Tag: Foundry Group
We have some entertaining news to share with you today. We have recently registered with the SEC and are now considered Registered Investment Advisors. Did we do this so that we can have cooler business cards? No. Did we do this because our back office was lacking in purpose? Heck no.
We had to, per the SEC rules. And the reason you ask? Well, we can’t tell you that or we could possibly break some other SEC rules. So for now, just accept that your friendly neighborhood venture capital firm is now subject to a lot of new and stimulating paperwork.
Why are we even bothering telling you this? Because it will affect what we can say on the Foundry Group blog and personal blogs that we write. We’ll have to be careful with statements that we make about companies we invest in. We’ll also be cautious in what we write about our funds or the industry in general. According to the SEC rules, we can no longer write anything that “promotes” our funds. While we’d argue that we never try to promote our firm, but just write anything that comes to mind and try to have fun doing it, with our new registration status comes new responsibilities.
This will be a learning process for us and our goal is to bring you content that is still 100% transparent. Please be patient with us if there are hiccups along the way, or perhaps even questions that we can’t legally answer in the comment sections anymore.
And as always – thank you all for the support. We love what we do and the community, and our interaction with you through our blogs, is a big reason why. And, don’t worry, there will be a third VC video from us – someday.
After all these years, I’m still a heavy RSS user. Every morning I click on my Daily folder in Chrome, open it up, and spend whatever time I feel like on it. The vast majority of what I read is in Feedly and includes my VC Collection as well as a bunch of other stuff. It’s almost entirely tech related, as I stay away from mainstream media during the week (e.g. no CNN, no CNBC, no NYT, no WSJ, no USA Today, no … well – you get the idea) since I view all this stuff as an intellectual distraction (and much of it is just entertainment anyway, and I’d rather read a book.)
This morning I came across a number of interesting things that created some intellectual dissonance in my brain since they came from different perspectives. I’d categorize it as the collision between optimist and pessimist, startup and already started up, and offense vs. defense. However, they all shared one thing in common – the message and thoughts were clear.
Let’s start with Tim Cook’s remarkable Message to Our Customers around the San Bernardino case and the need for encryption. My first reaction was wow, my second reaction was to read it again slowly, and my third reaction was to clap quietly in the darkness of my office. I then went on an exploration of the web to understand the All Writs Act of 1789 which is what the FBI is using to justify an expansion of its authority. I love the last two paragraphs as they reflect how I feel.
“We are challenging the FBI’s demands with the deepest respect for American democracy and a love of our country. We believe it would be in the best interest of everyone to step back and consider the implications.
While we believe the FBI’s intentions are good, it would be wrong for the government to force us to build a backdoor into our products. And ultimately, we fear that this demand would undermine the very freedoms and liberty our government is meant to protect.”
Thank you Tim Cook and Apple for starting my day out with something deeply relevant to our near term, and long term, future in a digital age.
Shortly after I came across Danielle Morrill’s post Surviving Whatever Comes Next and Heidi Roizen’s post Dear Startups: Here’s How to Stay Alive. I’m an investor in Danielle’s company Mattermark and was partners with Heidi at Mobius Venture Capital. I have deep respect for each of them, think they are excellent writers, and thought there were plenty of actionable items in each of their posts, unlike many of the things people I’ve seen in the last few weeks about how the technology / startup world is ending.
Unlike the sentiment I’ve been hearing in the background about deal pace slowing down (not directly – no one is saying it – but lots of folks are signaling it through body language and clearly hedging about what they are actually thinking because they aren’t sure yet), our deal pace at Foundry Group is unchanged. Since we started in 2007, we’ve done around ten new investments per year. I expect in 2016 we’ll do about ten new investments, in 2017 we’ll do about ten new investments, in 2018 we’ll do about ten new investments – you get the picture. We have a deeply held belief that to maximize the value and opportunity in a VC fund, investment pace should be consistent over a very long period of time. We did about ten investments in 2007, 2008, and 2009 – which, if I remember correctly, is a period of time referred to as the Global Financial Crisis. Hmmm …
So it was fun to see my partner Seth’s post titled Welcome to Foundry on the same morning as Danielle and Heidi’s posts. That started the intellectual dissonance in my brain. If you want to see what Seth sends every company he joins the board of after we make an investment in, it’s a good read. It also clearly expresses how we approach working with companies the day after we become an investor.
I then read Ian Hathaway‘s great article for the Brookings Institute titled Accelerating growth: Startup accelerator programs in the United States. There are a few people doing real research of the impact of Accelerators and Ian’s work is outstanding. If you are interested in accelerators, how they work, how they impact company creation, and what trajectory they are on, read this article slowly. It’s got a bonus video interview with me embedded in it.
I’ll end with Joanne Wilson’s post #DianeProject. Joanne shared a bunch of info about the #DianeProject with me when we were together in LA two weeks ago. While I don’t know Kathyrn Finney, I now know of her and her platform Digital Undivided. I strongly recommend that you pay $0.99 (like I just did) to get a copy of the report The Real Unicorns of Tech: Black Women Founders, #ProjectDiane. The data is shocking, and there is an incredible paragraph buried deep within it.
“A small pool of angel and venture investors fund a majority of Black women Founders. For those in the $100,000-$1 million funding range, a majority of their funders were local accelerator programs and small venture firms (under $10 million in management). One angel investor, Joanne Wilson and Gotham Gal Ventures, has invested in three of the 11 companies that raised over $1 million. On the traditional venture rm side, Kapor Capital and Comcast’s Catalyst Fund have invested in at least two of the Black woman-led startups in the $1 million club. Wilson, Kapor, and Comcast often invest together, aka “co-invest”, in companies, thus increasing the amount of funding a company receives.”
So – was that more interesting than CNN or CNBC?
I’m finally home after three solid weeks on the road which included Austin, Dallas, New York, Boston, Philadelphia, and Los Angeles. It’s delightful to sit in my green zebra chair in Amy’s upstairs office, with a cup of tea, the Diana Krall channel playing on Pandora, and just catch up on stuff.
The extra points from my trip was getting to spend some face time with close friends and family that I haven’t seen in a while. Amy joined me in LA and we had dinner with Fred and Joanne Wilson and then went art shopping with Fred on Sunday. I spent a weekend in Dallas with my parents and went to Dairy Queen for Blizzard’s three times with my dad (my mom tagged along and even had a Blizzard one night.) I had dinner with my Uncle Charlie, Aunt Cindy, Cousin Jon, and his son Jack. You get the picture – even though the travel was intense I got some time with humans I love and don’t get to smell as often as I’d like to.
At the end of the trip, I spent two days at the Upfront Summit in LA. This comes on the heals of Upfront managing director Mark Suster’s great post titled Embracing Your Community as a Strategy which I encourage you to read as it is magnificent.
I have a long relationship with LA. In my first company (Feld Technologies) my first large client was in LA (Bellflower Dental Group). While the company – a large 100 person dental practice – was based in Bellflower, the dentist that owned it lived in Mandeville Canyon and I usually stayed at his house when I was in LA (he was the step-father of a fraternity brother, which is how we got connected in the first place.) I drove a lot in LA and learned things like how the 10 connects to the 5 to the 605, or the 405 to the 605. I learned that if you left at the right time, each route was only 30 minutes, but if you left at the wrong time, it was over two hours. I heard about Wolfgang Puck before he was in airports everywhere. I enjoyed the non-meat dishes at Hamburger Heaven, went to The Palm when there was only one location, and hung out in Santa Monica before it was techie cool and the only thing around was Peter Norton.
Today, our current investments in LA include Oblong, Nix Hydra, and recently Two Bit Circus. In the last five years, there has been an explosion of startup activity in LA that continues to be exciting as the startup community grows and evolves. Mark and his gang at Upfront Ventures are in the middle of it and are having a huge positive impact on things.
Over the last 20 years, I’ve attended and hosted many VC annual meetings. I’m an investor in many early stage VC funds and, while I’m not a rigorous annual meeting attender, will go if one of the GPs asks me to. I always offer to be part of the content of whatever meeting / summit / dinner they do if it’s useful to them.
Since I was already in LA on Monday, I told Mark I’d stick around for the Summit if he thought it’d be useful to him and the team. He immediately programmed me into the content for Wednesday (LP/GP day) and Thursday (entrepreneur day). Mark also invited me to the Upfront annual meeting given (a) our Next strategy and (b) my new partner Lindel Eakman being a prior investor in Upfront when he was at UTIMCO.
The annual meeting was solid and consistent with high quality annual meetings. But the Summit on the follow two days was easily the best VC-driven summit that I’ve ever attended. The content was incredibly high quality, diverse, and stimulating. There was plenty of networking time organized around the content. The venues were awesome. The coordination and organization was first class. The attendee list was dynamite. My understanding is that Mark / Upfront are going to post the content online and I’d encourage you to watch many of the videos when this happens.
It being LA, the special bonus things I got to do, like the one pictured below, was about as good as it gets. Yes, Kevin Spacey is extremely smart, interesting, and extremely articulate – as I expected, but there’s nothing like getting to spend a few minutes with someone you admire (he’s always been one of my favorite actors), but have never met.
Mark, Greg, Stuart, and gang – thank you for including me in this. You are doing amazing things in the LA startup community.
I woke up this morning in Fort Worth, Texas. For the first minute I wasn’t really sure where was I but it eventually snapped into focus. This happens to me periodically when I travel.
I’ve got a stretch where I’m on the road a lot. Fortunately, I’ve got amazing partners. I was reflecting on this over a cup of stale coffee this morning.
One of our deeply held beliefs at Foundry Group is that all four of us work on, and are responsible, for every company we are investors in. We don’t have silos where there are “Brad companies” or “Ryan companies” or “Seth companies” or “Jason companies.” In about 90% of the companies we are investors in, two of us are actively involved. In about 50%, three of us are actively involved. But in 100% of the cases, we all know what is going on, have relationships with the founders and CEO, and can quickly engage and help wherever and whenever we bring something to the mix.
As a result, we’ve always been active at moving primary responsibility for a company (which we define as a board seat) between partners. This is, in effect, a simple form of load balancing that we are all technically aware of from our early investments in some companies that generated, or used, very visible load balancing products before some of these technologies started to become absorbed into the core Internet infrastructure (anyone remember early DNS round robin approaches?)
We have a full day offsite every quarter. One of the things we do is a full portfolio review. Part of that is a load balancing exercise. In addition, we do this exercise as each partner returns from their one month annual sabbatical, as the other three partners have already been handling that partner’s primary responsibilities.
The load balancing process is collaborative. We aren’t randomly moving companies around between us, but rather thinking hard about where a particular partner can help – both in terms of the specific company as well as reducing cognitive load on another partner.
We recently load balanced the companies I was primarily responsible for as (a) my load was excessive and (b) we knew I’d be on the road a lot in Q1. We made a few changes just before I went on sabbatical, talked about it a little more when I returned, and then made a few more changes two weeks ago.
As I sit here a little bleary eyed from the past few days, I realize how powerful this process is at many levels, most importantly eliminating any ego dynamics across the four of us when we think about the portfolio (as the load balancing includes a full range of companies – from those doing extremely well to those struggling.) And, I feel intense relief and satisfaction that I work with three partners who I trust as deeply as I do.
Over the years at Foundry Group we’ve built an extensive network of companies. While we’ve invested in some of these directly, this actually represents the smallest set of companies that we are involved with. We have also invested indirectly in many others through our investment in Techstars. Yet another, and much larger set of companies, come from our investments in other venture funds.
In 2013, we started thinking hard about the future of Foundry Group. When we started Foundry in 2006 we were very clear that we were not going to build a legacy firm. There would be no generational planning, no transitions to younger partners, and no senior partner hold-outs who would hang onto economics well after they had stopped working. Simply put, when we are done investing, we will drop the mic and shut off the lights.
During these discussions, we reflected on the incredible collection of early stage VC firms we’ve invested in personally over the years. We’ve been investing as individuals in venture firms going back almost 20 years. The four of us have served as mentors, and in a number of cases, formal advisors to funds around the world. In 2010 we started making the majority of our fund investments together through a common entity. While we never thought hard about this activity, over the years we’ve amassed a very strong track record through these fund investments. It’s also been fun – a great way to get close to new managers, build lasting personal relationships, and see deal flow for our Foundry Group investing activity.
In late 2014 the four of us got together to talk formally about the future of Foundry Group. We had each taken a month off in 2014 – well needed breaks after what had been a seven year sprint since starting Foundry Group. We were clear at that point that we wanted to continue to make early stage investments through a new Foundry Group fund, which we subsequently raised in the middle of 2015 and started investing at the end of the year.
At the same time we discussed our later stage investment strategy. In 2013 we raised a fund called Foundry Group Select. The strategy behind Select is to make late stage investments into successful companies where our early-stage funds had previously invested. The strategy has been a good one and with two early exits (Gnip and Fitbit) we’ve already returned significant capital.
As a result of our extensive networks, we constantly see other potential late stage investments. We’ve stayed away from these investments, not because they aren’t interesting, but because with the Select fund strategy we had limited ourselves to investing in existing Foundry portfolio companies. We broke this rule recently to make an investment in AvidXchange, a business run by an entrepreneur who I have known for over 20 years. The conversation around AvidXchange brought to light the magnitude of the opportunity we have to invest in interesting companies outside of our early stage portfolio.
We also had a long conversation about our GP fund investing strategy. It is clear to us that we enjoy investing in other VC funds and working to support the GPs. When we looked carefully at our track record, it became clear to us how lucrative this activity has been.
As we discussed the confluence of our fund investing strategy, our current Select strategy, and our interest in acting on our unique later stage deal flow, we realized that there was an opportunity to wrap these three ideas together into a single entity that would encompass not just what we had previously called our Select strategy but would also institutionalize our fund investment strategy as well as leverage those and other relationships to invest in other later stage opportunities in our broader network.
The critical ingredient for bringing this all together was finding the person to help us execute our GP fund strategy. Fortunately we knew exactly who we wanted to work on this project.
For the past 13 years, Lindel Eakman has been the head of UTIMCO’s private equity group. He’s created an incredible portfolio of investments in venture capital funds, including Union Square Ventures, Spark Capital, True Ventures, IA Ventures, Techstars Ventures, and Foundry Group. In April 2007, Lindel committed to be our largest investor in our first fund in 2007, taking 20% of the fund. This was a bold move, as we only had one commitment at the time.
Lindel – through UTIMCO – has continued to be our largest investor. He has been on our advisory board and for the past eight years has been a key advisor to us. Over the years he also has become a close friend.
We’ve been discussing this strategy with Lindel for most of the last year and have started calling the initiative “Foundry Group Next”. The Next strategy will not only allow us to continue making direct investments in high-potential startups, but will also scale-up our ability to support venture firms and funds whose vision and values align with ours. Through this activity, we hope to spread the Foundry Group values and DNA further into the overall venture and startup ecosystem.
We are pleased to welcome Lindel to Foundry Group Next and are excited to start this new chapter with him. And to make the the lawyers in our lives happy, we need to say that in no way is this blog post an offer to sell securities or an advertisement of us raising a new fund. We have yet to announce anything regarding any new funds that we may raise in the future.
Last Tuesday, while I was enjoying a week off the grid, AvidXchange announced they had raised a $225 million financing led by Bain Capital Ventures. I’m psyched to be joining the board of a company co-founded and run by Mike Praeger, a friend of mine for over 20 years.
It was big news in Charlotte, North Carolina where AvidXchange announced the groundbreaking on a new headquarters complex in the N.C. Music Factory. And, Matt Harris from Bain Capital Ventures wrote a good thought piece titled Submerging Payments, Part II on why AvidXchange is such a big deal.
This was an atypical investment for us as we participated in the financing through our Foundry Group Select fund. While we do late stage investments via Foundry Group Select, up to this point we’ve only used it to invest in companies we are already investors in. AvidXchange is our first Foundry Group Select investment that we weren’t previously investors in.
The price of admission for us to make an investment like this is that we think the company is extraordinary and will be an unambiguous long term market leader. But we see lots of late stage investment opportunities like that and consistently pass on them as it’s not where we engage. And, when Mike initially called me for advice on the financing he was putting together with Bain Capital Ventures, it didn’t even occur to me that it might be something we’d invest in.
But then Mike called me about some more stuff a week later. During this call, he asked if I’d be open to joining the board of directors as part of the financing. I told him that I couldn’t as we don’t join boards for companies that we aren’t investors in. Mike then asked if we’d be willing to invest if he could get Bain Capital Ventures to give us some of their allocation (they committed to the entire round.) I told Mike I didn’t think this made any sense given our strategy and we left it at that.
A few days later, Mike emailed and asked if he and his wife Cindy could come to Boulder to spend some time with me and Amy. We hadn’t seen each other in many years and it seemed like a fun evening if they were already traveling. A week later we had an awesome dinner at Oak and then Mike, Cindy, and I stayed up until after midnight at the St. Julien talking about AvidXchange. Mike again asked me if I’d consider investing. This time I told him I’d run it by my partners and get their feedback.
Seth, Jason, Ryan, and I had a long conversation about it after going through the AvidXchange financing deck and monthly financial package. I expected that we’d decide to pass and set up the conversation with them this way. But I was pleasantly surprised that they were all interested in exploring it more. Besides thinking this was an outstanding business at first blush, there were three other things that caused us to consider breaking our rule about late stage investing.
1. My long standing relationship with Mike. We met through YEO in Boston in the early 1990s when we were each running our first company. Through YEO, I got to know Mike and Cindy (who is also an entrepreneur and was in YEO) very well. A few years after Amy and I moved to Boulder, Mike and Cindy sold their first company and moved to North Carolina. Their experience in Charlotte has been similar to ours in Boulder, as they made it their home and immediately went to work building their next business and their life. In 2000, Mike co-founded AvidXchange and has been building it ever since. While we haven’t seen each other in person for a while, we periodically go back and forth on email and have a deep emotional intimacy that comes from the relationship we built through our time in YEO.
2. We are very interested in investing in fast growing companies in different geographies. When we started Foundry Group in 2007, we stated that we would invest in companies throughout the United States. While roughly 33% of our investments continue to be in California (San Francisco, Los Angeles, and a third city to be named in a week or so) and 33% of our investments are in Colorado (primarily Boulder and Denver), we have developed deep networks in many different cities, including Boston, New York, Seattle, Portland, and Minneapolis through the other 33% of the investments we’ve made. And, through our deep relationship with Techstars, our reach and network is even further and includes cities like Detroit, Kansas City, Austin, Chicago, San Antonio, and San Diego. When the opportunity to invest in one of the fastest growing, and most significant tech companies in Charlotte appeared, we couldn’t resist.
3. We could do our unique thing alongside one of the best fintech investors in the industry. We have enormous respect for Matt Harris and his work at Bain Capital Ventures. While this is the first time I’m working with Matt, my partner Seth has known him going all the way back to high school and Mark Solon, one of the managing partners at Techstars, worked with him during his time at Village Ventures. While fintech is not one of our themes, we think of AvidXchange as Glue in the fintech world, which gave us a comfortable lens to view it through.
Before making a decision to invest, we talked to each member of our advisory board to get their feedback. We knew we were onto something when several of them asked if they could invest alongside us in the round. Their feedback, as one would hope from an advisory board, was direct, clear, and ultimately supportive.
With that, we decided to invest and Mike got me to join the board after all.
A few weeks ago I reposted some great advice from Fred Wilson for pitching entrepreneurs:
“Fundraising is simple: find investors that get excited about your company.”
Our experience with Spare5 and their experience raising money from us, where we just led a $10 million Series A Financing together with Madrona Venture Group and New Enterprise Associates, fits this quote perfectly.
Matt Bencke, Spare5’s CEO, had a conversation last November with Jason. I remember Jason walking into my office and saying that he’d been thinking about something like this for a while and was super excited about how Matt was describing what Spare5 was going to do. Within a few days, Ryan, Seth and I also spoke with Matt and his co-founders and agreed to participate in their $3.25M Series Seed round.
While it helped that our long time friend Greg Gottesman had been working Matt for a while and that Spare5 was the first company to emerge from Greg’s Madrona Venture Labs project, Jason bouncing up and down about it in my office when describing his excitement to me was the real spark.
Since then the team at Spare5 has made great progress. We are psyched to be leading this round with the same VC team that made up the company’s first round. For the last several months we have had an insider’s view into Spare5’s progress, promise, and challenges. We love what we see.
Spare5 is bringing a unique approach to a massive problem that is riding huge trends. More and more companies are swimming in data – both signal and lots and lots of noise. Whether your company is posting content, selling online, training machines, and / or trying to understand what people think, you need human insights more than ever before. Spare5’s micro-task platform gathers targeted peoples’ inputs, and synthesizes them into valuable insights. The other side of this trend is the fact that we’re a society addicted to our smartphones. Spare5 aspires to give everyone a host of new choices about how to spend spare time productively and make a buck while doing it.
If you have dirty data or not enough of the good, actionable kind, check out www.spare5.com/product. If you are some particular combination of audacious, ambitious, and inspired check out www.spare5.com/jobs. And if you’re just plain nuts, download the iOS app and let Spare5 tap into your particular kind of crazy today.
Yesterday we closed our fifth fund, Foundry Venture Capital 2016, L.P. As with all four of our other funds, it’s a $225 million fund.
In 2007 we raised our first fund – Foundry Venture Capital 2007. We subsequently raised a $225 million fund in 2010, another one in 2013, and a late stage fund in 2013. Our 2013 fund was originally raised in 2012, but we didn’t start investing it until 2013 so we renamed it 2013.
Except for our late stage fund, each of our funds has 30 investments (+/- 2) in it. Each is $225 million. Each is roughly invested 1/3rd into companies in Colorado, 1/3rd into companies in the bay area, and 1/3rd into companies in the rest of the US (Boston, NY, Seattle, LA, Portland, Austin, Minneapolis, Washington D.C., Burlington, and Phoenix.)
Our investment strategy has been unchanged since we raised our first fund in 2007. We are thematic investors, an approach we pioneered with a few other firms that today is trendy (and often mislabeled). We invest $5 million to $15 million in a company over its lifetime. We are early stage investors – if you’ve raised more than $3 million you are too late for us. We only invest in the US, but will invest anywhere in the US. We are syndication agnostic – we’ll invest with other VCs or invest by ourselves.
Our late stage fund gave us flexibility to invest more money in our later stage companies. We aren’t a growth investor, but rather interested in investing more money in our winners. This fund has already seen two big exits – Gnip and Fitbit.
We view our jobs as taking a box full of money that our investors give us and giving them back a bigger box full of more money over time. It’s pretty straightforward. We try to do this our own special way while having a lot of fun doing it. We have a small number of investors (around 20) who we appreciate deeply for supporting us in our journey.
And we couldn’t do any of this without the founders we get to work with. We appreciate them more than anything. Well, other than Jason’s musical abilities. For example:
Matt Blumberg, the CEO of Return Path, has an outstanding post up this morning titled The Difference Between Culture and Values. Go read it, I’ll be here when you get back.
If you liked that, go get a copy of Matt’s book Startup CEO: A Field Guide to Scaling Up Your Business. It’s one of the books on my list of books all CEOs should read.
Matt distinguishes between culture and values. His punch line, which he reveals early, is:
Values guide decision-making and a sense of what’s important and what’s right. Culture is the collection of business practices, processes, and interactions that make up the work environment.
At Foundry Group, we have a slight modification to how we think of values. Supporting our values are a set of “deeply held beliefs.” These deeply held beliefs tangibly define our values and give us a frame of reference to operate.
For example, one of our deeply held beliefs is that “we will never grow.” Each of our funds is $225 million, we have four partners and no other investment staff, and we work out of the same office we’ve worked out of since we started in 2007. We’ve had opportunities to raise much larger funds and have considered it in the past given a variety of factors. But, we kept coming back to this deeply held belief and realized that raising a larger fund would violate our brand promise of only raising $225 million funds.
Our deeply held beliefs are fundamental to our values, although we are comfortable challenging them regularly to make sure they are deeply held, and make modifications on occasion when we learn new things but only after a lot of thought and discussion, among ourselves and with several of our very close limited partners.
For example, when we started we said “we’ll make around 10 new investments a year.” This came from a belief around the importance of time diversity of investing – we have a three year time horizon for making the 30 or so initial investments in the companies we want in each fund.
Until 2013, we made between 8 and 14 a year, which is close enough to 10 (although the year we did 14 was a year where we all said “too much – slow down.”) But at the end of 2013, when the JOBS Act became official and AngelList created Syndicates, we decided to understand the phenomenon better by participating in it. So, rather than sit on the sidelines, observe, and prognosticate about angel / seed investing, we created the FG Angels Syndicate on AngelList and have done around 60 seed investments in the last 18 months.
Another example of a re-evaluation of a deeply held belief was our decision to create our Foundry Group Select Fund. Until we created this fund, we limited the amount that we could invest in a company to $15 million. We would occasionally go a little higher (the most we have invested in a company from one of our funds, other than Select, is $17 million) but, especially with successful companies, we were limited to what we could do in the later rounds. During a particularly challenging financing for Fitbit, which we believed deeply in at the time as an unambiguously successful company, we were frustrated that we couldn’t write a big check in the financing. We talked to our LPs about what we were thinking, quickly raised a late stage fund to invest on in our later rounds for our portfolio companies, and made our first investment from that fund in the last round Fitbit did in 2013. With Select, we are no longer limited to investing $15 million per company.
Matt states in his post:
“A company’s values should never really change. They are the bedrock underneath the surface that will be there 10 or 100 years from now. They are the uncompromising core principles that the company is willing to live and die by, the rules of the game.”
I strongly agree with this, although I have one nuance. It’s hard to be absolutely correct at the beginning of the journey. So, instead of being dogmatic about values you created when you were three founders in a cafe somewhere, make sure you have one layer of abstraction about how you implement them, that can be tuned over time. For us, these are our deeply held beliefs, which support our values, but can be tuned as we learn new things. But, because they are deeply held, they can only be slightly modified, rather than torn up and replaced.
I passed on something referred to us by a close VC friend (who I’ll call Joe) who I’ve done a bunch of investments with over the years. A few minutes later I got the following email from the entrepreneur.
hey brad –if you get a moment, i’d love to hear your unvarnished reasons for the denial. thanks for the time…- i remain a huge fan of your blog…….
I get asked regularly for feedback on why we pass on something, especially when we pass after a single email interaction. As with many things, it’s useful to start with your strategy, assuming you have one.
In Foundry Group’s case, our goal is not to invest in every great company, it’s to invest in ten potentially great companies a year.
As part of our strategy, we have purposely constrained our fund size ($225m per fund, which lasts about three years and covers about 30 investments) and our partnership size (four partners, no associates.) As a result, our goal is to say no in 60 seconds. Sure, we’ll miss some great opportunities, but that is fine as long as we believe (a) there are more than 10 great potential companies for us to invest in each year and (b) our deal flow dynamics are such that we see a lot more than the 10 we end up choosing to invest in.
Based on our current deal flow dynamics, if we had unlimited time, unlimited capital, and unlimited partner resources, there are at least 100 companies each year that we would invest in. This 100 number is not “deal flow” – this is actually investments that we’d make. So given our strategy constraint, we could miss investing in 90% of the things we wanted to invest in and still have enough new, great, potential investments to execute on our strategy.
Many of our quick passes are in the “it’s us, not you” category. There are a few things driving this. Following is the response I sent to the entrepreneur above in response to his question about why I passed.
1. Stage – this is later than our usual entry point. If you’ve raised more than $3m, we generally don’t engage. We don’t have to be the first money in, and we love to work with Joe, so I squinted and made an exception since you’d only raised $4m
2. Focus – We are very selective since we only do 10 new investments a year. I wrote a post about this a while ago (https://www.feld.com/archives/2009/06/say-no-in-less-than-60-seconds.html). I took the first meeting / call because of Joe. I tested high level response internally against the other 100 things that are in front of us. It was no where near the top (we have this discussion continually and use each other for reactions).
3. Engagement – I’m in Dubai next week and then Canada the week after that. Then I’m home for a week, in Cleveland, then in Boston/NY. So the next month is one of those months where nothing much new is going to happen on my end. We hate to play the slow roll game with entrepreneurs – one of our deeply held beliefs is to either engage or not engage quickly. Given #2 and then considering #3, I know that nothing is going to happen for a while and I have no interest in being the schmuck that just hangs around waiting to see if something happens.
Fundamentally, the quick positive reaction was “neat + Joe is awesome” then weighed down by 1, 2, and 3 above, resulting in “I’ll face reality quickly on this – we aren’t going to get there on it…”
While at some level this might not be satisfying to the entrepreneur, and I’ve had many challenge me to go deeper in my exploration of their company, given 20 years of investing it’s usually pretty clear when something is not going to happen. The reasons vary greatly, but having a strategy that causes it not to matter in the long run has been something that we’ve spent many hours talking about and making sure we understand.
Ultimately, understanding what we do, how we do it, and the strategy behind it is key to us being able to run Foundry Group with just the four of us. I take inspiration from a lot of people on this front, including Warren Buffett and his approach to his headquarters team for what is now one of the largest businesses on the planet.
There are clearly more than one way to run a successful VC firm – our goal is to run it the way we think we can be successful at it.