Being Syndication Agnostic
Bijan Sabet started it with a great post titled We Gotta Do A Deal Together and Fred Wilson followed with an equally great post titled Trading Deals, A Lost Art? I’m going to try to add to the mix with this post by describing our strategy at Foundry Group around syndication and explain a little of where it came from. Please read both Bijan’s and Fred’s posts as it’ll provide a lot of context for this one.
At Foundry Group, we describe ourselves as syndication agnostic. Specifically – we are delighted to work with a syndicate of other investors and we are equally delighted to invest by ourselves. Another way to say this is that we are indifferent as to whether or not we have co-investors in a company with us at any stage of the investment cycle. I realize this isn’t the classical definition of agnostic but I think it’s an appropriate use of the adjective form.
Here’s what this means in practice. In an early stage investment we decide whether or not we want to invest and then leave it up to the entrepreneurs if they want to add anyone to the syndicate. If so, and they are someone we like working with or would like to try working with for the first time, we encourage it. If the entrepreneurs just want to get going with us, that’s fine also.
Now, assume there is no syndicate for the seed or Series A financing (e.g. it’s just us). Well in advance of when the company needs to raise the next round we’ll decide whether or not we’ll make another investment. If we are supportive, we are direct with the company, figure out a price we are willing to do it at (we are willing to invest by ourselves at a higher price if we believe the progress of the company merits it), and give the company the choice of having us invest in another round by ourselves or add another investor to the mix. Again, it’s up to the entrepreneur, but we signal our intent clearly and early, are willing to put a term sheet down, and lead the financing with or without a new investor.
Two things make this strategy work for us. We only invest in software and Internet companies. We have a deeply held belief that we can figure out “if things are working” by the time $10m is invested in a company. As a result, we are willing to invest up to $10m on our own to play out the early to medium stages of a company. By the $10m point we have to make a theoretically harder decision, although ironically it’s usually a pretty easy one. The company is either unambiguously on a success path, at which point adding additional investors to the syndicate is easy (since it’s a highly desirable later stage investment) or it’s a tough situation that’s not working out. Occasionally it’s in the middle (e.g. unclear and ambiguous), but not very often.
Some recent examples help illustrate this:
Next Big Sound: We led the seed round and co-invested with Alsop Louie (Stewart Alsop) and SoftTechVC (Jeff Clavier) – two VCs that we love to work with. We could have easily invested by ourselves, and Next Big Sound had a long list of VCs that wanted to invest (more than 5, less than 10). The founders chose the syndicate.
StockTwits: The seed round was led by True Ventures. We decided proactively that we wanted to invest in StockTwits as part of a new theme we are developing and approached Howard Lindzon (the founder/CEO). He was in the midst of closing a follow-on with True. We have enormous respect for True but hadn’t done a direct investment with them (I’ve personally invested in several companies with them) so were extremely interested in doing something together. They reciprocated and we put together a bigger financing than planned (although still a relatively modest amount as Howard isn’t interested in raising a lot of capital) that allowed everyone to be happy with their stake in the company.
Cloud Engines: Cloud Engines had raised some angel money (from well respected angels) prior to our investment. We did the first round by ourselves and recently did a second round by ourselves. We did this quickly because we were thrilled with their progress and this allowed the company to ramp up production to meet demand. We left the financing open for a strategic co-investor although we are perfectly happy to take the remaining piece for ourselves.
The common two themes from this for us is: (a) we only co-invest with people we like, trust, and respect and that like, trust, and respect us and (b) we view it as our responsibility to make a decision about whether or not we want to invest independent of any other investors (VC or angels) at the table.
For completeness, we love investing with Union Square Ventures (we are co-investors in Zynga) and Spark (we are co-investors in AdMeld) and we hope to make additional investments with both of them in 2010.
Ultimately the syndicate is the entrepreneurs’ choice. And our goal is to make the discussion simpler, cleaner, and crisper, so the entrepreneurs aren’t having to guess, or jump through bizarre hoops, or play a difficult VC-centric game as they finance their company.