Kindred Spirits – Our Investment In Founder Collective

Founder Collective

Foundry Group is best known for our investments in startups, but our vehicle currently investing in other venture funds, Foundry Group Next, is off to what we believe to be a great start and I wanted to share an update about it by talking about our new investment in a fund managed by Founder Collective.

I’ve written previously about why we created Foundry Group Next. We have been personally investing as LPs in funds of other managers for decades and found the activity to be emotionally rewarding. When we decided we wanted to expand and formalize that activity, it gave us a chance to work more closely with Lindel Eakman, who was the largest investor in our first fund through his role at UTIMCO. Lindel joined Foundry Group as a partner to lead the fund investing activity of Foundry Group Next.

We’ve made about a dozen investments in funds including funds offered by Union Square Ventures, True Ventures, and Forerunner Ventures. One of our recent investments, offered by Founder Collective (FC) – an eight-year-old manager with offices in Boston and San Francisco – is an excellent example of what we look for when we invest in funds offered by other managers.

It starts with the people. We don’t invest in managers unless we can picture working with them for decades. We’ve had the opportunity to work with Founder Collective’s partners – David Frankel, Eric Paley, and Micah Rosenbloom – over the years on several companies. We also know many of the entrepreneurs in their portfolio. From those founders, we are aware that FC takes their mission “to be the most aligned fund to founders at the seed stage” very seriously.

We aren’t a generational firm, but investing in other VC funds gives us the benefit of working with managers who challenge and enhance our thinking while sharing the lessons we’ve learned with other investors. We want to work with people who bring a focused and complementary perspective to investing and were interested in the Founder Collective mantra of being “stage-focused and sector agnostic.”

This means FC avoids trends and relentlessly questions entrepreneurs about how their product enables specific use cases and market opportunities. This approach has paid off and helped the team to identify hot sectors well outside of the current hype cycle. If you look at the Founder Collective portfolio, you’ll see many well-recognized companies that they invested in at the very first round. In general, these investments were rarely competitive at the time of their first financing.

“Founder friendly” is an overused term, but there is a big difference between marketing this as a concept and living it every day. The team at FC has structurally designed their firm around alignment to founders. They’re a rare venture fund that doesn’t exercise pro-rata rights over the lifetime of an investment, meaning they dilute alongside company founders, which they believe better aligns their interests as seed investors with the entrepreneurs.

At a time where funds are aggressively deploying capital and not considering the downsides for founders, FC is actively promoting the value of efficient entrepreneurship and helping founders maximize their outcomes and optionality. Not only are the downsides of overcapitalization problematic for founders, but FC also examined overcapitalization in upside scenarios by studying the data from the last five years of tech IPOs. The findings were surprising in that the amount of money a company raised and its success in the public markets were not positively correlated. In fact, the companies that raised less money out-performed the most funded over time. Needless to say, having investors that keep this balance in mind can be precious to founders.

It’s one thing to have a unique perspective; it’s another to generate returns with it. As an LP, I’ve had the good fortune to be an investor in many funds, including some exceptional ones. Before diving into diligence, we had a sense that Founder Collective had strong performance based on their portfolio. When we saw their financial track record, we realized how special the performance was.

We know many firms that build portfolios with great logos by buying into companies at later stages and higher valuations. FC’s portfolio is made up exclusively of seed stage investments at seed valuations.

These aren’t just paper gains – they have already returned a meaningful amount of cash to their investors. Founder Collective’s first fund has the potential to be enshrined in the annals of VC history. Their second fund is tracking ahead of the first at the same point in development.

Needless to say, we had many reasons to hope to be part of their third fund. The only problem was they didn’t have any room. We found out they were oversubscribed just from their existing Fund II investors – that’s without pitching any new LPs. But they didn’t take advantage of that demand. Instead, they stuck to their principles and kept their fund size the same as their previous fund.

We love seeing that strategy discipline as we believe it is the mark of good fund managers. When Union Square Ventures’ 2004 fund was on fire, Fred and Brad raised their next fund at the same size. This has also been our approach at Foundry Group.

In the case of Founder Collective, the partners effectively shrunk their fund regarding outside capital by increasing their personal financial commitment to their fund. This investment generates additional evidence that they are confident in their strategy while creating more alignment with their LPs.

As a GP I applauded the approach and accepted that as an LP we had to beg and plead our way into to the fund. All the same, we were honored that Foundry Group Next was the only new investor in Founder Collective III due to our long and trusted relationship.

By virtue of time and focus, we can only help so many startups, but we’re proud to be investors in funds like Founder Collective, which is deeply committed to helping enrich the startup ecosystem. We are delighted to be working alongside them and finding other managers of their caliber going forward.

Venture Deals 3rd Edition Available via Kindle Matchbook

If you have purchased the hardcopy edition of Venture Deals 3rd Edition, you can now buy the Kindle version also for $2.99 via the Amazon Kindle Matchbook program.

Jason and I have been asking our publisher (Wiley) for this for a while and we are psyched they’ve agreed to it. It came about after a number of you asked us if we were going to do this, so thanks to y’all for pushing us on it.

Relationships Are 100/100, Not 50/50

In a vox with my partner Seth recently, he said something that stuck with me.

“Relationships are 100/100, not 50/50.”

He was referring to a business dynamic between two people, but it applies to any relationship and any number of people.

It’s a simple idea, but a great one. When I consider my relationship with Amy, it’s 100/100. Sure, we have plenty of conflicts, but we are both 100% all in on the relationship.

When I consider my relationship with my partners, it’s 100/100. We refer to our relationship as one of business love. We communicate with brutal honesty delivered kindly. We argue, disagree, and get frustrated with each other. But we own our actions – good and bad. And we learn and evolve together.

We are best friends. Our relationship is 100/100.

When I talk about my relationships with a CEO in a company that I’m an investor in, I describe it as one where I only ever want to make one decision, which is whether or not I support her. As long as I do, I work for her. If I don’t, it’s my job to do something about it, which does not necessarily mean “fire her,” but instead try to get back to a place where I support here. Again, I’m all in on the relationship, and I expect it to be 100/100.

Thanks Seth for the concept. I hope never again to say “relationships are 50/50.”

Through the Looking Glass

He took his vorpal sword in hand:
Long time the manxome foe he sought —
So rested he by the Tumtum tree,
And stood awhile in thought.

– from Lewis Carroll, Jabberwocky

Jabberwocky and the vorpal sword always makes me think of Princess Leia saying “Help me Obi-Wan Kenobi you’re my only hope.”

One, two! One, two! And through and through
The vorpal blade went snicker-snack!
He left it dead, and with its head
He went galumphing back.

I can almost see Obi-Wan swinging his lightsaber.

It delights me that we’ve invested in a company called Looking Glass who is making their own version of a vorpal sword.

Well, ok, it’s a volumetric display. But we’ll get there …

We’ve been investing in stuff around 3D since we started Foundry Group in 2007. Our first 3D-related investment was Oblong, which has reinvented the way we engage with computers (which we call infopresence) through the use of their 3D spatial operating system called g-speak and their collaboration product Mezzanine.

Well before the current generation of VR/AR/MR/XR/whateverR came about, we focused our attention and investing in the notion of a radical change in human computer interaction (HCI). We believed that in 2007 we were at the beginning of a 30+ year shift that would make the WIMP interface, which emerged in the early 1980s and was dominant in 2007, look and feel punch-card archaic in the future.

While we dig the moniker XR (for extended reality), we are much more interested in, well, reality. Our investments in 3D printing, first with MakerBot (the first successful consumer 3D printer) and now with Formlabs and Glowforge, cross the boundary between designing in 3D and making physical things. Our investment in Occipital has changed how we, and many others, think about 3D inputs and what to do with them. And life wouldn’t be much fun if you couldn’t play Rock Band in 3D, so Harmonix has you covered there.

So, why Looking Glass? After Stratasys acquired MakerBot for over $400m in 2013, we didn’t pay much attention to 3D printing for a few years. But, in 2015, when we invested in Glowforge, we realized that we had only begun to play out physical interaction with 3D. The industrial laser cutter market presented the same opportunity as the industrial 3D printer market, and hence our investment in the first 3D Laser Printer.

In 2016, when we invested in Formlabs, we had another insight that was reinforced by one of the ubiquitous Gartner Hype Cycle graphs. I think it speaks for itself.

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We are now enjoying market leadership during the plateau of productivity.

One day, I was in Jeff Clavier’s office at SoftTech VC in San Francisco. He made me sit down with Shawn Frayne, the CEO of Looking Glass. Thirty minutes later, I called John Underkoffler, the CEO of Oblong, and said “John, I finally saw what you were trying to create with your holographic camera.”

Did I mention that John was one of the inventors, in 1990, of the holographic camera?

And, as a bonus, the physical camera, which for over 20 years lived in the basement of my close friend Warren Katz’s house, now lives in my Carriage House in Longmont. It’s in several pieces, but that’s a detail that some day John will remedy.

It was an easy decision to invest in Looking Glass.

`Twas brillig, and the slithy toves
Did gyre and gimble in the wabe;
All mimsy were the borogoves,
And the mome raths outgrabe.

Back From Vacation

Amy and I just took a two-week vacation. We were mostly off the grid, to the extent we could be given several things we were working on together. We hid from the world, caught our breath, and regrouped.

I often get asked what my rhythm is on a vacation like this. It’s simple – I have no rhythm or schedule. My days are organized around waking up when I feel like it and going to bed when I’m tired. When I look at my Fitbit sleep data, I got at least nine hours of sleep every day. My resting heart rate was 62 at the beginning of the month (down from 69 when I declared a travel moratorium) and is 57 today.

I do have a few things I do each day. I meditate first thing for 20 minutes. Amy and I three meals together. I exercise, which on this trip included ramping up my running nicely. I take an afternoon nap. And I try to read at least once book a day.

We have a few friends living near where we are hiding so we have had some fun dinners together. We went and saw the movie Logan in the middle of the day and walked around a shopping mall for a few hours. We thought about going to a sporting event but never managed to pull it off. And we’ve watched zero TV.

Usually, we take a week off the grid each quarter. This time I felt like I needed more, so we took two weeks. I’m glad I did.