We describe Foundry Group‘s behavior as “syndication agnostic.” When we make an investment, we are completely agnostic as to whether or not we have a co-investor. This is true at early stages but also true at later stages. We make our own decisions to invest, or not to invest, independent of what other investors are thinking. As part of this philosophy, we’ll lead follow-on rounds for companies we’ve already invested in, including those making great progress where we will lead an up round that we price. We aren’t looking for outside validation from other investors of any sort – either positive or negative. Because we are syndication agnostic, we are delighted to work with great co-investors and welcome and encourage the interaction and partnership. But we don’t have any dependency on it for our decision making.
I saw two important posts this morning – one by Fred Wilson titled Social Proof Is Dangerous and one by Hunter Walk titled The Death of Social Proof. Both are worth reading along with the comments. Naval Ravikant, the co-founder of AngelList, also has a thoughtful comment on Hunter’s post, although I disagree with some of it.
For me, the essence of the conversation comes back to making your own decision as an investor. As an angel investor, I invested in many things and passed on many things. As a VC investor, I invest in a few things and pass on many things. When I look at what drives my decision to invest, it’s the entrepreneurs and the product. It’s never the existing investors, even if I like working with them. When I look at what drives my decision to pass, it’s the entrepreneurs and the product and occasionally the existing investors if I simply don’t want to work with them.
Within Foundry Group, we use a qualitative process to determine whether we are going to invest in something. Once we are actively engaged exploring an investment, all four of us independently interact with the company (although this may happen in groups of us.) To get to this point, it’s going to be a company we likely would invest in. However, we can only invest in about 5% to 10% of the company’s we see that reach this point based on the size of our funds, our tempo, and our deal flow. So we pass on 90% – 95% of companies that “we’d like to invest in, but for some reason don’t get there.”
The reason is almost always qualitative. If the sentiment from one of us trends down during the evaluation process, we immediately pass. This sentiment is driven by our individual interactions with the entrepreneurs and their product. But we each make our own decision, and a single qualitative negative trend causes us to pass. We make mistakes often – there are plenty of companies we pass on that in hindsight we would have liked to be investors in, and in some cases we get a second change and invest in the next round (Fitbit and SEOMoz are two that immediately come to mind.) We always offer to be helpful to the entrepreneurs if they get to this point – some take us up on this. But regardless, we aren’t looking to other investors, or “social proof”, to drive, or even influence our decision making.
This is especially powerful for follow-on rounds. We leave it up to the entrepreneurs whether they want to go find a new investor or not. We express our opinion early in the process and are supportive with whatever the entrepreneur wants to do. If we are going to invest regardless, we’ll make a commitment before the fundraising starts so the entrepreneur knows it is there, even if he isn’t able to attract an outside investor. And, if for some reason we aren’t going to invest, we are clear about it upfront.
I’ve found this interaction to be fascinating with other VCs who are our co-investors. Some are very comfortable with this approach and, as a result, we are attracted to working with them over and over again. Others aren’t, but aren’t offended by our approach, and, since we don’t need them to commit to co-invest along side of us for us to follow through on our commitment, tend to be thoughtful about what they want to do. And some don’t like this approach, although we rarely find this out until we’ve worked with them at least once. When we encounter this kind of situation, we tend not to seek them out as co-investors in the future.
All along the way, we try to be painfully clear with the entrepreneurs that we are making our own decision, independent of the behavior of other investors. This has come from many years of seeing “the investor syndicate” make bad decisions either in the case of a successful company (where they don’t lean in) or an unsuccessful company (where everyone keeps dragging each other forward to “one more round.”) We’ve evolved a deeply held belief that we need to make our own decisions, independent of everyone else, communicate them clearly, and move quickly one way or another.
I’ve tried to scale this personally to my whole life. I don’t really care what other people think – I just try to do my best all the time and learn from everything I do. I describe that as being intrinsically motivated by learning. Sure – I listen to all the feedback I get, but am mostly looking for content, especially content that I can use to improve what I do (and learn from). Praise and validation go in the same bucket as social proof for me – I appreciate it but ignore it.
Are you making your own decisions?
I think AngelList is awesome and I’m a huge fan of what they’ve done. Nivi wrote a great post celebrating their 1.5 year anniversary today: 1.5 Years Of AngelList: 8000 Intros, 400 Investments And That’s Just The Data We Can Tell You About.
One of the powerful constructs of AngelList is social proof. It’s become an important part of the seed / early stage venture process as very early stage investors pile into companies that their friends, or people they respect, are investing in. AngelList does a nice job of exposing and promoting social proof during the fundraising process in a way that is both legal and non-offensive.
However, as one would expect, entrepreneurs focus on taking advantage of every opportunity they have. As a result, I’ve been getting a request on a daily basis to either “follow” or be listed as an “endorser” for various companies. These requests fall into two categories: (a) people I know and am trying to be helpful to and (b) random people.
I’ve decided to say no to both categories unless I’m investing in the company. And I encourage everyone involved in AngelList to do the same. I think the concept of social proof is super important for something like AngelList to have sustainable long term value. I don’t ever want to be on the end of a conversation with someone who invested in a company on AngelList, runs into me, and says “things are sucking at company X – why did you ever endorse them” and for me to say “I have no idea who you are talking about.”
As with many things in life, the key lesson is to do your research. It’ll be interesting to see how AngelList copes with things like this over time – I expect Nivi and Naval will stay one step ahead of the problem. However, if you are an investor or entrepreneur – help by having some discipline on your end – it makes things better for everyone.