Episode 19 – Accelerating Impact at Techstars

Lisa Graham (00:00):
Hi, my name is Lisa Graham, and I’m happy to welcome you to another episode of Change The Rules. I have my co-host, Dan Graham, with me.
Dan Graham (00:06):
Hi.
Lisa Graham (00:09):
And today we’ll be talking with Zoe Schlag, Managing Director at Techstars Impact. Thanks for being here, Zoe.
Zoe Schlag (00:13):
Thanks for having me.
Lisa Graham (00:14):
Awesome. So you are the Managing Director at Techstars Impact, but when we first met you, you were with UnLtd USA. And I think when we met you, you had just flown into Austin from India and were checking out Austin, figuring out how to bring Unlimited to the States. And since then, that venture has merged with Techstars to create Techstars Impact. And so to start out, can you tell us what Unlimited is or was, and then how this merger with Techstars came about?
Zoe Schlag (00:46):
Sure. Back at the beginning. So let’s see, I started UnLtd USA about four or five years ago. Before that I was actually living in India, I was there for two years. And the Unlimited model is to find entrepreneurs building business models that solve social problems. We invest a small amount of money in them and then work with them over the course of the year. I did that for two years in India. Totally fell in love with the model. Loved working with the entrepreneurs. So decided to look back at the U.S. And see if there was a place for it. Unlike a business school student, I did not do any kind of feasibility study like you would see from your top MBA schools. I went on a road trip. So when I was looking at where to launch Unlimited, we did an eight city tour across the U.S. to evaluate different cities to launch the program in. We had myself, the two co-founders of Unlimited India, and an Armenian entrepreneur. So we were an American, a Brit, an Indian, and an Armenian packed into a car going across the U.S. to figure out where to launch UnLtd USA.
Lisa Graham (01:44):
It sounds like a reality TV show.
Zoe Schlag (01:46):
More or less. It did include a hospital visit at one point and a lot more stories. So that was back in 2013. From that trip, we visited Oakland, Boulder, Austin, New Orleans, Charleston, DC, Philadelphia, and New York. Ended up selecting Austin to launch UnLtd USA for a handful of factors. One just the pipeline of entrepreneurs here. The type of entrepreneurs we want to back who are actually building sustainable business models that solve social problems. Two is the fact that there was a plethora of investors who were wanting to invest in these companies.
Dan Graham (02:24):
What was your least favorite city that you considered?
Zoe Schlag (02:41):
Oh, man. I loved Oakland actually. I would say Philadelphia and New Orleans were the second and third on the list where we almost launched.
Dan Graham (02:50):
Oh, very cool. Both great cities.
Zoe Schlag (02:52):
See how I veered that question.
Dan Graham (02:54):
That was really well done.
Zoe Schlag (02:57):
Thank you. So, let’s see. So we picked Austin. Oh, and then the third piece, there was just a gap in the landscape here. There were not many organizations that were actually investing in for-profit entrepreneurs tackling social problems. So to us it was kind of a no brainer. And then the tacos here were just like cherry on top.
Dan Graham (03:17):
What’s amazing is people listening to this now might think that it was sort of a no brainer, great fit. But when really the first time you and I talked, there really wasn’t an ecosystem here for social innovation or social impact investing or anything in that space. I mean, you were really kind of pioneering that when you came to Austin.
Zoe Schlag (03:35):
Yeah. So there were definitely a few people who were really deep building in this space five years before Unlimited showed up. That said, I remember, I think my first five meetings in showing up in Austin, three people told me to leave because there were no entrepreneurs here in Austin to build this this type of organization that I wanted to build. So those were my first five meetings. It was not encouraging. But also lines up with kind of exactly the story you hear from entrepreneurs that you’ll get a lot of no’s before you get yes’s.
Dan Graham (04:10):
I feel like it’s part of every great entrepreneurial story. There’s some part of it where everyone is telling them that’s not going to work.
Zoe Schlag (04:18):
Oh yeah. I got a lot of that. In some of the cities I went to. Austin was really receptive actually. That was a huge piece. Another piece of why we came here. Because there were so many investors and entrepreneurs who were interested in this idea, willing to work with me to figure out the pieces to make it work. Versus some of the other cities I went to, it was just closed door after closed door, after closed door. So that was another piece of it, I would say.
Lisa Graham (04:44):
And so how did the partnership with Techstars come about?
Zoe Schlag (04:47):
That’s a good question. So let me fast forward. So we launched Unlimited in January 2014. The model was running cohorts of entrepreneurs through a year long class. We’d invest in them.
Lisa Graham (05:02):
And when you say, sorry to interrupt, but when you say “invest”, where did that money come from? Did you work with other investors to invest in you all? Or how did you raise money?
Zoe Schlag (05:09):
Good question. So we were a charitably funded 501c3. We would raise grant dollars to make our investments. Had a lot of support from Austin investors, folks like Notley Ventures. The Hitachi Foundation was one of our big supporters early on. We would raise grant dollars, invest them in our entrepreneurs. Our investments looked a little bit different than what you typically see in this space, in that, because we were a charitable organization, we were able to take on that early stage risk. So we did what we called a “pay it forward model,” which is that the ecosystem we were trying to create was one where entrepreneur who have had success invest in the next generation of entrepreneurs. We’ve seen that in the tech ecosystem. I mean, Dan, you do a lot of this. You’re a successful entrepreneur investing in the next generation.
Zoe Schlag (05:58):
And so the way our financing was structured is Unlimited entrepreneurs, instead of paying their funding back to Unlimited, they would, in five years time, invest it in the next cohort of Unlimited entrepreneurs. So we ran through three cohorts doing this. And along the way, we were thinking about how we could grow and scale, because we were primarily working with Austin based entrepreneurs and had an unsustainable business model ourselves. The irony of which I did not lose, kind of a punch in the face every single day when I showed up to work. That was on my mind non-stop as we were building Unlimited. And I knew we would have to eventually transition to this new sustainable model. We used the charitably funded route at the outset to be able to really understand the ecosystem in terms of “what does the pipeline of deals look like?” and “what does the appetite from investors look like?”
Zoe Schlag (07:08):
So, about two years in, I was knocking my head against the wall every day on our business model. We got some momentum to go out and build a small fund, primarily from Austin-based funders. Looked at that model and we basically realized that would be great, but it was never going to create the kind of systemic change that we really wanted to see at more of a global level. What I’m really excited about is what happens when you take these entrepreneurs who are building business models to solve social problems and put them at the center of the best network of resources and support in the world, regardless of who they are and what they’re building.
Dan Graham (07:44):
So as you were kind of beating your head against the wall, what kept you going? Were there particular companies that you were working with that were just doing amazing things? What are a couple of examples of those rays of light that you kind of look to to just really continue that momentum?
Zoe Schlag (08:04):
That’s a good question. That is the sole reason why I’m in this and like the only thing that kept us going. So, let’s see, from Cohort One, we had PelotonU co-founded by Hudson Barrett and Sarah Saxton. I think you guys know them very well.
Dan Graham (08:19):
Very well. And they pitched at Philanthropitch last year and did very well.
Zoe Schlag (08:23):
They’re a great organization supporting working students to earn a college degree on time and debt-free. They’re one of them. Let’s see, Buzz White. He was the founder of Blue Hub Health, which is a patient centric EHR system. They were actually acquired by Afoundria a year and a half ago and Buzz is now the President of Afoundria.
Dan Graham (08:51):
DHR. Is that electronic health records?
Zoe Schlag (08:57):
Yes. Buzz is awesome. He is a hilarious entrepreneur. Brilliant, absolutely brilliant, but also very hilarious. So yeah, I mean, working with these founders was really a big piece of what motivated me. And actually it was the piece that showed the opportunity with Techstars to me, which was that as we were working with our entrepreneurs, we kept finding ourselves looking at the same entrepreneurs as Techstars here in Austin did. So Pen Pal Schools, they were in our second class at UnLtd USA, and then they went through the Techstars Austin class. And so as me and my board members are beating our heads against the wall figuring out our business model, we just kind of looked at each other like, ‘huh, maybe there’s something to explore here.’ So before I jump into that, when I was looking at raising this small fund, we went pretty far down this path of raising a fund. And one of my personal mentors, he’s a GP of a $250 million fund, he sat me down for breakfast one day and he goes, ‘Zoe, you can go do this. But I just want to let you know, raising a fund is like crawling uphill on your hands and knees over broken glass for two years.’ Great. Sign me up.
Dan Graham (10:20):
So was he trying to encourage you to continue doing this? Or was he saying, please do something else and hire me?
Zoe Schlag (10:32):
He’s been an incredible support. This was in New York and I was just like, well, I don’t know, maybe other entrepreneurs feel this way too, but like that type of challenge, like, all right, let’s do this.
Dan Graham (10:44):
We just did the Tough Mudder this weekend. So crawling on your hands and knees over broken glass, it has, you know, very tangible sort of, you basically have to do that. Yeah. It’s rough.
Lisa Graham (10:59):
I did it through soft mud and it hurt. Under barbed wire.
Zoe Schlag (11:04):
That’s like equally as bad. I mean, if I can imagine barbed wire going over my head.
Dan Graham (11:09):
Well, you know, when you get to one of these obstacles and one of the signs says, if your teammate gets stuck in the barbed wire, please stop to help them. Anyway, sorry, that’s a bit of a tangent. So, broken glass.
Zoe Schlag (11:23):
So, yes. So as we’re building this, we had an incredible board at Unlimited since the outset. Really, really smart people. And at that point, Jason Seats was one of our board members. He’s been an incredible supporter of Unlimited since the very beginning.
Dan Graham (11:40):
He was a judge in your first cohort class, yeah?
Zoe Schlag (11:43):
Yeah. I completely forgot about that. So he’s been involved since the very beginning, he’s a Managing Partner at Techstars. And so when we kept running into the same entrepreneurs, I said to him, ‘let’s just see if something makes sense here.’ So at that point I went through the full Techstars portfolio (at that point, they’d invested in about a thousand companies) and saw that they have just organically been in this space for several years. And what we saw is that the number of social ventures that were just coming on to the Techstars platform was increasing year on year over the last three years by over 50%. And this was unintentional. They were just investing in the best opportunities they found.
Zoe Schlag (12:29):
And so it just felt like a no brainer to us that we would look at this. And then what’s interesting actually is when we compared the impact cohort at Techstars to the general cohort, the impact cohort was actually outperforming. So it was a no-brainer to move into this space. So that’s the point at which we essentially folded Unlimited into Techstars to launch Techstars Impact, which is the first program at Techstars that backs forprofit entrepreneurs building technologies that solve social problems.
Lisa Graham (13:02):
Great. And when you guys are selecting these organizations, what are you looking for? How do they find you guys? Because these people are coming from all over the world to come to Austin, to work with Techstars, and to work with you. How do you get the message out there? And then how do you start figuring out who’s going to come?
Zoe Schlag (13:22):
That’s a really good question. So let’s see, we looked at, for this first class, we looked at just over a thousand companies to select 10.
Lisa Graham (13:29):
Wow.
Dan Graham (13:31):
Oh my gosh. So that took a couple of hours.
Zoe Schlag (13:37):
Sped right through it. So I guess they hear from us from a handful of ways. You know, some of it is from other investors, some of it’s from other founders. A lot of it at this point, I mean, Techstars is a worldwide network that supports entrepreneurs. We run 40 accelerator programs around the world. And then have, through our startup programs, a our presence in upwards of 150 countries. So, in terms of getting the word out, Techstars already has this massive global presence. For the impact program, a piece of it was just making sure that founders knew that there is a program for them if they are actually building the type of business model that solves a social problem. So it was a huge amount of work on my end, just kind of working through different referral networks to have folks send founders to us to review. And then let’s see, in terms of selecting the founders, I would say, to way oversimplify, I’ll put my finger on two things.
Zoe Schlag (14:36):
So one is starting with the business model. At the end of the day, we back people first and foremost. But starting with the business model, the way we look at impact at Techstars and the way where I think the impact and mission actually becomes a competitive advantage to drive better business outcomes is if you’re building a business model where the business model and the impact model sit in lock-step, and they’re intrinsically tied, such that scaling the business model has the inherent effect of scaling impact. That’s the point at which this really becomes this flywheel around the company.
Lisa Graham (15:10):
Can you give an example or a couple of examples of that?
Zoe Schlag (15:13):
Yeah, let’s see. So Zipline is a company that went through Techstars a couple years ago. They build drones to do last mile delivery of medical supplies in rural Africa. So they’re increasing access to medical supplies for communities that previously wouldn’t have access to them. But as they scale that business model, it scales access by providing more access to medical supplies.
Dan Graham (15:39):
And so, if the organization or the company meets that criteria and if that takes it from a thousand down to 200, then at that point, is it just kind of a best investment kind of ROI/IRR type evaluation once they meet that minimum criteria? Or do you have some comparison of impact in the social space that you then apply to that spectrum?
Zoe Schlag (16:09):
That’s a really good question. The way that we limit impact risk in what we’re doing is one around the intrinsic type business model, the impact model, to the extent to which impact is a part of the immediate go-to-market strategy. And then I guess I should’ve started with our initial eligibility for impact is a technology that solves a social or environmental problem. Under social, we look at technologies that increase access or affordability to basic services and needs. So that’s a lot in education and financial products. Technologies that decrease poverty and inequality and technologies that increase diversity and inclusion. On the environmental side, we’ll look at technologies that increase access or affordability to clean energy or climate change solutions, food supply insecurity, and then water and sanitation systems.
Lisa Graham (17:04):
What do you mean when you say “impact risk”?
Zoe Schlag (17:07):
Ah, awesome question. So the same way an investor looks at the financial risk and return profile. We also look at the impact risk and return profile. So this is a calculus we look at in terms of, you know, first and foremost we’re investors. So we are investing for a financial return. The criteria laid out before is how we think the impact actually accelerates that. For instance, one-for-one models, I won’t invest in them. I’m decidedly an un-fan of them. And the reason is because there’s so much impact risk. Because if you hit a cash crunch, you can immediately divorce the impact side of the business out of that, and never add it back in. And that, I would say, can have negative implications for the business model itself and ultimately your financial returns.
Dan Graham (18:01):
So if you’re looking at two drone companies and both drone companies are delivering medical supplies to rural Africa, and one company is delivering slightly fewer medical boxes, but making more money. And the other company is delivering a lot more medical boxes, but making a little bit less money. How do you decide which of those drone companies to invest in?
Zoe Schlag (18:32):
Yeah, that’s a good question. And there’s no right answer to that because the answer to that, I would say, is really dictated by the type of capital that you’re managing. So for instance, you could find a Rockefeller or any kind of charitable foundation who would look at that and they’re managing impact risk before financial risk, versus a commercial VC is going to manage financial risk before impact risk. I think the scenarios that I’m most interested in are the scenarios where you see a Rockefeller and a Sequoia on the same cap table. There’s something interesting going on there because they’re managing for different types of risk.
Dan Graham (19:13):
But you know, if really what it is is you’re coming in as an additional player at the table and you’re looking at who else is at the table, then I think kind of evaluating these opportunities. I think it’s probably very unlikely that you have that exact scenario I just put out there.
Zoe Schlag (19:25):
I mean, it’s a good question. And I’ll say, first and foremost, we’re investors looking for a financial return. So that’s a calculus that we look at. Intellectually, I guess I would approach that for which business model has the greatest chance towards business scale, because at business scale it will deliver the most impact.
Dan Graham (19:42):
Right.
Lisa Graham (19:44):
Earlier, the language you were using too was, ‘the founders that we meet are the founders that we invest in’. How much does that play into the selection of these organizations?
Zoe Schlag (19:53):
So that’s our most important calculus when looking at this, because, you know, at the end of the day, we’re an early stage investor and we bet on teams. So that’s the impact risk and return profile that we look at from the business side of things. But at the end of the day, I’m looking at the team. And what I like to look at with the team is, you know, equivalent to your product market-fit, your founder-problem fit. Is this a founder who is well equipped to solve this problem? They have the knowledge, expertise, networks to build a company in this industry. And you know, is this a problem that I believe this founder wants to spend the next 10 years of their life waking up at 4:00 AM stressed about the business thinking about? If I can say yes to that, then I get excited. And I say that, because I woke up at 4:00 AM every night for many years at Unlimited.
Lisa Graham (20:45):
And so when these companies are selected and they come to Austin, what do they do for three months when they’re with you guys?
Zoe Schlag (20:53):
Good question. It’s a packed three months. So we have 10 companies coming in. They’ll all arrive on June 4th here in Austin. We invest $120,000 in each company and then put them through our 13-week mentorship driven accelerator program. So what that looks like is these companies will meet anywhere between 80 to 100 mentors over the course of the initial three weeks of the program. It’s nuts. It’s crazy busy. But it’s an incredibly helpful and beneficial exercise, because you’re basically getting advice from very smart, successful people that is often contradicting. So as an entrepreneur, you have to deal with and figure out how to filter that, and be able to take the best advice and apply it to your business.
Lisa Graham (21:37):
Well, I’d imagine too. I mean, there’s probably a lot of cultural differences as well that come into play. These people are coming in from all over the world. They’re working in a very different environment solving issues that maybe entrepreneurs here don’t even know exist.
Zoe Schlag (21:48):
100%.
Lisa Graham (21:48):
And so it sounds like that would be a huge part of this kind of getting through that information. But I think it’s also do they come across a lot of similar problems? I guess that would probably be surprising, maybe.
Zoe Schlag (22:02):
Yeah. I mean, building a business and building a mission-driven business, there’s the same pattern of challenges that you’ll run into. Obviously there’s nuance depending upon what industry you’re working in or what markets you’re working with, but, for the most part, we find that there’s a lot of transferable and applicable knowledge across different domains. So if we’re working with a team in Sub-Saharan Africa, having a mentor, even if they haven’t actually been on the ground in Sub-Saharan Africa, may have incredibly useful knowledge about building their go-to-market strategy.
Lisa Graham (22:38):
Right. And where do you guys find your mentors? Are they in the Techstar network? Is that a benefit of having this partnership and merging? Or is it Austin market?
Zoe Schlag (22:48):
Good question. So I went out and recruited our mentors for the impact program. And a piece of that I’m actually still doing because the remainder of our mentor network we built after we selected the 10 companies, so that they could align with the industries and business models of our founders. But our mentor network includes folks like successful entrepreneurs who’ve exited, taken companies public, industry professionals, early stage investors, experts who have specific domain expertise. So, it’s pretty wide ranging.
Lisa Graham (23:23):
And in terms of getting everybody here, how does that exactly work? Is that a big part of your job as well?
Zoe Schlag (23:30):
Yes. Turns out relocating with families across borders is not always easy for everyone.
Zoe Schlag (23:45):
It’s a big commitment for them to come here. We deal with challenges like visas, figuring out how to relocate for the period of three months, which, you know, it’s a big commitment, but ultimately huge value to these companies. Looking at not just the Techstars Impact network, but the global Techstars network. Which when we back an entrepreneur, we say Techstars for life, and they have access to our global network of corporate partners at any point.
Dan Graham (24:19):
Does Techstars Impact just invest in for-profits or does it do PRI or MRI type investments in nonprofits? And if not, you mentioned PelotonU earlier as something that kept you going, and as a nonprofit not being able to serve them. Talk about that a little bit.
Zoe Schlag (24:36):
We exclusively work with for-profits. We don’t invest in nonprofits at all because we’re a venture firm. So an organization like PelotonU was a fit for UnLtd USA and would not be a fit for Techstars Impact. I’m a huge fan of them, huge fan of the team. This also what I’ve seen in the impact investing world. I think you really need to tighten the aperture around the type of entrepreneur and the type of company you’re backing. One of the things that I loved about Unlimited, but that was wildly challenging, is that we backed for-profits, nonprofits, every industry. As long it was a business model that solved a social or environmental problem, that was in the realm of what we could look at. The result of that is that we had some entrepreneurs who went on to raise VC money. We had some entrepreneurs raise money from CDFIs. We had some entrepreneurs who raised grants. And so it was this massive network that wasn’t actually streamlined across them.
Lisa Graham (25:38):
I mean, Techstars provides this incredible network. It’s worldwide. It’s huge. How important is the ecosystem to these entrepreneurs when they come through a program like this? Being able to have people who are in similar situations that they can go to back home or wherever they decide to maybe travel and establish their business? Even developing that ecosystem, you know, how important is that to their success?
Zoe Schlag (26:05):
That’s a good question. I mean, I think the ecosystem is critical. Well, some entrepreneurs can just build their companies isolated and they just power through. But having a supportive entrepreneurial ecosystem makes such a huge difference. I mean, that’s a huge reason why Unlimited was successful here in Austin. I remember, I think you were probably like my first 5 to 10 meetings here in Austin, Dan. And you introduced me to a huge community here in Austin.
Dan Graham (26:34):
I think when we first talked, you were actually in India. And it was a phone call.
Zoe Schlag (26:38):
Oh yeah, you’re right. Oh man. Okay. So I’d forgotten about that. So there were maybe like five people I talked to while I was still in India and had chosen Austin and knew we were going to come here. You were one of them, Dan. And I was just like, where do I get started? Coming to Austin, I knew a single person well moving here, which was the co-captain of my high school soccer team.
Zoe Schlag (27:13):
But the fact that I could have that call with you while I was in India. And then you introduced me to a huge number of successful entrepreneurs, investors when, at that point, the ecosystem wasn’t as developed here. I would say it was more like people learning about what is this model? What could this look like? But having ecosystems like that matters so much.
Dan Graham (27:32):
Absolutely. So, your first Techstars class is about to be announced. What are you most excited about? What spoilers can you give us?
Zoe Schlag (27:41):
Oh, man, that’s such a good question. What am I most excited about? These are some really strong teams. I think the teams that are coming, several of them this isn’t their first business. So they’re onto their second or third business at this point. A couple exits in the past. Really, really strong teams. I think the other piece that’s really interesting is we have a huge diversity in terms of industry and location that these entrepreneurs are coming from. Which I anticipated we’d have at least maybe a couple more thematic buckets in our cohort, but they’re really, really diverse business models. Really diverse industries. So it’s going to be fun.
Dan Graham (28:29):
Where’s the most surprising place that one of these entrepreneurs is coming from?
Zoe Schlag (28:34):
Let’s see. We’ve got a team coming from Africa. We’ve got a team coming from Asia. They’re crossing borders.
Lisa Graham (28:59):
Well, that’s great. Thank you so much for coming, Zoe. This has been really interesting. And I love hearing you talk about your story because I think it’s also shown that in such a short time how much this space has changed and grown, and it’s becoming more mainstream. And the fact that you brought this to Austin to help build the ecosystem and connect the Austin ecosystem to a network across the country and across the world. I think that’s huge for the city. So, thank you.
Zoe Schlag (29:23):
Well, I owe a huge thank you to you guys. Notley was one of our first supporters at Unlimited and you guys were both hugely instrumental in me even coming from India to Austin. I still can’t believe we talked in India. That’s awesome. I love that.
Lisa Graham (29:42):
Well, thanks again for coming. This has been really fun. And to stay up to date with everything Techstars visit www.techstars.com, and we will also have a link to sign up for their newsletter in the show notes. The Change The Rules podcast is sponsored by Chez Boom Audio. Chez Boom Audio is the leading audio post-production company for TV, film, advertising, audio books, and podcasts in Austin. And we’re honored to work in their studio with the wonderful Shayna Brown. You can find her studio at https://chezboomaudio.com/. And if you want to hear new episodes every week, please subscribe to the Change The Rules podcast on iTunes. Thank you.