The Empire Theater will come alive with a different kind of stage show Wednesday morning. The orchestra seats will be filled with an audience of VC and angel investors, Rackspace founders, and locals who made highly profitable early bets on the hosting company. All will be there hoping to watch the curtain rise on the next big thing.
Taking the stage will be the creative forces behind 11 startup companies who were selected from hundreds of applicants nationwide to spend three months in TechStar Cloud in San Antonio, a newly established technology business accelerator located in Geekdom at the Weston Centre. TechStars, based in Boulder, also operates in Boston, Seattle and New York. Graham Weston and Pat Condon, two of the Rackspace founders, made the investment to establish TechStars for the first time in a city not known as a hi tech hub.
Just being selected was a coup for the start-ups. Each of the 11 entities won an $18,000 cash infusion from TechStars in return for a 6% equity stake. Each team received workspace in Geekdom; technical, managerial and marketing support; and access to a deep network of industry leaders, investors and fellow startups.
One of the most interesting stories in the house, however, won't be told on Wednesday. It's the story of Jason Seats, the managing director of TechStars Cloud in San Antonio. Seats is the mentor, business coach and group leader of the 11 teams in development here. He's also a role model. Seats co-founded Slicehost in 2006, a highly successful hosting and early cloud computing company based in St. Louis that was acquired by Rackspace less than two years later. Now 32 years old, Seats was a wealthy young man by the time he turned 30.
"At Slicehost we had lightning in a bottle, and we didn't know it. That won't happen to anyone in TechStars," Seats said, recalling his own startup accomplished without such support. He and college friend turned partner, Matt Tanase, started with $20,000, maxed out credit cards, and no outside investors.
All 11 companies already enjoy some level of investment in addition to the TechStars portfolio of perks. Wednesday they will be looking for additional capital, ranging from hundreds of thousands to millions of dollars.
"Ideally, their stage presentations should be polished, well put together, and focused on two goals: one is to be entertaining, and the other is to get a meeting," Seats said. "That's what all our coaching is about. But all these companies have term sheets, they'll be funded."
After intermission, former San Antonio Spur Sean Elliott will take the stage and introduce local students enrolled in the FIRST program and some amazing basketball shooting robots (they don't miss) they built from scratch, a sure sign the pipeline is alive with future startup candidates.
Many readers remain mystified by the tech world and value creation, and why wealthy investors clamor to underwrite startups. Headlines, such as those on Monday reporting Facebook's $1 billion acquisition of Instagram, a 17-month-old social media app with no revenue, leave people shaking their heads. Cash-rich Facebook can afford an extravagant purchase of a perceived competitor. Most Internet companies like Slicehost, however, are acquired because they provide a real service to a defined customer base, and they do so at a profit. Their products might be digital, but they make things people need and are willing to pay for.
"These companies are the guts and the plumbing of the Internet," Seats said. "It is a very complex world, but it's also an ever-expanding world and it's not unlike the physical world with an infinite number of niches that need products and services."
And the payoffs can be astounding as a well-executed idea is shaped into a product or service that meets new demand. What outsiders do not see are the thousands of ideas that die as quickly as they are born, or the high number of startups that win initial investment support yet fail. When businesses do find a niche, they can go from startup to success story very quickly.
Slicehost sold for millions of dollars. The acquisition gave Rackspace a toehold in the fast-developing cloud computing market. Today, thanks in no small part to Seats, what once was Slicehost with a handful of employees and two leaders with no job titles will soon be a $100 million business for Rackspace with an annual growth rate approaching 80%.
The payoff, however, extends well beyond Seats and Rackspace. Such deals contribute to a significant and growing "brain gain" benefitting San Antonio. Seats' story is not unique. Other successful startups and founders have been attracted to San Antonio as Rackspace has grown and acquired companies, acquisitions that often lead to founders and key employees relocating here. The local tech community has been growing slowly but steadily, and each arrival contributes to San Antonio's transformation. One can only wonder if any of the current class of TechStars entrepreneurs might relocate here one day.
In the beginning, "there was a lot of pain"
Seats' success story was borne out of adversity that few can appreciate today when they meet the TechStars leader.
Flash back to St. Louis in the summer of 2001. Seats was 21 and in trouble. He had $50 to his name and his car had just been stolen. Worse, he was expected that very day at the local offices of the FBI, where he faced tough questions and a polygraph test. "I actually had to find a ride to the FBI," he said, describing a very low moment.
Seats is quiet when you first meet him, but it doesn't take long to figure out he is smart and outspoken. He was an electrical engineering and computer science major just out of St. Louis University when he and Tanase were hired as the first programmers at a local husband and wife Internet security startup with connections to the federal law enforcement and intelligence community. It wasn't long before the husband's odd personality traits and his outsized promises to potential customers made the young coders nervous. Before long, he accused them of stealing code (which they had written) with the intention of selling it to foreign intelligence interests.
"My mother was a secretary at St. Louis University and she was humiliated by FBI agents who showed up at her workplace to ask how to find me," Seats said. "I was right there in my apartment, my car was parked out front, but the doorbell was broken. At the same time, I started hearing from friends that FBI agents were asking about me."
Seats hired a lawyer and had to endure two rounds of interrogation and a polygraph test that he said he failed before agents finally were convinced he was the victim of baseless accusations.
"I'm totally sympathetic now to people who say they are falsely charged of a crime," Seats said. "The polygraph is just a prop they use to set you up and break you down. Imagine how my Mom felt when they showed up. She got that job when I was 10 years old and told me she was working there so someday I could go to college."
Dino and Dolores, Seats' parents, married young, had children, and never finished college. Both were smart, hard-working and committed to the education of their three children. His older sister is a nurse and his younger brother a doctoral candidate at Stanford. "My Dad went to school for electrical engineering before he had to quit to help support the family," Seats said. "He introduced me to binary and boolean theory using blue and white sugar packets at a Steak 'n Shake."
Seats was traumatized by the encounter with the FBI and retreated for five years into a mindless IT job with a St. Louis company. Slowly, over time, he shook off his previous experience and his entrepreneurial spirit was rekindled. "I have an idea," Tanase told him one day, and that was the start of Slicehost.
Seats' life story was shared with this first TechStars class and captured on video for posterity. It has all the makings of the classic startup narrative: a couple of guys with an idea, big ambitions and a relentless work ethic driven by 20-hour workdays, neglected private lives outside of the office, potentially ruinous debt, and an utter conviction they would succeed. Along the way, Seats was forced to borrow money at 20% and then borrow even more from his father-in-law, bringing family into the startup equation, a risky and volatile proposition.
That first year he and Tanase spent Christmas sleeping in the office, each partner working two hours, sleeping two hours, dealing with the stream of customers calling about the inadequate performance of newly expanded servers Slicehost had introduced.
Seats and Tanase were building a business that by its second year was growing exponentially. Fear of failure was long gone. They had cash flow, a cool office space and talented co-workers. Neither was looking to sell. Then Rackspace came calling.
Actually, Rackspace invited the two founders to San Antonio. "We told them we couldn't come, there wouldn't be anyone to watch the business, which is why we never went to SXSW in Austin," Seats recalled. "We had no idea if this company from San Antonio was inviting us in for a sales pitch, for a brain drain, or an acquisition, but we finally made a decision to be open."
"We are going to enter this space."
Rackspace, on the verge of going public, sent a team to St. Louis to examine Slicehost up close and make an offer. "Lew Moorman (now Rackspace's president) told me I needed to work things out with my partner first," Seats recalled, "but he also said, 'I want to be clear: We are going to enter this space.' " The gauntlet was laid down.
Seats describes the angst he and Tanase experienced trying to analyze the offer. The Rackspace team sensed the tensions building between the partners over whether to sell and move from St. Louis to San Antonio. Moormon's team decided to go home.
"It was a giant ton of money, but we'd have to move to Texas," Seats said. "I was in the worst possible negotiating position. I was going from nothing to something. We were just these two dudes completely alone. I was never really afraid until then. I was afraid of the opportunity cost."
It's a lesson TechStars startups should consider carefully: When is the right time to sell? How do you value your company?
Ultimately, a decision was made to sell, but the process drove a wedge between the Slicehost partners. They eventually reaffirmed their friendship, but their lives were set on separate courses. Tanase stayed in St. Louis. Seats and his young wife, Amanda, moved to San Antonio.
"It's like I ended one life and started a new one," Seats told the TechStars members. "I had life changing wealth, I could never go back. I sometimes think selling this company was like a one-way ticket to another planet. If I am coming across as somewhat melancholy, it's because I am."
Seats grew restless at Rackspace, a company that was growing fast. After he and Amanda had their first child, a daughter named Isla in 2010, Seats returned from paternity leave and resigned his senior position there.
Blessed with resources, Seats went though a period of uncertainty and self-inquiry. He spent time with geneticists at the Southwest Foundation for Biomedical Research, helping design software to accelerate their research. He considered pursuing a doctoral degree in plasma fusion research. He toyed with launching a hedge fund.
"I think everybody in the same position fears being lost," Seats said. "When your dentist asks what you are doing, you don't have an answer. Do you say, 'I'm helping some scientists, I might start a hedge fund.' You sound crazy. I just told people, 'I'm a programmer. I write software.' "
About that time, Graham Weston, co-founder and chairman of Rackspace, invited Seats to accompany him on a West Coast swing to meet with Paul Graham, a noted Silicon Valley venture capitalist and founder of another accelerator, YCombinator. It wasn't until their return flight that Seats realized Weston was exploring the possibilities of bringing an accelerator to San Antonio.
Weston later said he was searching for a meaningful way to keep Seats in San Antonio, contributing to the growth of the tech community here. Much of Weston's current efforts outside of Rackspace focus on his push to make San Antonio more appealing to tech workers. His experience as one of the tri-chairs of SA2020 accelerated his determination to push the city to change faster.
That led to the formal establishment of the TechStars program in San Antonio and the announcement late last year that Seats would be its inaugural managing director. Wednesday represents the culmination of the team's first class of startups.
Seats is mentor and coach, but also an example of what those on stage at the Charline McCombs Empire Theater hope to duplicate. The end of the three-month stay in San Antonio merely marks a way station. After Demo Day, everyone will board a bus to Dallas, ready for another pitch to potential investors.