Techstars’ $80M partnership with J.P. Morgan is on the rocks, employees say
Reading Time: 4 minutesDuring a Zoom meeting with her senior leaders last summer, Techstars CEO Maëlle Gavet sat at a table, an open notebook in front of her, a laptop to her side, her arms crossed. An attendee had just asked her about the progress of the organization’s $80 million Advancing Cities Fund, which was raised through J.P. Morgan’s Private Bank Platform.
Techstars had begun assembling cohorts and deploying out of the fund since 2022 with a goal to back more than 400 companies founded by underrepresented founders. It led to the creation of Techstars programs in at least eight cities, including Oakland, Atlanta, and Miami.
However, J.P. Morgan has yet to tell Techstars whether it will renew the partnership for an Advancing Cities 2 Fund once the initial contract expires in December, sources say. That decision was supposed to be handed down last summer so that Techstars could start fundraising and begin deploying capital in 2025.
This means the fate of the Advancing Cities programs — and some of the around 20 people who work at Techstars in this program — is up in the air.
A ‘long series of incidents’
At the same time, Techstars is known for supporting founders of color and giving them opportunities that would otherwise be hard to come by. Funding for founders of color is so chronically dismal that access to capital can be life-changing.
From the outside, the uncertainty of this program’s future may look like J.P. Morgan is simply retreating on its diversity promises, following the path of many corporate institutions that walked back commitments made after the murder of George Floyd. However, several current and former Techstars employees say that Techstars has struggled to live up to the robust expectations that J.P. Morgan had when it partnered with the firm for this fund.
A Techstars presentation from another meeting that also took place in August noted a ‘long series of incidents’ since Techstars started deploying its Advancing Cities Fund in 2022. These involved multiple complaints about directors at multiple programs, as well as issues with events, including behavior, programming, naming, and sponsors. The bank grew so concerned about an invitation extended to a politician at one DemoDay that it withdrew its branding, sources said.
J.P. Morgan also flagged four instances of ‘inopportune’ wording around Techstars’ diversity goals. For instance, Gavet and a managing director wanted to call the Oakland program Techstars Silicon Valley despite J.P. Morgan’s intention to emphasize the accelerator’s focus on and presence in a prominent Black city. In the end, the accelerator program was named after Oakland.
Conflicting definitions of diversity
For $80 million, sources said, J.P. Morgan simply expected better results.
Five people close to the matter, some of whom are no longer at the company, said there has always been a focus on increasing gender diversity within Techstars programs, but race would fall by the wayside. Some managing directors struggled to source founders who would be considered diverse under J.P. Morgan’s standards. The different tags and broad definition of diversity helped Techstars spin some numbers when it comes to publicly stating the diversity breakdown of their programs, said three sources with knowledge of the matter.
Grossman emphasized that, as of late last year, 63.5% of the Advancing Cities CEOs accepted into the program, who agreed to self-report their race, are Black, Latino, Indigenous, or Pacific Islander. He added that every cohort besides one has hit the 50% objective. This report, made public late last year, covered only the first half of the fund’s investment and initial cohort acceptance. It did not specify the diversity percentage of graduates.
Pay tied to returns
Another source of friction was that J.P. Morgan wanted the focus of the program to lean toward a high percentage of diverse founders, but, like all investment firms, Techstars rewards managing directors primarily based on returns.
That means managing directors are trained to search for startups that they believed were likely to graduate from the program and land follow-on funding from other VCs. That provided another layer, making some managing directors prioritize program acceptance on metrics other than founder diversity.
‘We’ve always said that we are looking for the best founders,’ explained Monica Wheat, managing director of the Detroit Advancing Cities program. ‘We’ve always also said that we are doing that but targeting underrepresented founders. And we do that specifically through all the MDs’ respective networks and respective experience as investors. We’re investors first and foremost.’
Techstars said that managing directors’ compensation includes carried interest, aka a percentage of the fund’s profits, and a cash bonus. To align rewards with J.P. Morgan’s mission, some percentage of the bonus for managing directors in the Advancing Cities is tied to how many of their startups fit the diversity criteria.
In addition to the friction over acceptance priorities, four sources said J.P. Morgan was also frustrated with what it saw as high staff turnover in the leadership suite. Since last year, Techstars’ chief revenue officer, chief technology officer, chief financial officer, chief accelerator investment officer, chief capital formation officer, and chief legal officer have all departed the C-suite. This is in addition to the 10-plus managing directors who have left for various reasons and other staff turnover.
She added that Techstars’ own accelerator fund could not take over Advancing Cities’ entire footprint, either, and that it was essential for the fund to be successful.
But as recently as this month, sources said that leadership had warned staff in all-hands meetings that if the contract with J.P. Morgan doesn’t renew in December, then people in those programs should be ready to go to other programs or apply for other internal roles if they are willing to relocate, or they may be exited from the company.
It is unclear when the returns of Advancing Cities are expected, but if it follows a traditional fund cycle, J.P. Morgan could be waiting at least seven years to see the results of the $80 million investment. This December, however, comes well before then.
Ref: techcrunch
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