Early Stage Investing in Startups with David Cohen, Managing Partner, Techstars
Every investor in startups seeks the magic formula for finding successful entrepreneurs and companies.
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Every investor in startups seeks the magic formula for finding successful entrepreneurs and companies. In many cases, early-stage investors lack the rigor and discipline of venture capitalists and institutions. Our guest this week has a taken a systematic and large-scale approach to startup funding. David Cohen, Managing Partner of Techstars, calls the firm a "mentorship-driven seed stage investment program." With branch locations around the country and internationally, Techstars has quickly gained respect from the startup and VC community.
In this episode of CXOTalk, David Cohen shares his approach to startup investing and offers advice to company founders and other investors. We are excited to enter the mind and learn from of one of the foremost early-stage investors in the world today.
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Michael:
(00:04) Startups, and investing in start-ups and the technologies that come out of start-ups, and the way that start-ups are changing the world, one of the most interesting things that we can talk about. And today on episode number 116 of CXO-Talk, we are in for a treat. I’m Michael Krigsman, my glorious co-host is Vala Afshar, Vala.
Vala:
(00:31) Michael great to be here and yes, we’ve had a number of start-ups, CEOs, and founders on the show before like Alan Levey of Box, and Brian Halligan of Hubspot, but today we’re joined with David Cohen, a founder of Techstars hello David.
David:
(00:48) Hey guys it’s great to see you and thanks for having me on the show. I’m a huge fan and I appreciate it and that topic Michael you we’re talking about, I actually like so I’m ready to talk about it.
Michael:
(00:59) All right well David, so you are the managing partner of Techstars, why don’t you give us a sense, briefly about your background and then tell us about Techstars.
David:
(01:10) Sure, briefly my background is I studied computer scienceand was a software programmer since I was 13 and I had one job interview in my life. I got that job and only worked there for about a year and started a company, as an entrepreneur to compete essentially do what they were doing, but do it better. So haven’t had a job interview since and I built three start-ups in the past as the founder and CTO of those companies and two of them had successful exits and one was a failure and I view Techstars my fourth start-up and we’ll see what happens there.
Vala:
(01:48) Tell us a little bit about Techstars. I read it’s over 3000 entrepreneurs, mentors and advisors, is that accurate?
David:
(01:55) Yeah, it’s just got a lot bigger actually. We’ve been growing quite a bit. What Techstars is just fundamentally for those of you who aren’t familiar with it we’re global ecosystem in which entrepreneurs are enabled and empowered to bring new technologies to the market. So we focus on technology companies, primarily Internet companies. We do that through our accelerator programs, which are three-month intensive mentorship programs that operate in cities around the world; 13 different cities.
(02:25)We also have about 300 million in venture capital to back companies that are exciting and are emerging from that ecosystem. And actually just this week, we announced that we acquired Upglobal, which is the folks that do a fine job with startup weekend. If you’ve never experienced a startup weekend, it’s like discovery and inspiration for entrepreneurship, it happens 1000 times a year around the world. So we’re really helping entrepreneurs all along their journey from idea to IPL.
Vala:
(02:54) How did Techstars come about?
David:
(02:59) I’m in Boulder Colorado today and that’s where we started and that’s where our headquarters is although we operate and have offices in many major cities throughout the US and Europe.
(03:09)But the idea came about because initially we were just in Boulder and we wanted to improve the entrepreneurial community here. We wanted more activity, more entrepreneurship and we took a 20 year view towards that, myself, Brad Feld who’s a highly regarded venture capitalist that’s here and is a good friend and Jared Polis, and David Brown. The four of us wanted to make Boulder better as an ecosystem over a long period of time, and tried away to do Angel investingthat made more sense.
(03:38)And so the way we thought of to do that was to invent the mentorship driven accelerator model. That’s where you have companies apply to Techstars and averaging about 1000 companies apply. We pick 10, so it’s about a 1% acceptance rate.
(03:52)We spend about three months with them, three months of intense mentorship and we get the best entrepreneurs in each of the communities that we operate in, so really focus on those companies for three months. We fund them with a little bit of capital, not enough to do any damage. But a little bit to get them going.
(04:06)And then at the end of that they share their ideas with venture capitalists and investors, and hopefully go on to build businesses. But it all started because we wanted the ecosystem to be better. Today, we do that in many communities around the world and we also do it on behalf of major corporations.
Michael:
(04:24) So you call yourself a network and what’s the significance of that, and how is it different from traditional venture capital investment.
David:
(04:34) Well, you know the history of venture capital like the history of many things in our world is this hierarchical view. It is the boardroom on Sand Hill Road, that you know the entrepreneur must come to and present their ideas on a project and in front of people in Silicon Valley, I’m sure you’ve seen it, who judge that idea and perhaps give them some money. This is the old school, you know you come to me, I will listen to your pitch, and perhaps I will anoint you as someone worthy of capital.
(05:06)The way it works today, entrepreneurship because of the accelerator movement is that it’s much more of a network effect. Its network over hierarchy and so in each community, take New York for example we have about 150 mentors. We have 10 companies that are being mentored by them for an intensive period and then we have a global network that looks like that stamped out across major cities like Chicago, Seattle, London, Berlin and all over the world.
(05:30)So it’s a global ecosystem of people, because the powers in the network that want to see these start-ups be successful that are fully capable of funding these start-ups, right, inside the network, whether they are mentors, investors who are helping new mentoring. Or alumni who have already had an exit and are coming back to Angel invest. So we think it’s a new flip model for venture capital and you know, we put network ideas first over the ideas of old school hierarchy.
Vala:
(05:58) So out Of 1000 companies you’ve turned down 990. For those lucky 10 that you select, what are their themes, what are the attributes, characteristics that you look for, for that lucky at 1%?
David:
(06:13) Yeah, so this is in the accelerator activity where they get the first funding from us and that three month of intensive mentorship. I would say startup weekendeverything’s super inclusive, to get to this next level of the 1% acceptance rate. It’s a lower acceptance rate than Harvard or MIT at Stanford etc. so it’s tough to get in.
(06:31)You know I think what we’re looking for in order is there’s six things that we talk about all the time. Thing one is team. You know it’s very much about who’s on this team, and how we know each other and what their capabilities are. Thing two is team and thing three is team also. So we’re heavily focused on team, team, team.
(06:49)Then fourth is market. What market are they in? Is it shrinking, growing, changing, somehow interesting. And then progress is the fifth thing we look for. They do stuff. We have this theory we’re pretty sure it’s correct. We think that entrepreneurs do stuff, they don’t just talk about stuff, and so we look for signs that they actually do stuff.
And then thing number six is idea. I put it number six only to help people understand that it’s last. It does matter. Its bonus points, good ideas of course matter, but they’re going to change a lot and it’s much more about the team and the market and the ability to get stuff done.
Michael:
(07:25) Now the mentors are extremely important, so how do you chose the mentors and what are the characteristics that make a great mentor.
David:
(07:35)So the mentors, there’s 2000 of them that are global now and in the network and help these companies locally. By and large they’re people we’ve done business with in one way and another. Either we’ve had experience in funding them in the past. They might be alumni or it might just be someone we funded with the venture capital.
(07:51) They’re someone in the community, that often it’s just an operator or maybe business you’ve heard of but not necessarily you know that well known outside the community. And then there’s you know, the Brad Felds and the Fred Wilson’s and the Brad Godesman and the people that are venture capitalist that people do know.
(08:08)We look for mentors that follow The Mentor Manifesto that I wrote in terms of their approach to mentorship. Which is again not a hierarchical view, it’s a network view of I’m going to try to help. I’m not in charge but if I give into the system first, I’ll get back some unexpected way later. They typically take a Socratic approach, you know they’re not coming in and telling people what to do. Instead they’re sharing their experiences.
(08:35)We have a whole checklist of things that we ask them to follow, and then we rate them. We rate them on that and if they’re not doing those things they won’t be around. And the good news is they’re a tremendous amount of great people that are mentoring and really having an impact on these companies doing it the right way.
Michael:
(08:51) So this is a very very collaborative approach it sounds like.
David:
(08:55) Yes it’s a new model and it’s you know, entrepreneurship the ideas that give first are often very foreign especially to larger corporations, but we’re working with many innovative corporations, you know, Nike, Ford, Microsoft, Barclay’s, sprint, many other that have understood the power of this give first where you just provide help to entrepreneurs and that’s what these mentors are doing.
(09:21)And what’s coming back to them is opportunities to invest or perhaps a job as a CEO of an interesting high growth startup. Or in some other way the network is giving back to them in an non-transactional way. Or in almost a karmic way, and I think this is the nature of entrepreneurship that we’re on a mission to help educate people around the world.
Vala:
(09:42) What do you look for in a mentee? What do you look for in someone? I mean you’re investing time, energy, dollars. What are your expectations of someone who you’re mentoring?
David:
(09:53) Well again at the Techstars level, we’re making investments and we are looking for economic impact long term. But I think some of the skills that up front, we really want people to be mission driven, purpose driven entrepreneurs.
(10:07)Or experience and 600 plus portfolio companies and my own entrepreneurial experiences have been that. you know those founders who are really about the mission are the best ones, they build the best companies. They view the world a certain way. I mean Ryan Graves from Uber, when they were just starting he viewed the world a certain way and was able to invest and that came true. They don’t all work out that well, but I want to know, you know they’re not going to stop until the world works that way.
(10:37) Andthey have to have great talent. Part of it is obviously the team team team thing is that you’re looking for people that just you know, incredible executers, either technically or on the business side.
(10:49) You know but I think at the same time you know, you want to look at people who are really attached to the problem and not to their solution to the problem. That are willing to throw it all away to get it right to solve the problem and change the world in the way that they envision.
Michael:
(11:04) We had Tim O’Reilly as a guest on CXO-Talk recently, and he spoke about it very much the same way that you did being mission driven, and obviously he’s a great thinker, and how again is that different from traditional VC investment.
David:
(11:23)Well I don’t know if that particular element is different, it’s the way in which we organize the network around these entrepreneurs that is very different right. it’s the traditional deal flow for a venture capitalist – and there are many great ones that have huge networks. You know, it is out of their network right. they’re unlikely to just fund something if you email them and they get to (trade?) some.
(11:43) You know, what we’re really doing is building this global network in a different way and then giving it away to have impact as opposed to just, here are the people in the local community and having served you know good investment opportunities but from those known people. We’re bringing new people – you know, fresh meat into that system all the time. We’re spending three months with these companies in a very hands-on way before we really put significant capital into them, so we are really eliminating team risk. For generally first, second or third time entrepreneurs that maybe aren’t the people who are going to walk in and get $10 million just because who they are
Vala:
(12:18) David, you’re incredibly transparent when it comes to talking about success and failure. Right out of the gate you gave us a background. You said I started three companies, two succeeded one failed. And from what I’ve read, your definition of failure is not quite failure because of how you handle that particular situation. But why so transparent, why is that in your DNA and how you conduct business?
David:
(12:42)Well I think first of all it’s just natural. I do come from the school of Brad Feld and venture capital and the founder group guys and I learned the early value of that. if you go on the Techstars website you see every company we’ve ever funded. How much money have they raise, how many employees do they have, where are they based. As much as we can give away without harming the companies that give away.
(13:05) And every single one of them has a founder at their domain email address, because if anybody wants to work with us should be entitled to speak to any of those people. You know, it’s a 100% reference able client list, right.
(13:18)That’s transparency. We have all the stats, all of that is there. But I think you know, also you know, it’s just what entrepreneurs deserve. Again, in entrepreneurship transparency I think is important because you know, there are so many problems that you just have to be real about them.
(13:34)There are so many way for a startup to die, right, so the transparency attitude is you know, the first thing we say in orientation when you get into a customer’s program is you know, drop the act. You know, we’re already in, we’re on your team you know, like show us all the problems in a counterintuitive way once again, the more you do that, the more you’re real with people, and the more you let people help you, the more they get to understand how you operate as an entrepreneur. The stronger that relationship is, then the more likely there’s a future together in that relationship
Michael:
(14:07) So obviously what you’re doing is trying to create a supported environment where the entrepreneur will be willing to share his or her issues whatever the challenges are, so that your network of mentors can therefor help them analyze, troubleshoot and fix whatever those issues might be.
David:
(14:29)That’s right, they benefit from the experience of those mentors. And you know, again the best mentors don’t say, ‘here’s how you fix it’. they say, ‘oh this happened to me once, and here’s what I did, here’s what’s good about it and here’s what’s bad about it.’
And often you know startups are about managing psychology and so you have all of these experienced psychologists around, who are operators who have done it before. They’d help you through the difficult times which are inevitable.
Vala:
(14:57) We shift the topic to corporate innovation. We’ve had folks like Alex Osterwalder, bestselling international author talk about you know, how big companies just fail to innovate at the speed to stay relevant. Average age of a company of 6500 is about 12 years and that used to be 60-70 years. Do you see corporations using startups to either augment or replace, completely replace their innovation efforts and product solutions and road maps.
David:
(15:27) Absolutely, I think one status the Fortune 500 is 50% different than it was 10 or 20 years ago. Right, these big companies are not big any more or other ones are becoming bigger. And I think you know, everyone understands in larger companies the value of innovation, but it’s a mystery to many people, and they bring in their VP of innovation who has some experience with this but there is the cultural tide sometimes that makes it difficult.
(15:56) And there are very few successful corporate venture capital funds that have sustained. You know, you have got your Intel, Qualcomm’s and a few others but most companies have not figured it out.
(16:10) So what happened to us is that we got approached early on by Microsoft, and earlier on they were a partner of ours and they said, ‘hey, I want you to run an accelerator that’s just like what you do, but around our technology sets.’ At that time was you know, Azure and other platforms and Connect, you know the motion control platform.
(16:30) We did that and we discovered something really interesting that by creating the combination, so letting Techstars do the same thing we normally do, with our normal mentors, but calling it the Microsoft accelerator in this case and then supplementing the mentors with people from inside the Microsoft organisation, who have to leave the campus, come down to a startup space that has a cool vibe, and just give first and participate – not trying to get anything, and they got mandated with that in their job description, go down there and help.
(17:03) Something really magical happened. Amazing companies were born, they got the benefit of Microsoft’s partner network, and the funding around Techstars and Microsoft didn’t take anything. They didn’t take any equity, they didn’t take any options, they didn’t take the right to buy, the right to do business with – nothing like that.
(17:23) But they got a lot of opportunities to do those things because they gave first. Since then, we’ve rolled that model out, refined it and do it now for many partners like the ones I mentioned earlier. They are focused vertical like Qualcomm for example, who run an accelerator in the robotic space. Ford in the mobility space in Detroit, right, so we verticalized and Disney in entertainment and so on to enable that magical combination, and give corporations this understanding of by giving first they actually get more out of it.
Michael:
(17:54) So the magical combination. Just define, what is that magical combination.
David:
(18:02) Technical failure, just ripped the headset out, I’m sorry.
Michael:
That’s what we usually do, that’s what we do.
David:
(18:10) and I’ve seen Vala do it before. He’s always doing it. What was the question Michael I’m sorry.
Michael:
(18:21) You said what is that magic. You kind of described a little bit. You said see those magical moments take tell. So what’s the definition of that magic? What’s the components?
David:
(18:32) Sometimes it’s easier to just use an example of a company that participated in the Disney accelerator, I’ll give you a company called Spyro. They make a robotic ball gaming platform. It sounds really interesting right, but it’s hard to make a robotic ball move around because there is no forwards or backwards or left or right and control it with a thumb.
(18:51) Very cool company and it was doing great and went into the Disney accelerator. Bob Eager, started mentoring the company, with again no ask, no expectation, no deal in place. It turned out that this company inspired the character VB8, which is the new R2D2 in the next Star Wars movie and Bob, he just envisioned it when he saw this, and he made a bigger version of it, and if you haven’t seen it it’s a rolling droid and you know it is hugely synergistic for both companies.
(19:22) It will turn out to be great for both companies, but I’ll tell you, if Disney had said you have to give, give, give on the way in, they would never have had that opportunity. Instead Disney gave, gave, gave and was helping this company to develop business, giving them opportunities, introducing them to executives, giving them office space with no expectation of return.
(19:41) And that’s the sort of magic thing that comes out of it, because they didn’t view it as a transaction where they have to get something up front.
Michael:
(19:49) How do you convince a company, a large company to do this, because sometimes it’s kind of antithetical, the culture of most large companies.
David:
(19:59)Only the most enlightened companies are approaching us early on, but it is getting broader and we have a lot of companies that are interested in this. You know really to be honest with you it’s been all inbound. They see what we do, and they see the track record of companies that go through Techstars on average always 2 million in venture capital. We’ve had 65 M&A acquisitions are ready. We’ve got many big companies, and they say, how do we create that in a space that’s near us, so we can be near it and understand it, and drive some innovation, and perhaps we can acquire or something, and we teach them how to do it.
(20:37)Because the old way to do it is, well let’s go find some startups and bring them in, and restrict them from doing business with our competitors. Right, and take the rights of first refusal. So I think it takes you know examples, and you are seeing more and more out of these programs. There are many significant companies that have come out of that, and some where they aren’t being acquired by that partner, and they don’t have the right to do that but sometimes that’s the right outcome.
(21:01) Maybe they are being funded by that partner, but those are the things that happen later and not earlier, so frankly what we are seeing is someone from the entrepreneurial community being hired in as the Chief Innovation Offers, understanding the nature of entrepreneurship better and then seeking out solutions like what we are doing.
Vala:
(21:21) Are there a common set of measurements that these companies use as to engage with Techstars that you can share with us.
David:
(21:28)The corporate partners of larger companies?
Vala:
(21:30) Yeah, are they key performance indicators or score cards or what are they used to evaluate progress based on you know, mutually acceptable time…
David:
(21:40)It depends on the corporation. I’ll give you a couple of examples, but you know, when we were running with Nike what they really cared about at that moment in time, they have this Nike Fuel API, they make the FuelBand, and we are trying to create this kind of point system activity, which is obviously taken off hugely since then, and things like Fitbit going public the other day, very similar types of ideas.
(22:02) Anyway, they had a tech platform and they were going to release their API’s, and rather than release them to the world, they took me gold to be learning. Let’s go and get 10 high potential startups and just give them this before anybody else and see what they can do. Right, and they push the envelope on that technology and informed Nike about what they should do to make it better. Right, so in Nike’s case it was learning. Now, they got a lot of PR out of it and it didn’t hurt. In the case of Caplin, right around EdTech it was much more about, well we want some opportunities to invest. But we would don’t want to invest in stuff unless we experience it.
(22:41) Right, we want to essentially have these companies around for three months and ultimately, you know once we have lived with them for three months we will have a better idea of who we want to invest in. So let’s use this model to do that, and of course they didn’t have the right to invest.
(22:57) So here’s the magical result is I think in the first programme, I think eight or 10 companies did it take an investment from Caplin because it was mutually beneficial, not because they had to come right after the program.
Michael:
(23:08) So in a sense you have a different model of corporate innovation from the standpoint of large companies working with startups to the benefit of both, and the model that you’ve developed offers less risk to the large company. And at the same time gives benefits to the smaller company and creates an opportunity for them to work collaboratively together to see, hey, is there something good here and you have that freedom and kinds of goodness seems to emerge.
David:
(23:42) Yeah, what if you know a giant hotel chain or a giant travel company had accelerated airbnb, right could they have controlled that or shape that to be more beneficial to them rather than you know, it really eating away at their business.
(24:02)So you know I think the larger corporations realise that we are going to be disrupted on many levels and technology moves on really quickly. Let’s be close to it, add value to it, and have the opportunity to be the first mover on it because we understand it better rather than let it happen to us.
Vala:
(24:18) I’m a CMO of a $600 million and I never thought about working with Techstars or accelerator program to fuel innovation – you just named Nike, Qualcomm, Disney. I mean some of the largest companies in the world. I had no idea. I mean we’ve got to get this out there.
David:
(24:43) I should come on a talk show and maybe get the word out. That’s a good idea.
Vala:
(24:49) Well you are a managing partner, so can you tell us a little bit about what you do specifically and I would gladly spread the message, no question about that.
David:
(24:59)Yeah, so there are four of us who are managing partners so my focus specifically in the organisation is on the investment side. I’m the original founder and original operator of the business from 2007. David Brown really was also a founder, but has only been active in the business for a couple of years now. He’s our operations person. He makes the trains run on time and manages all the employees and whatnot.
(25:22) Mark Solon and myself are primarily focused on how do we deploy the capital we have intelligently throughout the ecosystem. So we are raising the money and we are deploying the money. Deploying is much more fun, but that’s what I do day to day and you know I show up to these programs and and I mentor as well and I have close relationships with the individual managing directors that run these programs around the world.
Michael:
(25:48) So lets’ talk about that transparency that you mentioned earlier, and you published which is really unusual. You published the companies that you’ve invested in, who’s been acquired and their success rates or failure rate. And you invested in 401 active companies. 67 have been acquired and 58 have failed. So first off, are you happy with these numbers? What do you think about these numbers, your report card?
David:
(26:22) Well it’s probably changed since whenever you printed them right, because we are funding around 200 a year at this pace around the world. But I mean obviously you know, you have a selection bias, we are picking one percent of companies that apply. So you would expect that these would be somewhat interesting companies, and obviously they are.
(26:39)Those companies have raised $1.5 billion in venture capital and employee thousands and thousands of people. My report card is, are we creating a better ecosystem for these companies to be successful every day. I think we absolutely are. You can’t really look at these numbers, that’s the nature of venture capital for about 20 years.
(27:02) Ask me then, how many companies did we create that you know became very meaningful, sustainable, long-lasting and companies who have an impact on the world. You know, I feel like there is eight or nine you know multi-billion-dollar companies in the portfolio. I only know three or four of them, right, but there is probably five more that are given all the promising companies that are out there.
(27:24)And so you know, we are thrilled with it and mostly because we are answering the opportunities for these entrepreneurs.
Vala:
(27:32) Can you talk to us a little bit about some of the main challenges and maybe we’ll focus on SaaS startups, what are some of the challenges that they’re facing.
David:
(27:41) Yeah, I’m on the board of many SaaS startups and it’s really fun to watch, you know when you get that model right it’s incredibly amazing and how that grows and it becomes this annuity if you have returned. I think you know, getting it going is one of the hardest parts. I mean you can in the start-up phase, you really have to find product market fit. You have to figure out how to survive long enough and have enough financing to get that ramp to a place where it’s actually you know, profitable, because you really have to invest in a SaaS model.
(28:13) But you know, fundamentally at the early stages, the companies face – no matter what space they are in they all face the talent challenge. I don’t care where you’re from, right now you are saying I can’t find enough designers, I can’t find enough developers if you’re working on Internet stuff. And so it’s a battle for that talent, and one of the things I like to say is that today, the developers are picking the companies that are going to have a chance. They are picking the companies that are going to get funded.
(28:39) So entrepreneurial developers – not all of them are entrepreneurial, are going in and falling in love with an idea and that money is following them because that’s the hard resources to go get early on.
Michael:
(28:51) To what extent do you invest in enterprise startups.
David:
(28:55)A lot. It’s a big part of what we do I would say you know, maybe not quite half with the sort of B2B more enterprise level companies. And I think it is something that has grown again in popularity. For a while it was all about the consumer. And I think anytime the market goes down for startup investing, you will see more enterprise startups because it is, hey, go figure out a problem, goal solve a problem, go and sell it to somebody and it’s much more straightforward. So you do see some cycles, but we’ve always been very active in enterprise.
Vala:
(29:32) I was going to say, you know every other article I read is questioning the role of the CIO and whether they can ever earn a seat at the strategic table. What do you see happening in IT and why do you think so many people are questioning IT’s ability to drive business results and desired outcomes.
David:
(29:53) Yeah, I mean there’s a little bit of kind of a innovators going on, you have to do protect the thing you have, and you’ve got so many systems in place and so much security concern and privacy security to deal with that sometimes it becomes harder to think about trying something new.
(30:11)And some of the organizational structure out there that I find really interesting is I keep mentioning Qualcomm. They have a venture fund and a venture group that has sustainable it has worked. It’s one of the top corporate innovation venture funds out there. They don’t just do strategic stuff. They do stuff that you know, could someday be product they have, but the organisation of it is really interesting. It’s all organized under I think the CTO. So is not reporting to the CEO, it’s reporting to the CTO. So it’s technology and innovation in that area that’s the purpose of that thing.
(30:46) I think that is interesting, but I think you just get caught in the natural trap. You’re running a huge thing, and protect what you have. That’s a huge challenge already. And anything new is scary and dangerous and this is again why they outsource the model and let it evolve as its own company. Be close to it, but bring it in only when you know it is going to have a huge business impact.
(31:07) Something that is doing $10 million a year is not going to impact these companies. It’s got to be something that will move the needle on the bottom line, so I think that’s the pushback that I see is that they don’t want to risk what’s working and what they have for a potential growth item. Once it’s really working they are very willing to do it.
Michael:
(31:27) Well it’s very difficult to put stability aside if you are a CIO and take that risk. But going back to enterprise startup investing, one of the big challenges I see talking with startups who are wanting to serve the enterprise, is that they don’t always have a clear understanding of the fact that enterprise software is really is about the business process of that large organization. So how do you filter when you’re looking at enterprise entrepreneurs, how do you filter to find people, who have a sophisticated understanding of the way a large enterprise functions, purchases, and evaluates new products.
David:
(32:17)Well first of all – I’m sorry the lights have gone out on you I might have lost your picture and I don’t know if anybody else can see you, I hear you fine. Is actually better than me, I don’t need to see you.
Michael:
Yeah, I’m pretty ugly I get that all the time.
Vala:
(32:55) You’re not the first guest to say that.
Michael:
(32:37) This happens to me all the time.
David:
(32:40) No I think Michael the question is you know indicative again a model that we don’t find ourselves trapped in, because what we do is we go to partner with the enterprise. Right, and we have mentors who are selling enterprise software, who are working in the enterprise helping the entrepreneur navigate that.
(33:00) Right, I think again this is why the network is so important. It’s not just, ‘Hey, do we know anybody at Disney.’ It’s you know we are working with every level of the executive team, right we can have them help guide. One of the most valuable things is when you know an executive like that from a company comes in and speak to our companies and says, ‘he has every division in Santa’s company and how you navigate it and what they care about.’ It invaluable type of information, and when you again build that global ecosystem and have more relationships like that, and more people inside those companies because our portfolio companies are being acquired. Right, they become the executives inside those companies. We use them as coaches to help us navigate. So, it’s not that you have to be born with the skill, we can supplement the natural skills with the power of the network and that knowledge of understanding.
Michael:
(33:49) So that’s where the network is – so I’m just going to be a disembodied voice, you know sort of coming down from the clouds the voice pervading.
David:
(34:02) Vala must have tripped over a cable or something again.
Michael:
(34:06) Yeah something like that, exactly.
Vala:
(34:08) I remotely shut off his camera, Twitter feedback.
Michael:
(34:13) Yeah exactly, that Vala he’s tricky. So basically what you’re doing then is your network is very enterprising and sophisticated with the enterprise issues, so you are able to beef up around the entrepreneur and add the points of view that are necessary again with all those different dimensions, how they buy. How they run their processes, how they change their processes, and the pace that they are willing to change their processes. All of that kind of thing in order to support the companies that are within your network.
David:
(34:45) Yes, because frankly the innovation going to come from people who don’t understand that. Right, they are not going to play by the rules. Right, the guy that went out and created Slack and I don’t know if you’ve seen that in enterprises yet, but it’s coming. You know, he didn’t care of how any of that stuff worked and he is getting good coaching and good help to figure out how to navigate that. So I think you add that in and you let the innovation be pure.
Michael:
It’s a really interesting point of view.
David:
(35:11) I like to do that and
Michael:
(35:14) That’s why you’re a guest on CXO-Talk.
Vala:
(35:17) Our last three guests have been CIO’s who I think have an IT budget in order of a billion. We’ve had Oracle, US Patent Office and US Immigration Office and all of them touched upon consumer technology or consumerization. Do you see enterprise in consumer space merging in terms of the need for mobility, social, apps, data, and so on and so forth?
David:
(35:42) Yeah, I think in 20 years we won’t even be talking about that you know segmentation anymore. If you think about company like Dropbox, which is the common example. Is that a consumer Internet company, is it a personal Internet company, is that an enterprise company – yes. It’s a solution to a problem that ranges through all of that, and has levels that you can graduate through. I mean we are seeing more and more of that and I don’t think people in my life you know may be in yours, identify only with the business they identify with.
(36:19)Their personal life, their family, sport and their companies, and they move companies a lot. Right, so they are bringing the technology that has solve problems for them regardless of the label that we historically put on it.
Vala:
(36:33) So is it just security and scalability that will drive differentiation, or in 20 years, those things will be addressed.
David:
(35:44) Well I think the things that will penetrate the enterprise will still need to have those aspects right, you know if Dropbox didn’t deal with the early security issues or you know the early scalability issues, there is no way it would ever reach into an enterprise.
(37:00) Something like Twitter you know was never thought of as a business focused right until they needed to make some money. Right, it was pure consumer and now all of a sudden it’s for media and TV and advertising and all the other things. Which is just natural evolution, but I think yes you always have to have those things, but we will stop thinking largely about software as for the business or for the consumer. And we will start thinking about it as solving a problem.
Michael:
(37:28) Do you see a difference between enterprise and consumer startups in terms of being aware that they ultimately need to make money?
David:
(37:41) No I think you know, at least the ones we find I think the consumer Internet companies they all know that they’ll make money. There is a business model, and you know we looked at the common business models at Techstars companies at one time and there was about nine. There are all these straightforward ones you would understand. Some of the people would actually say, the only business model we really see is where an audience is massing which will then be valuable to somebody else.
(38:05)And that is a common consumer Internet business model. Companies do get required in the 30 million you know, quarter billion sort of range just because of the audience they bring, right or some strategic value they bring to a larger company. Even although they have no money, no revenue coming in, right we see that regularly in that range. But if you want to be a stand-alone billion-dollar company you are going to have to figure that out eventually.
Vala:
(38:32) David, some advice to entrepreneur, you already gave us six; team, team, team also market fit, getting things done and the idea lastly. But okay, I’m a startup founder, I want to build a team and I want to come and pitch to you and I know I only have 1% chance of making it. what advice do you have in terms of building the right team? What should I be looking for?
David:
(38:57) Well, I mean I think you want to surround yourself with the best possible people, and some people put you know headroom up on that and say, well you know I’m not going to hire anybody better than me because I’m the CEO, I’m the founder. That’s just crazy right, you need you know world-class people if you can get them in every aspect. So I think it means being a strong evangelist. Painting a picture of the future and getting back to this mission driven thing, where people buy into your ideas because they want to come and work for you on the same set of problems. I think that is a skill worth developing.
(39:30) I think you know at the same time, I think just being incredibly obsessed with the solution, right. You know, just being in on the product and not just – oh, I have these people to do that. Intermittently understanding that an intimately driving that. Those are some of these traits and habits of some of the best entrepreneurs that we work with.
Michael:
(39:50) And how about some advice for your mentors. You have 2000 mentors; they’re a critical part of what you do. What’s the key piece of advice that you would share with them?
David:
(40:01)Well they all know it and they all do it, and it’s incredible to watch that at scale. The idea that you come to Techstars for a summer or for three months, you find a company that you want to help and just give, give, give. And you have no idea what’s going to come back to you. Those are the thousands of people that we have volunteering around their system. You know all I can say to them is thank you for that because you are really impacting on entrepreneurship globally. But if you want to mentor a startup and you want to help, go and do it. And I think again it’s a network and not a hierarchy, you don’t have to be someone that is famous or has $100 million exit through M&A.
(40:44) Right, you can be someone who understands search really well, or understands marketing. And you can go and mentor someone; everyone in the community can be a mentor to everyone else. And I think just go and give and you will be amazed in what comes back to you and the opportunities that get generated out of that rising tide lifts everybody.
Vala:
(41:20) Do you know Garry Vaynerchuck?
David:
(41:03) I do, he’s one of the most hilarious people I’ve ever met. He’s so funny, he’s just the funniest guy. He’s a Techstars mentor and he’s spoken at a bunch of our events. He’s just absolutely hilarious and he’s also just so smart. You know, I don’t know if I can quote Garry because Gary is always dropping the F-bomb, business this is all about giving a_ and that’s what he says.
Michael:
(41:38) You can say that, we’re not a family show
David:
(41:39) I did say it, you bleeped me. You pushed the bleeper. But he’s right, I mean if you want to simplify it, if you don’t care about the think you’re doing then you’re never going to be successful because it’s too hard.
Vala:
(41:57) So my final question. A technology that excites you if you think in the next two or three years, you know something that’s – people are not quite on board with but going to be disruptive and change the way we do things.
David:
(42:13) Yeah, well so many. I really want to say teleportation but I just can’t. it’s not coming. You know, I was in Boston yesterday and I’m in Europe next week. I mean jeez, how great would that be.
(42:25) But in the realm of reality you know I think I would stick with transportation I think. It’s going to happen a lot quicker than people even understand that you know we are going to have the autonomous cars. That is going to present a new wave of challenges for safety. These cars are being programmed right now; in what situation do I run this person over or kill that person, versus the three over there – I mean there is going to be some really interesting technology decisions to be made. Right, and I think we are going to start to see this much sooner than people imagine it. I think transportation is one of those fundamental human needs, like communication and when things change it changes a lot.
Vala:
(43:05) What about Hyperloop is that something.
David:
(43:08) Similar yeah. I’d like to see that happen quick. I mean San Francisco to LA. I envisioned it being underground but I guess above ground.
Michael:
(43:18) And final question, what grabs your attention as an investor and what’s more than anything else that you just want to see?
David:
(43:28) In terms of technology or…
Michael:
(43:31) In terms of people who are coming to pitch you, they want money.
David:
(43:35) I mean the passion and passion is such an easy word to say. I look in the eye and I see they will not rest and will not stop until you know, this thing about the world changes. I want to see that fire and I want to see that understanding when I talk to them. And you know, I guess the second thing I would say is I want them to be really honest about it. I want to see their vulnerability, the problems with it, the challenges, have real conversations about it. But you know these traits of people that can’t be stopped. You know, they’re just going to run through every brick wall to get that thing done. No matter how painful, how long it takes. It’s not about an exit. It’s not about making money. Those are secondary to changing the world.
Vala:
(44:20) That’s awesome. I can see why you’ve only had one interview in your life. You were meant to do bigger and better things. That’s awesome. I’m totally inspired.
David:
(44:31) Well cool. Well you know I love the show and it’s awesome to be on. I love the guest’s you’ve had on, they’re pretty amazing. I’ve watched a bunch of the episodes, so hopefully I can live up to that and the people got something out of it.
Michael:
(44:44) Well you have been great. We have been talking with David Cohen, who is the managing partner of Techstars, a larch network of investors, startup, and mentors. David, is that a good way to characterize it?
David:
(45:00) Beautiful.
Michael:
(45:02) And this has been episode number 116 of CXO-Talk. Next week we will be talking with the Chief Marketing Officer for IBM Systems Division, which is basically a multi-billion dollar company in its own right. I’m Michael Krigsman, my gloriously fabulous co-host Vala Afshar. Vala, I hope this week the force is with you in the full extent of its glory.
Vala:
(45:36) Michael, I’m going to be sending an email to a bunch of CIO’s and CMO’s of the largest companies in the world and letting them know about David Cohen and Techstars. That’s what I’m doing so have a great weekend to you both.
Michael:
(45:50) David, than you so much.
David:
(45:51) Thanks for having me.
Michael:
(45:53) Everybody, thanks for watching and come back next time for episode number 117. Be here or be square. Bye bye.
Airbnb www.airbnb.com
Barclay’s www.barclays.com
Disney www.disney.com
Dropbox www.dropbox.com
Ford www.ford.com
Intel www.intel.com
Microsoft www.microsoft.com
Nike www.nike.com
Qualcomm www.qualcomm.com
Sprint www.sprint.com
Spyro (Activision?)
Techstars www.techstars.com
Uber www.uber.com