WHY TECHSTARS’ EQUITY BACK GUARANTEE IS RISK-FREE

Techstars made headlines when it offered an equity back guarantee. Will other accelerators be doing the same anytime soon?

Techstars’ “equity back guarantee” is being met with shrugs by other startup accelerators, who say the offer is more about PR than revolutionizing the accelerator business model.

“It’s an interesting marketing gimmick, but it didn’t shift the landscape in any sense,” said Vic Gatto, founder of Jumpstart Foundry, a healthcare accelerator in Nashville, Tenn.

With 13 locations, Boulder-based Techstars is one of the most prominent accelerators in the world. It made headlines this fall when it announced that, beginning in 2015, companies that successfully completed its course would have the option of reducing or eliminating the 6% equity share taken by the accelerator. In exchange for the 6%, Techstars offers $18,000 in funding and a $100,000 convertible note.

Techstars CEO David Cohen has said the equity back guarantee erases any doubts applicants might have about the program and is a sign of the accelerator’s confidence in its value. Since the announcement, no other accelerators have followed suit and several contacted by ID8 Nation are even upping their equity share.

Chris Heivly is CEO of The Startup Factory, a tech accelerator in Durham, N.C., that takes 7.5% equity in exchange for a $50,000 investment. He said the equity back guarantee is a way for Techstars to distinguish itself from other high-profile accelerators like Y Combinator and 500 Startups.

“They have to find a way to be unique,” he said. “From where I sit, I don’t need to do that.”

Other accelerators dismissed the idea that Techstars is taking a risk with the equity back guarantee.

“There really isn’t any risk. I thought it was a great marketing strategy,” said Kirk Coburn, head of SURGE Ventures, an energy accelerator in Houston that recently raised its equity stake in member companies to 8% from 6%.

Accelerators identified a number of reasons why Techstars is not running a risk:

1. Techstars is a quality program. Companies that survive the competitive application process and complete the course are unlikely to be dissatisfied enough to ask for equity back.

2. Most startups are worth little or nothing upon graduating from an accelerator, so any equity Techstars might lose has potential value only, not real value. And, companies that want their equity back, “aren’t going to be the companies that build equity, anyway,” Coburn said.

3. One of the benefits of Techstars is access to a network of 3,000 alumni companies. Any startup that asked for equity back is likely to become a pariah in that network and the larger startup community as well.

Heivly, Gatto and Coburn said they’ve never had a graduate startup ask for equity back, and predicted Techstars is unlikely to see that request either.

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