Mentorship is the Missing Component for Startups

David Cohen is the founder of TechStars, one of the largest and most successful startup accelerators in the world. Though he’s now seen as the go-to guy for mentorship, it wasn’t always that way. Before his TechStars days, Cohen started a company called iContact, which he calls a “graceful failure.” He says it was that experience with iContact that taught him the importance of mentorship. He didn’t have any mentors around then, and he later met people who could have helped his company from going under. “Mentorship is the missing component for a lot of early stage companies.”

Cohen decided to become entrepreneur after getting his first job after college. “A lot of entrepreneurs go through that, they work for somebody and then they realize that they never want to do that,” he says. “I got that one job, worked there for about a year then started a company and have always been in startups since then.” He started and sold companies including Pinpoint Technologies and earFeeder.com, and built iContact in between. It was through building and subsequently folding iContact that Cohen learned valuable lessons about failure and entrepreneurship. ”Every startup that you do teaches you a lot, the ones that fail teach you the most. I learned a lot of specific lessons relating to the internet including the importance of distribution, and just how critical that is to the success of just about any internet startup,” he says. “At that time there were no app stores or open systems and really the phone carriers controlled distribution. The gatekeepers who control a market are difficult to work with.”

It was 2003 when iContact shut down, and Cohen reflected on it with a post-mortem in 2006. He says in nine years the approach to failure hasn’t changed much in the U.S. “In general, we’re really fortunate in this country that people accept failure,” he says. “I travel all over the world and talk about entrepreneurship and in many places its not tolerant.” He believes every company that fails should write a post-mortem because writing it down forces you to think about the lessons that you learned from that company, and it also could help someone else going forward. “It’s really powerful to do but not a lot of people do it.”

Cohen launched TechStars with Brad Feld, David Brown, and Jared Polis in 2006. The mentorship-driven seed stage investment program runs three-month long programs in cities like Boston, Seattle, Boulder and NYC, taking technology businesses from idea to viability through mentorship, access to investors, and funding. Each of the ten companies selected for a class receive $18,000 in funding and are offered a $100,000 convertible debt note, and graduates of the program raise an average of $1 million in outside capital. TechStars has launched now-acquired companies including BrightKite and DailyBurn, with 104 companies in the alumni network.

The program also features a network of mentors including prominent investor Fred Wilson, and Foursquare founder Dennis Crowley. Their approach to mentorship is what Cohen calls the “Socrates approach.” “The mentor does not know all, the mentor is simply there to share their own experiences and to be supportive of the company however they can be,” he says. “Big red flags go off for us when we have mentors that say this is absolutely how it is and I’m right. Instead they can say I’ve been in four experiences, it’s always turned out this way and hopefully you can learn from that and talk to other people.” He says the best mentors are happy to be told no.

TechStars made headlines recently when it was revealed that it’s harder to get into the program than to get into Harvard. They receive hundreds of applications for each spot, and founders are constantly trying to figure out what they can do to stand out. Cohen says the five things they look at for Techstars in order are, team, team, team, markets and ideas. “Team is the first three, so when we say how can a founder stand out, really how can a set of founders put together a team that has some unfair advantage or unique insight into the market they’re attacking,” he says. “Why is this team the team that can do this thing? That’s the number one thing you have to convince us of.” Beyond that he says they’re looking for teams who really understand their market.

Nine of the TechStars graduates have already had their company acquired, and many more will sell in the years to come. So what’s Cohen’s advice for navigating an acquisition? He says it’s important to have people who have been through that process on your side. He tells the story of his first company, which he sold. “We bootstrapped the company and there were just a few founders and we did really, really well with it. But I got to know the CEO of the company that acquired it over the next few years and he told us very directly, ‘You left half the money on the table.’ Otherwise, you sucked at negotiating that deal.” He said that because it was his first exit, he didn’t go find a mentor that understood those dynamics. “We did great, but we left half the money on the table.” The lesson for startups is to get someone experienced to help you navigate an acquisition. “I’ve seen Brad Feld double outcomes on phone calls for our companies at exit,” he says. “He has the ability to just understand what’s happening and how to negotiate. He’s had a wide range of experiences.” He says at Techstars they take six per cent equity, but it will probably double a company’s exit value. “Not only because of the experience and negotiating, but of the number of people the acquirer gets on their team. Mentors, mentors, mentors is the answer.”