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Hi, I’m Brad Feld, a managing director at the Foundry Group who lives in Boulder, Colorado. I invest in software and Internet companies around the US, run marathons and read a lot.

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Being Syndication Agnostic

Comments (34)

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.

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  • http://www.facebook.com/p.dash P-Air Wolff

    fm bijan's post however, not sure "syndication" can be agnostic. it's whether you proactively look to bring other investors into your deals or not. the fact that foundry group is willing to invest alone or w/others just implies that it doesn't mind being brought into deals ;) …or am i missing something?

    • http://intensedebate.com/people/bfeld Brad Feld

      I’m not sure what distinction you are drawing.  We are happy to be brought into deals, we are happy to bring others into deals, and we are happy to go it alone.

      • http://www.facebook.com/p.dash P-Air Wolff

        i think it was the context that threw me. bijan's initial post that started it all seemed to be directed at the fact that other vcs talk about co-investing but never really do. 'talk < action'.

        fred's post appeared to say that he could see this practice getting harder and harder given various conditions taking place in the market.

        it seems like both bijan and fred are also agnostic, so i missed what point was being added to theirs besides the term "agnostic". it's a term i found strange to use in this context because agnosticism is an either/or acceptance between competing positions or beliefs. since most vcs will syndicate if a deal is brought to them then what's the value of saying that one is agnostic about it…aren't most vcs?

        sorry for this knit, but it just seemed like i might have missed something here that was more fundamental.

        • http://intensedebate.com/people/bfeld Brad Feld

          See DaveJ’s good explanation of “agnostic” as the correct phrase below.  Also, just because someone brings us an investment doesn’t mean we’ll do it.  I guess by definition if we do an investment that someone else has invited us into then it is “syndicated”, but my point was simpler – namely that we are willing to do an investment by ourselves – and equally willing to do it with a co-investor.

          As you probably know, many VCs are unwilling to make investments on their own.  Some others are unwilling to share, especially at the early stages.  And some have magic percentage thresholds (e.g. “we can’t do this investment unless we have at least 20%”) which – in my book – is silly.

          Our goal by saying “agnostic” is that we are willing to play any way and don’t have a preferred approach – it’s completely situation specific.  Simultaneously, I was trying to make the point that we make our own decisions independently of anyone else.  And this doesn’t just apply to the first round – it applies to all of the follow on rounds also.

          • http://www.facebook.com/p.dash P-Air Wolff

            go it, and reaffirms the reasons why i've always had a lot of respect for your investment philosophies. sorry for doubting you and thanks for the clarification :)

  • http://twitter.com/bijan @bijan

    Great perspective.

    I liked this line the best:

    "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."

    well said.

  • http://intensedebate.com/people/fred_wilson917 fred wilson

    i was taught early in my career to be very pro syndication and it's something i've done my entire career almost religiously. i like using the word agnostic because i am coming around to that way of thinking as i lose my religious belief in the value of syndicating.

    that said, in capital intensive deals, it really helps to have a syndicate

    • http://intensedebate.com/people/bfeld Brad Feld

      I completely agree in the importance of a syndicate in capital intensive companies.  That’s part of what has shaped our philosophy at Foundry Group not to invest in capital intensive companies.  We’ve drawn a mental line at $25m – our belief is that companies we invest in should be able to become cash flow positive on $25m or less of total investment (and we expect that plenty will become cash flow positive with less than $10m of investment.)  Since we are willing to invest around $10m by ourselves (and don’t have an upper limit – just a guideline) and are comfortable investing $15m (again not an upper limit – a guideline) in a company we feel really comfortable with this philosophy in the context of our investments.

      I was also trained / guided to be pro syndication early on.  I intellectually fought this along the way at Mobius which was then reinforced by a lot of the over-syndication activity at Mobius where I saw first hand the problem of too many firms in a syndicate, a syndicate where the investors got out of alignment with each other, a syndicate where you had one bad actor in the mix, and a bunch of other problems.

      For me, it comes back to my statement “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.”

      • http://intensedebate.com/people/fred_wilson917 fred wilson

        its funny because one of the guys who taught me the business (and the pro-syndication approach) used to say "the success of a deal is in inverse proportion to the number of VCs involved"

        • http://intensedebate.com/people/bfeld Brad Feld

          That would imply that the perfect syndicate size is between 1 and 3!

  • http://intensedebate.com/people/KevinVogelsang KevinVogelsang

    Brad,
    What are the downsides to syndicating a round of financing for the entrepreneur/startup (assuming the relationship with all investors is a good fit of course)? By syndicating a deal, the entrepreneur gains access to a larger network. This seems to be a big positive. However, there must be downsides (less attention, more interest groups, etc.) Love to hear more on the topic.

  • http://intensedebate.com/people/bfeld Brad Feld

    I’ll write a separate blog on the downsides of syndicates, especially when they get too big.  I’ll try to crank this out tomorrow to keep the conversation going.

    • http://intensedebate.com/people/KevinVogelsang KevinVogelsang

      Awesome. Looking forward to it. Topic has been on my mind.

    • http://twitter.com/reecepacheco @reecepacheco

      Great. Throughout this conversation I've been curious as to the negative effects for the entrepreneur – VC's driving down valuations, negotiating terms, etc.

  • DaveJ

    Contra your concern, I think this is a good use of the term "agnostic." It means that you cannot know; and the reason you cannot know is that there is insufficient information. It seems that this is exactly what you describe: you cannot know whether you want to syndicate without more information: who are the other investors, do the entrepreneurs want to syndicate, etc. Given this, it is also better than "indifference," because even when used in its economic mode it suggests that either way is just as good, and that's not true because it *depends on the circumstances.* Next Big Sound appears to be a situation where you achieved indifference (in the economic sense) because you had the details you needed and were fine going either way. Presumably, in some cases you will reach a point where you are neither agnostic nor indifferent (e.g., you do not like the proposed syndicate partner).

    My favorite example of the downside of religious syndication is one you may recall, I'll call it company X. X was formed as the merger of two VC-funded companies, each of which the original investor was unwilling to continue to fund alone. By merging the companies, each investor was able to create a syndicate for the follow-on investment. While it's possible that creating X could have been a good idea, the syndication driver caused both investors to ignore red flags about the combination.

    • http://intensedebate.com/people/bfeld Brad Feld

      Good help with the logical analysis of the phrase “agnostic” – you are correct.  Also, thanks so much for reminding me of Company X.  I will never, ever again allow myself to be convinced to fund into a garbage truck merger as a justification for continuing to fund a company.  I’m pretty certain (but not positive) that Company X was the last one I ever did.

  • http://twitter.com/howardlindzon @howardlindzon

    seth is great.

  • http://startuptrek.net steve bell

    Hey, from an entrepreneur’s perspective, if you have a feeding frenzy between your investors re: syndication (or, whatever)… then that is a good thing! Let them fight it out, and don’t make it your concern.

    I think Brad has the right perspective on this sort of thing. And that is to just stay focused on building & growing your business; let the vc allocation issues work themselves out in the natural course of doing business. Don’t distract yourself with that!

    -steve b

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  • http://intensedebate.com/profiles/ Anonymous

    Brad, there's never enough time for me to pick up all the great information from folks like yourself, Fred, Howard, Chris and many others. Appreciate the candid approach to the idea of syndication ( I can see advantages to having a couple of VCs at the table).

    I look forward to building a company that would both benefit from external funding, and provide fantastic utility to a changing web. We're pre-funding at Victus Media and working on locking into a great value offer to users/partners. Our development effort is leading us away from being a twitter app, and into becoming a web service, but the driving goal is implicit user information, and it's potent ability to enable an adaptive web. A simple example of an API we have live on our test server will enable news or blog sites to do a simple cross reference between their popular content tags, and a user's expressed interests. Another example is a simple ad widget which caters to the browser, not the content of a page.

  • http://intensedebate.com/profiles/ Anonymous

    Brad, there's never enough time for me to pick up all the great information from folks like yourself, Fred, Howard, Chris and many others. Appreciate the candid approach to the idea of syndication ( I can see advantages to having a couple of VCs at the table).

    I look forward to building a company that would both benefit from external funding, and provide fantastic utility to a changing web. We're pre-funding at Victus Media and working on locking into a great value offer to users/partners. Our development effort is leading us away from being a twitter app, and into becoming a web service, but the driving goal is implicit user information, and it's potent ability to enable an adaptive web. A simple example of an API we have live on our test server will enable news or blog sites to do a simple cross reference between their popular content tags, and a user's expressed interests. Another example is a simple ad widget which caters to the browser, not the content of a page.

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