SXSWORLD

New Venture Capital Firms Adapting to Tech Sector's Rapid Changes by Timothy Varner vation. It seemed that for some old-line investors, freemium was just another word for voodoo. Th is year, SXSW Interactive's Startup Village will host its fourth annual Accelerator, a two-day competition that features 48 startups competing to convince a select panel of the merits of their ideas and products. In many ways, this competition and the investors that attend refl ect this wider evolution of venture funding. Y Combinator (YC) is one of a handful of venture capital groups to organize itself around a diff erent vision for seeding economic I n the middle of last decade, the climate in the venture capital world started to change. Traditional models of seed funding were not well-equipped to maintain pace with the rate of technological inno- 2005, YC has provided seed funding for more than 380 startups. "We can't think of ways to improve Y Combinator that we're not already doing (or we'd be doing those too)," says co- founder Paul Graham. Tech accelerators such growth. Since as YC, 500 Startups and TechStars diff er from one another, but there are rela- tive similarities in their approaches. off ers lean (relative to more Each group traditional models) seed funding, a holistic mentoring program and a short, intense "boot camp" style development window, often as short as three months. 500 Startups founder Dave McClure once quipped, while channeling his best inner Billy Beane of Moneyball fame: "If Sequoia (Capital) is the Yankees, [tech incubators] are the Oakland A's." McClure's analogy works. Th e early returns on tech incubators sug- gest an ability to realize better returns on leaner budgets. Y Combinator funds startups at $20,000 or less. Similarly, TechStars off ers up to $18,000 in seed funding. But the results are convincing. Since 2007, TechStars has provided seed funding and guidance for 92 companies. Seventy-six of those companies are still active, eight have been acquired and only eight have failed. Based on these numbers, TechStars has a success rate of 91%. Venture capital fi rms are often regionally-focused and restrictive, wanting to stimulate job creation and new wealth within a particular city or state. Tech accelerators see the world diff erently. "It's an illusion that incubators are specifi c to local markets," Graham explains. "In fact they all serve the same national (indeed international) pool of founders. People who start incubators often have the mistaken impression that they'll be serving some local market, but when they try funding their fi rst batch of startups they notice: (a) the applications are SXSW 2011 Accelerator Winners 24 SXSW ORLD / FEBRUAR Y 2012 from all over, not just their area, and (b) that the best startups from their area apply also to incubators in other places." Although tech accelerators are not tied to the economics of particular municipalities, they do maintain a concern for communities. Nicole Glaros, managing director of TechStars Boulder, notes that tech acceleration programs and incubators are actively working to improve the "entrepreneurial ecosystem" by teasing out "the inner entrepreneur in non-traditional populations such as women, minorities and youth." "TechStars makes a solid eff ort in this area, and while our minority population is more active than most (other cities), it's still small. We just don't get the applications from those communities," Glaros continues. "But we're partnering with orga- nizations that work in this space, such as NCWIT (National we accumulate more expertise, and the alumni network grows bigger and more powerful," Graham says. "We've now funded over 380 startups with 800 alumni between them, so the alumni network is already pretty big. But each new person adds knowledge and contacts to the pool." "Th e magic of TechStars is the mentorship, and with mentorship, the success rates skyrocket," Glaros opines. "Th e success rates beat the average venture fund, so we act as a fi lter for many VCs. Th ey look to us for quality dealfl ow." ■ vide an ongoing network of support for its participants. Y Combinator employs a similar strategy. "As we fund more startups, SXSW Interactive's Startup Village will be open Friday, March 9 - Tuesday, March 13 and headquartered on the 4th Floor of the Downtown Hilton Hotel (500 East 4th St, across from the Austin Convention Center), with satellite events happening at various locations around downtown Austin. There also will be a Startup Village section of the SXSW Trade Show. For more informa- tion, visit sxsw.com/interactive/startupvillage. SXSW Interactive Accelerator (presented by Microsoft Bizspark), will be held on Monday, March 12 and Tuesday, March 13. For more information, including a list of the competition's fi nalists, visit sxsw.com/interactive/startupvillage/accelerator. Women in Technology) and actively trying to improve the ratios." But at the heart of this new generation of venture capitalist is the ability to provide imme- diate momentum and a deep network of mentors for entrepreneurs. Glaros points out that TechStars is committed to "dive deep after the … program ends" by looking for ways to pro- Center for REGINA VISCONI

• Cover