Kirk Coburn Talks About Accelerator’s Halt at Houston’s Surge Ventures
[Editor’s Note: Xconomy reported Thursday that Houston’s Surge Ventures would not host a fifth consecutive accelerator class. ]
Surge founder Kirk Coburn surprised many in the audience at a recent Rice University conference by saying the four-year-old accelerator program would be put on hold.
But in an interview Friday, Coburn says the decision makes sense in light of weak market conditions in the oil and gas industry, the fact that no Surge startup has yet had a successful exit, and his belief that the current Surge management didn’t have the key expertise to handle both a fifth startup class and a potentially $50 million fund—not to mention the need to nurture 37 existing portfolio companies.
While Surge has built a reputation as the go-to place for energy innovation deal flow and boosted the overall cleantech community, Coburn says adding a new startup class wouldn’t be fair to existing investors. “People that haven’t invested their own cash, they want to see it, it benefits them,” Coburn says of those in the energy innovation community at-large. “Those who have cash in are completely on the same page with me.”
Surge held its most recent demo day in May, graduating its fourth crop of cleantech startups that aimed to use software, data analytics, and other technology to make the energy industry more efficient. The group had re-christened itself Surge Ventures—instead of Surge Accelerator—to reflect a broader mission that included raising a fund as large as $50 million and the genesis of an energy information service.
That’s all been scrapped, Coburn says, in order to focus attention on Surge’s existing 37 portfolio companies. “We believe we have the best deal flow globally [of] anyone else,” he says. “We see hundreds and hundreds of deals every year.”
In addition, Coburn says Surge has developed “incredible” relationships with energy industry giants, and counts entities such as Shell, Schlumberger, Baker Hughes, Saudi Aramco, and others as sponsors and investors.
He does acknowledge that pulling the plug on a fifth Surge class is “tough” because of a loss of momentum and a possible hit to its place in startup rankings. “For Surge 5, we have 400 companies that have applied,” Coburn says, “and we haven’t launched the application process.”
He did say that he would be open to changing his mind on a fifth class but “someone has to foot the bill and I’m not going to ask the current investors to do that.”
As of late afternoon Friday, the Surge website was still accepting startup applications.
Here is an edited version of our conversation:
Xconomy: What prompted this thinking?
Kirk Coburn: In the spring, I started thinking through it. We have been executing on the same business model that we had from the beginning, which is fine, but all that will give us in five years is a whole lot more companies. We were changing from being an accelerator to being a larger fund. That’s a different set of skills. We’re trying to create extraordinary returns, especially because we’re risky. As an entrepreneur, trying to sell others (on a new fund) is one thing, but as an investor, I don’t see how the math truly plays out for the risk.
I put a stop to the fund a few weeks ago, and decided not to take on a 5th class. Y Combinator and Techstars have successfully proven that they can have true exits. The current market conditions in oil and gas are not great. We have already invested into 34 existing companies that are still growing. How can we manage 10 to 12 more and how can we manage a larger fund when we can barely keep up with the companies that we’ve already invested in?
As the largest LP, I’m looking at it as an investor: Would I personally invest in myself and this team without a track record? We didn’t have an exit. We believe there will be exits but it’s unrealized value right now. I have not paid back existing investors’ cash. We said five to seven years but the companies are still raising Series A rounds. The exit is at least another four to five years away. So the timeline went from five to seven years to 10 to 12 or 13 years. With current market conditions pushing that out to 15 years.
We didn’t have the complete team necessary that has experience and and track record of being able to manage funds and make high returns to investors. One of my rules in business, you always want to have the best people in the world on your team who’ve been there and done that. I’m not going to raise [another] fund and take on new companies without some kind of secret weapon in my satchel.
X: What would you like to see happen with the 34 companies in the next year or two?
K.C.: I don’t have a mandate. I personally have a lot of money tied into these funds, so I should be spending my time with those companies and helping them whichever way I can. Last year, it was impossible to help; we were looking through deal flow, interviewing companies. My time’s better spent helping them. Right now, I don’t even know what that truly means.
X: What are the set of circumstances that would cause you to bring in another class?
K.C.: Exits—and those entrepreneurs need to come back to Surge themselves and invest or start another company and lift the playing field. We’ve seen that at Y Combinator, Techstars. They’ve been successful in seeing that happen. We’re too early to see that, but there is a path. Milestones need to happen.
X: I understand that (the decision to pause the accelerator) was not a function of investors balking.
K.C.: No, everyone else is nodding heads, saying, yes you’re doing great. I put responsibility on myself to make the right decision. With the market conditions, the lack of track record, and the team, I don’t believe I can produce the returns unless we have a few unicorns. I’m not going to bet on a unicorn. As an investor, I’m not going to bet on those odds. While there’s a big reward that could be out there, the risk is higher than the reward. That’s not a prudent way to invest money.