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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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Something Ventured: The Founding of the Venture Capital Industry

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Last night Amy and I watched the movie Something Ventured: Risk, Reward, and the Original Venture Capitalists. This was my reward (I got to choose) since she watched both football games yesterday (and today). We have a 15 minute and 30 minute rule on any movie – after 15 minutes the chooser asks “still into this movie?” If the answer is no, we stop. This question gets asked by the chooser again after 30 minutes. If the answer is yes, we go for the duration, even if someone falls asleep. For example, after 15 minutes the other day, Amy said “still in” on my choice of The Hebrew Hammer. After 30 minutes, we were both “no’s” and that was the end of that.

I figured Amy would veto Something Ventured after 15 minutes. I’d heard from a number of VC friends that it was really good, but the idea of watching a documentary on the history of the creation of the venture capital industry doesn’t sound like an awesome Saturday night movie choice. But after about ten minutes, Amy said, “Wow – this is great!”

As I’m deep into writing book three of the Startup Revolution series (titled Startup Boards: Reinventing the Board of Directors to Better Support the Entrepreneur) I’ve been thinking a lot lately about what makes a great board of directors, and what characteristics of different VCs contribute to this. It ended up being super helpful to see direct interviews with a number of legendary VCs, including Arthur RockTom PerkinsDon Valentine, Dick Kramlich, Reid Dennis, Bill Draper, Pitch Johnson, Bill Bowes, Bill Edwards, and Jim Gaither. They covered a wide range of experiences, but were all there at the beginning of the VC industry and shaped many of the fundamental structures of venture capitalists, VC firms, how they interact with entrepreneurs, how the companies (and investments) are structured, and how boards work.

The entrepreneurs who were in the documentary were equally awesome. They included Gordon Moore (co-founder of Intel), Jimmy Treybig (founder of Tandem), Nolan Bushnell (founder of Atari), Dr. Herbert Boyer (co-founder of Genentech), Mike Markkula (president/CEO/chairman of Apple for many years), Sandy Lerner (co-founder of Cisco), John Morgridge (early CEO of Cisco), and Robert Campbell (founder of Forethought). The interplay between VC and entrepreneur as the story of the founding and funding of their companies was told was very powerful.

After 30 minutes, when asked if she was still in, Amy emphatically said “yeah – definitely.” While I thought I knew all of the history, I learned a few things I’d never heard before, but more importantly I got the nuance of the stories directly from the participants. And all of it was rolling around in the back of my head this afternoon as I spent three solid hours on Startup Boards.

If you are a VC, or aspire to be a VC, do yourself a favor and watch Something Ventured right now. And, if you are an entrepreneur who is interested in how the VC industry got started, I think you’ll also find this fascinating. The film ended with all of the VCs echoing the powerful reminder that without the entrepreneurs, there would be no VCs. It made me happy that it ended on that note.

I Give You Permission To Hate My Feedback

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Last night Amy and I had an awesome dinner at Perla with Fred Wilson, Joanne Wilson, Matt Blumberg, and Mariquita Blumberg. Fred and I have been involved in Return Path for a dozen years and this has become an annual tradition for us when Amy and I are in NYC. At 12 years of service, Return Path gives a six week sabbatical and a pair of red Addidas sneakers as a “get ready for your sabbatical” gift. Fred and I got the sneakers, but not the six week sabbatical.

I sat across from Joanne and since the restaurant was noisy our table ended up having two separate conversations going. Joanne is awesome – if you don’t read her blog, you should start right now, especially if you are interested in NY entrepreneurship, women entrepreneurs, food, and the thoughts of an amazing woman. I still remember meeting her for the first time around 1995 and thinking how dynamite she was.

Oh – and if you are a seed stage company in NYC looking to raise money, you are an idiot if you don’t immediately reach out to Joanne and try to get her involved. She is one of the most thoughtful angel investors I’ve ever met.

We talked a lot about seed stage investing during our part of the conversation. Joanne has done about 25 investments in the past few years and has a very clear strategy for what she invests in. She works incredibly hard for the companies she invests in, is deeply passionate about the products and the entrepreneurs, and clearly loves what she does.

During the conversation we had a moment where we were talking about feedback. I told her about my approach of saying no in less than 60 seconds. She told me a story about giving entrepreneurs blunt feedback in the first meeting, which I always try to do also. And then she said something that stuck with me.

Joanne will often start a meeting by saying something like I give you permission to hate my feedback. You can decide that you want to tell me ‘fuck you’ after the meeting. But I’m going to tell you what my direct and honest reaction is.

Now Joanne is a New Yorker through and through. Aggressive, direct, and clear. But never hostile. Ever. And a deeply loyal supporter. So this feedback, while direct, is incredibly powerful. It’s often extremely hard for someone to hear, especially if they are in “I’m trying to convince you to fund my company mode.”

I play the same way. At Foundry Group, one of our deeply held beliefs is that we always be intellectually honest, no matter how difficult it may be. At TechStars we pride ourselves on providing direct feedback, but always saying “this is only data”, letting the entrepreneur make their own decision about what to do.

These are versions of Joanne’s permission to “hate her feedback.” It’s a powerful way to frame any discussion. And I know I’ll be using the phrase “I give you permission to hate my feedback” many times in the future.

VCs Are Like D&D Characters

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I spent most of the day yesterday at TechStars Boulder. Demo Day is a week away and I did my annual “talk about how to finance your company” thing which included meeting with each company and giving them advice on where they were in the process. As I walked to dinner, I felt incredibly energized – once again there is a great set of companies coming out of the program and it’s awesome to reflect on the progress that they’ve made in 90 days.

My “near the end of the program” talk has become a ritual for a few of the programs – I just sit around and answer questions about the financing process for an hour. This lets me tune the discussion specifically to what’s going on and what is top of mind of everyone at this stage in TechStars. Since everyone in the program is in the room, they get to hear specifically what their peers are going through and how things are being addressed. This is obviously not a steady state phenomenon from year to year as while some of the issues and dynamics around fundraising stay constant, the environment is continually changing.

I woke up to an email this morning from Isaac Squires of Ubooly which said “Best Analogy Ever: I think it went something like – “VCs are like D&D players – I’m the psi mage, and Jason is the barbarian…”  It was part of my rant about VC archetypes.

One of the biggest mistakes entrepreneurs make is to assume “all VCs are the same.” Over and over again I hear questions like “how do I raise venture capital” or “how do I approach a VC”, or “what does a VC want to see in the first meeting”, or “now that I’m going to pitch a VC, what should I show them?” The answer – generically – is “I have no fucking idea – WHO are you meeting with?” This usually gets the person’s attention, at least a little.

The point I go on to make is that there are dozens are archetypes of VCs. Yesterday I listed half a dozen quickly off the top of my head using one line descriptions. I then paused and used an analogy that occurred to me in the moment and caused all the nerds in the room to smile. I said something like:

“Think about D&D, or Magic the Gathering, or any other game like that. The VCs are individual characters in D&D. Each character has a different set of skills, weapons, money, and experience points and over time develops more. A firm is a combination of different characters – at Foundry Group you might have a mage and a barbarian – and the combination is what you have to pay attention to.”

I played a lot more D&D than Magic (D&D was my junior high school game of choice) but the analogy holds exactly for Magic or even in simpler form Werewolf. One you realize you are dealing with many different archetypes with different skills and skill levels, and the configuration of these archetypes into a firm are similar to how characters combine and interact in a battle, you realize that there is no “generic VC.”

I moved off the analogy to make the point that you should do your research on the person and firm you are talking. It’s easy to do today via the web and the power of all the network connections between people. If you understand who you are talking to, what motivates them, and what they care about you can both target them better as well as have a much more effective conversation with them.

I expect I’ll use this analogy again and again – it’s better than saying “there are lots of different VC archetypes.” I need to think a little harder about the specific archetypes at Foundry Group since right now we all appear to be 3-D printed bobble-heads when you look at our website. At least there’s the consistent theme of beer in the background.

Make Your Own Decisions

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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?

Too Many Seed Investment Choices

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Yesterday I sent emails out passing on participating in two seed rounds for companies I really like. They had lots of investors trying to invest and each company was competitive with two other seed stage companies we’ve seen in the past 30 days. All are exciting, all are working on something that we like, and all of them are at the starting line with different strengths and weaknesses.

So far this year the number of high quality seed investments we are seeing in themes that are relevant to us is overwhelming. This is an awesome situation – for us and for entrepreneurs – and something I’m extremely excited about. But it forces us to think about our strategy, especially at the seed stage, and make sure we are comfortable with it. We are, but it occurred to me that it’d be worth putting it out there both so it’s known how we are thinking about seed investing and to get feedback on how we are approaching it.

First, some background. We’ve made a conscious decision as a firm never to grow – either number of partners or size of fund – so we are limited to the number of new investments we can make a year based on our approach. This translates into about a dozen new investments a year plus or minus a few.

Our strategy is “early stage” – so we are comfortable with seed investments, first round investments, and what might in the past have been called Series B investments if the company hasn’t raised much money to date (less than $3m). We summarize this as saying to entrepreneurs that if you’ve raised less than $3m so far, we are a target for you; if not, we aren’t. We are willing to invest as little as $375k as our first investment (e.g. Next Big Sound) or $15m as our first investment (e.g. SEOMoz).

We only invest in companies in our themes and only invest in US-based companies so we can say no in 60 seconds to 99% of the companies we see. Our goal isn’t to invest in all of the great companies; it’s to invest in around a dozen great companies a year. We are geographically agnostic – anywhere in the US – about 33% of our investments are in Colorado, about 33% are in California, and the rest are spread around the US. We are syndication agnostic – happy to invest alone and equally happy to invest with firms we like to work with. And we are very patient – we’ll lead our own follow-on rounds (at markups if warranted), are willing to invest up to $10m in a company before we declare “the moment of truth” as we’ve seen many companies break out in year three or year four of their life, and play for many years with the goal of building meaningful companies.

Finally, we believe strongly in active engagement as a seed investor. It’s not natural to us to make a bunch of passive seed investments or to toss $100k directly into a company without engaging with the company at the seed stage. We don’t have a seed program, nor do we expect to – if we invest, we are in for the long term.

So – what do we do?

1. Pass on the cluster: Per the intro to this post, if we see a cluster of seed investments in an area that we like, we are passing on all of them and trying to engage with them with the goal of leading the next round for one of them. Our belief is that we have to earn the right to invest and we want the entrepreneurs to choose us. At the same time, we want to invest in entrepreneurs who want to work with us and view us as a unique resource for them rather than just another check. In almost all cases like this, the seed round is easy to raise right now, which is awesome for the entrepreneur and gives her more choices downstream. We hope to earn our way in as one of these choices, while at the same time getting to know the entrepreneur better over a reasonable period of time. Of course, part of this is keeping the individual entrepreneurs plans confidential so we are very careful not to share any information between companies, although we’ve found several clusters where all of the entrepreneurs know each other and are already friends.

2. Support accelerators – especially TechStars – to create more seed opportunities: We co-founded TechStars and are investors in the program. Last year we helped put together (and invested in) Star Power Partners, which invests $100k in a convertible note in every TechStars company. As a result, we are tiny indirect investors in all of the companies that go through TechStars. Many of these companies raise less than $3m coming out of TechStars – all of them are subsequently in our zone for the next round financing.

3. Support other seed stage VCs: We’ve actively supported (as investors in their funds – individually, not through Foundry Group) many seed stage VCs including Jeff Clavier (SoftTech), David Cohen (Bullet Time), Manu Kumar (K9), Chris Sacca (Lowercase), Dave McClure (500 Startups), Eric Norlin (SK), and David Beisel (NextView). We don’t expect anything for this other than a role as a typical LP, but we view it as increasing the seed ecosystem.

4. Stay firmly focused on our strategy: We’ve seen strategy drift destroy VC returns, create chaos within VC firms, and make a mess of many VC / entrepreneur relationships. We know what we do well and are intent on continuing to do it for a long time.

As I mentioned at the beginning, we’re always thinking hard about how we do things and would love any feedback.

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