Techstars’ $80 million partnership with JPMorgan Chase in jeopardy, employees say

During zoom Last summer, Techstars CEO Maëlle Gavet sat at a table with an open notebook in front of her and a laptop next to her, arms crossed, during a meeting with senior leaders. An attendee had just asked her about progress on the organization’s $80 million urban development fund, which was raised through JPMorgan Chase’s private banking platform.

She replied, with a calm demeanor of trying to watch her words, that Advancing City was not going well. Multiple incidents across multiple projects caused JPMorgan to panic, according to sources familiar with the conversations, including evidence seen by TechCrunch.

Since 2022, Techstars has begun building teams and deploying from funds with the goal of supporting 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.

But by August 2023, when that meeting took place, JPMorgan’s team had become “disengaged,” a description seven people associated with the project independently described to TechCrunch. Gavitt admitted at the meeting that the broken relationship wasn’t entirely the bank’s fault: Techstars’ mistakes created much of the tension.

Gavet recently told TechCrunch that Techstars has now invested about two-thirds of the fund, adding that the bank is “an amazing partner” and “very active in our plans.”

However, sources said JPMorgan has yet to tell Techstars whether it will renew its partnership with the Advancing Cities 2 fund once the original contract expires in December. The decision was originally scheduled to be made last summer so that Techstars could begin fundraising and begin deploying funds in 2025.

That means the fate of the Advancing Cities project and the roughly 20 Techstars employees working on it remain up in the air.

JPMorgan and Techstars both declined to comment on the future of the partnership. But Techstars spokesman Matthew Grossman emphasized that the current fund is still active, having invested in 263 companies, and plans to support another 200 companies. “This year, we will continue to deploy the fund until the fund is deployed. And then like all other venture funds, after the fund is deployed, we will see what happens next,” he told TechCrunch.

“a series of events”

Techstars is in the midst of an operational restructuring that includes cuts to global programs, layoffs and the closure of accelerators in cities including Oslo, Austin and its former parent company, Boulder, Colorado. The company missed its 2023 revenue forecast and posted a loss of $7 million, according to preliminary data seen by TechCrunch.

Techstars, meanwhile, is known for supporting founders of color and providing them with opportunities that would otherwise be hard to come by. Founders of color have been so underfunded for so long that access to capital could be life-changing.

From the outside, the uncertainty over the program’s future may look like JPMorgan is simply abandoning its diversity commitments, emulating those made by many corporate institutions in the wake of George Floyd’s murder. However, Techstars has struggled to meet the intense expectations JPMorgan had when it partnered with the firm to build the fund, several current and former Techstars employees said.

Gavitt became CEO of Techstars in 2021. Image Source: handouts/handouts

A Techstars presentation at another conference, also in August, noted that a “series of events” had occurred since Techstars began deploying the Advancing Cities Fund in 2022. The incidents involved multiple complaints against various program directors, as well as event issues including conduct issues, programming, naming and sponsors. The bank was so concerned about an invitation to a politician at a demo day that it withdrew its branding, sources said.

JPMorgan Chase also pointed out four “inappropriate” language surrounding Techstars’ diversity goals. For example, Gavitt and a managing director wanted to call the Oakland program “Techstars Silicon Valley,” even though JPMorgan was intent on emphasizing the accelerator’s focus and presence in a prominent black city. Eventually, the accelerator program was named after Oakland.

At least three sources said Techstars received complaints from founders about a managing director at Advancing Cities, with some of the allegations describing a hostile work environment. TechCrunch was unable to confirm the specific allegations, but we understand that the managing director has since left the project and is now in charge of another Advancing Cities project. Techstars and JPMorgan Chase declined to comment on the incidents.

Conflicting definitions of diversity

One of the biggest issues, according to sources and documents seen by TechCrunch, is that JPMorgan wants at least 50%, but preferably 70%, of each city group invested in new startups led by underrepresented founders. companies that meet certain definitions. Diverse founders.

However, data seen by TechCrunch shows that diversity in Advancing Cities has steadily dropped below the threshold since last year. At one point last year, at least one project didn’t hit the 50% benchmark at all, although other projects made up for it by hitting nearly 70%.

For $80 million, JPMorgan simply expected better results, sources said.

JPMorgan Chase also provided Techstars with a narrow definition of what it considers a diverse founder: Black, Latinx, Native or Pacific Islander ancestry. However, Techstars uses a broader definition of the term internally, including gender, age, veteran, disability and immigration status. According to documents seen by TechCrunch, managing directors can choose to add two different DEI labels to describe a company: JP Morgan Diversified and/or Techstars Diversified.

Techstars plans have been focused on increasing gender diversity, but race will be put on hold, five people familiar with the matter, some of whom no longer work at the company, said. Some managing directors struggle to find founders who are considered diverse by JPMorgan’s standards. Three people familiar with the matter said different labels and broad definitions of diversity helped Techstars skew some numbers when it publicly stated the diversity breakdown of its projects.

Techstars denies this characterization. “We measure different data sets for different purposes,” Grossman told TechCrunch. “We believe in investing in underrepresented founders. When we say underrepresented, we mean all the people who have traditionally been under the radar of traditional venture capital.”

Techstars has been restructuring its operations in an attempt to cut costs. Image Source: John Blandin/The Boston Globe/Getty Images

Grossman highlighted that as of the end of last year, 63.5% of City CEOs who had accepted the program and agreed to self-report their race were Black, Latino, Native or Pacific Islander. He added that every group but one had met the 50% target. The report, released late last year, only covers the fund’s first half of investment and initial group acceptance. It did not specify the diversity percentage of graduates.

Pay and rewards linked

Another source of friction is JPMorgan’s desire to tilt the program’s focus toward a high proportion of diverse founders, but like all investment firms, Techstars rewards managing directors primarily based on returns.

This means that managing directors are trained to find new startups that they think are likely to graduate from the program and receive follow-on funding from other venture capital firms. This provides another dimension that causes some MDs to prioritize project acceptance over metrics of founder diversity.

“We’ve always said we’re looking for the best founders,” explains Monica Whitt, managing director of Detroit’s Push City Initiative. “We’ve also always said we’re doing this, but for underrepresented founders. We’re doing this specifically through all the managing directors’ respective networks and their respective experiences as investors. We are investors first . ”

Techstars said the managing director’s compensation includes carried interest, which is a percentage of the fund’s profits, and cash bonuses. To align rewards with JPMorgan’s mission, a percentage of progressive city managing director bonuses are tied to how many of their startups meet diversity standards.

In addition to accepting friction over priorities, JPMorgan is also frustrated by high turnover in leadership, four sources said. Since last year, Techstars’ chief revenue officer, chief technology officer, chief financial officer, chief accelerator investment officer, capital formation growth officer and chief legal officer have all left senior leadership positions. This does not include the more than 10 managing directors who have left for various reasons and other turnover.

At a meeting with Gavitt back in August, when she acknowledged the shaky status of the program, attendees flooded her with questions, mostly asking who would replace JPMorgan if the bank decided to end the partnership. Gavitt explained that replacing JPMorgan as a financing partner would be difficult, if not impossible, because it is one of the few banks with a financing platform that allows accredited investors to back early-stage startups. According to sources and records seen by TechCrunch, raising funds on its own will be difficult, given the overall challenging funding environment in 2024.

Techstars’ own accelerator fund also won’t be able to take over Advancing Cities’ entire business, which is critical to the fund’s success, she added.

But just this month, sources said, leadership warned employees in all-hands meetings that those involved in those programs should be prepared to join other programs or apply for other programs if their contracts with JPMorgan are not renewed in December. If they are willing to move, they can take a position internally, otherwise they may exit the company.

It’s unclear when Advancing Cities expects to see a return, but if it follows a traditional fund cycle, it could be at least seven years before JPMorgan sees results from its $80 million investment. However, December arrives earlier than that.

Current and former Techstars employees can contact Dominic-Madori Davis by email at dominic.davis@techcrunch.com or via the secure encrypted messaging app Signal, or by phone at +1 646.831.7565. You can also contact Mary Ann Azevedo via email at maryann@techcrunch.com or Signal +1 408.204.3036.