "The Soul of Money" for its transformative ideas on the use and impact of money.

• Early exposure to entrepreneurship through family experiences can shape one's approach to business and life.
• Observing a parent's dedication to clients and employees can inspire a focus on putting others first.

And I just remember being introduced to the idea of entrepreneurship, and I was in my father's office and doing data entry on payroll systems for restaurants and just sort of realizing, wow, all these people are employed. Because of what my dad is doing and the work that he's doing for clients, he actually cares about them.

David Cohen recounts how witnessing his father's entrepreneurial spirit and care for others influenced his own values and career.

• Strategies for managing a high volume of emails include starting from the bottom, using to-do lists, and achieving inbox zero regularly.
• Assistance from an executive assistant and utilizing labels and rules in Gmail can be helpful.

I start at the bottom and I... I always struggle to figure out why people struggle so much with their email when they have 10,000 messages.

David Cohen shares his approach to managing emails efficiently.

• Angel investing and seed investing are viewed as distinct from venture capital, with different needs, requirements, and performance characteristics.
• There is a growing recognition of the differences between seed investing and traditional venture capital.

I believe that angel investing, seed investing is a completely different thing than venture capital.

David Cohen expresses his belief that seed and angel investing should not be lumped together with venture capital due to their unique characteristics.

• The best days involve impactful interactions with entrepreneurs, where guidance leads to realizations and solutions.
• The worst days involve public relations crises, shutting down companies, and acknowledging significant financial losses.

The worst days are the ones with big pr crisis. Something's going on in a portfolio company, or it's just something's not working.

David Cohen describes the challenges and low points that can occur in the investment business.

• David Cohen's ability to skip a night of sleep without significant detriment to his functionality is a personal advantage, especially for international travel.
• This ability is limited and cannot be sustained over multiple days without rest.

I can skip a night of sleep and function. Okay.

David Cohen explains his unique ability to function well even after skipping a night's sleep, which aids him in managing the demands of international travel.

• Ordermark was chosen for investment due to its role as infrastructure for online food ordering.
• The company's foundation in infrastructure for a growing trend, combined with impressive founders and their hustle, made it an attractive investment.

So that would probably be ordermark, which came out of our accelerator program here in Boulder, actually.

David Cohen discusses Ordermark as his most recent publicly announced investment and explains the reasons behind the decision to invest.

• Appreciation is expressed for the support and kindness received from others in the industry.
• Resources such as Brex, Terminal, and Cooley are mentioned for their contributions to the startup and venture capital ecosystem.

So, David, I really do, sir, appreciate that.

Harry Stebbings thanks David Cohen for his support and mentions the helpful resources available to startups and investors.