David Gardner (Cofounders Capital): We have a joke that if we don’t understand something in the first 2 minutes, we won’t invest.
30 Jul, 2021
Seth Levine is Managing Director at Foundry Group. His career spans venture capital investing as well as operational, transactional and advisory roles at both public and private companies. Prior to co-founding Foundry Group, Seth began his venture capital career at Mobius Venture Capital.
For me, it was a long time ago. I had lived in New York City for a little while and had been an investment banker. When I was still around 23, I decided that I want to have a life change. And I moved to Colorado and worked for a couple of companies here, including .COMs. After .COM burst, I end up in a company I was running pretty large portion of the business. That company was moving into some different direction, and I wasn’t excited to stay. It was part in being manager that I really like, but I spent most of my days just meeting with people and not doing a lot, so I decided to move back to more transactional world. I had a lot of friends in VC world from my days in banking, I decided to give it a shot. I was in my late twenties and started networking, as I thought it may be interesting way to combine my deal experience, my managerial experience into the next thing I was going to do. Eventually I was introduced to Brad Feld who is my partner now and who was a managing director at another VC company at the time, named SoftBank Venture Capital (aka Mobius VC). We met. They were hiring for an associate level position. And I decided that I wanted to take a step in my career doing something different – it was a chance. I went to interview and was hired to SoftBank Capital. About 2005/2006 they were going to raise another fund. I told Brian that I wasn’t quitting now, but I didn’t want to stay for this next fund. I was at my early 30th and promoted to very junior partner, but I was going to have another couple a deals myself for that fund. That was fine, but it just didn’t seem like it was going anywhere. He said, “Actually, I don’t think we’re going to be able to raise this fund as Mobius VC. What would you think about your putting the fund together with us and maybe a couple of other people?” That’s how the Foundry Group has started. The year 2006 our founding partners Ryan McIntyre and Jason Mendelson moved from the Bay area to Colorado; in 2007 we launched the Foundry Group. Our initial fund was targeted to be $175m, and we almost didn’t make it. Eventually some very influential people decided to back us, and that first fund became $225m fund. We raised 4 more $225m funds, we also raised a $225m Select Fund in 2013 to invest in later stage companies from our portfolio. In 2016 we hired Lindel Eakman to help us investing in later stage opportunities as well as in other venture firms. For these purposes in 2016 we launched Foundry Next fund, which is a $500m fund. In 2018 we brought everything together and raised one $750m fund to invest in early stage companies, in certain growth rounds and in investment funds. This is the history of Foundry Group. We are still very small, just 5 of us (and one of the original founders has already retired) managing $2.5b out of Boulder, Colorado, which is right in the middle of the US.
The most unusual pitch I ever received, which we’d not fund, because it was a little more out there literally and figuratively, was a business that was planning the colonising of the Moon. The idea was that they would mind the materials, build satellites and then launch those satellites from the Moon, where it would be much cheaper to launch them, because the gravitational pull so much less. They wanted to raise something like a trillion dollars for this project. This was the most unusual business that we didn’t fund. We funded a lot of businesses that have seem to be somewhere unusual, but sometimes those are the most interesting businesses. Right now in the portfolio we have a business that creates holographic displays, where you can display medical images and things like that in three dimensions. And you don’t need glasses, it is a real 3D. The idea is it splits images onto several layers shown in a true volumetric display. It is a little out there, but we think it is the future of certain types of imaging. Our most successful investment was Fitbit, but when we invested, some people thought that was silly. It is just a pedometer, and they were around for years. “People don’t want to count their steps, people are not going to wear a device to them.” Obviously, it became a thing, people all over the world are wearing devices on their bodies to measure biometrics. This is a good example of the investment that seemed a little bit out there at the time, but ended up being highly successful. A lot of what we do at early stages, probably, seems out there. Some of these companies do fail, but others succeed and later become absolutely obvious choice for everyone.
We used to track it, but it got to be too many. We estimate that we see about 8 thousand opportunities each year, give or take. And we invest somewhere between 6 and 8.
A little bit of both. Certainly, we are very open about what we are interested in and investing in, so we put a lot of information on our website or blog. We’ve done quite a bit out of just broadcast, and then people find us, because we are very open with channels, like email. We have a huge network of entrepreneurs and other venture funds, whom we know well or work with, and we receive a lot of inbounds from them. We occasionally start businesses ourselves, when we have an idea we like and can find a management team for realisation. We also sometimes have an idea about a specific space or some new technology and decide that we want to go looking for a team that’s already doing something, so we do that as well. And then, finally, and it is the best way nowadays to find new investment opportunities, is that we have a network now of 35 venture funds that we have put money into as an LP, and those funds have 5 to 6 thousand companies in their combined underlying portfolio, and we spend a lot of time mining data coming out of this existing portfolio looking for companies that we think might be a good fit for us.
Sort of a million-dollar question. We look for passionate founders who are product abscessed. That is the key criteria. It depends a little bit on the stage. Now we’re doing some growth stage investments. There are much more analysis, markets, financial models. At earlier stages it’s more about the team and the idea. As we’re looking at plucking companies out of other funds we are having close relationships with. We also look at the conduct of the underlined manager, how excited is the other original investor, who we have now very close relationships with, about this opportunity, where do they rank it in terms of companies in their portfolio.
We think about it more in terms of long technology trends, into which we can fit multiple investments. It is less industries focus or verticals focus, more thematic focus. The most active investing themes recently were the marketplaces – a lot of VCs invest there. We like particular types of marketplaces where not physical objects are sold, but expiring assets, time or expertise. Rover is a canonical example for us, just because it is the largest marketplace in our portfolio right now. That the dog sitting marketplace. If I have 2 rooms in my home to watch 3 dogs tomorrow night and if I don’t watch those dogs tomorrow night, this spot is gone – you cannot go back in time and recreate it. This is a big theme for us. Another big theme is what we call “Glue” – it is some technology product that a somebody from a technology organisation would buy – CIO and CTO. These are connection technologies.
We are, mainly, Series A investors. We are investing in the companies that already raised a little bit of money, from $1m or $2m to as much as $5m, have a product on the market and early product-market fit, and now raising at Series A round. We occasionally come into companies that are at Series C, early growth – not huge hundred million growth, but early. They might have $15m in revenue up to $40m or $50m in revenue: real business, real metrics, they know what they’re doing, but already trying to figure out their next phase in the business – this is the other time that we are the most commonly come in.
We think about ourselves as US investors. US is huge, we’re in the middle of the country, and it is not as much as I enjoyed personally going to Europe and elsewhere. It’s just really hard to stretch yourself around the globe, so we decided that our sandbox really is the United States. We did a couple of investments in Canada. We did one which was very hard to get through but we did want it, in London. But there is now a direct flight there from Colorado!
We are pretty quick at Foundry. We like to set up a lot of meetings, rather than having the marathon of due diligence session that might last 3-4 hours, we like to set up multiple meetings ang get multiple partners involved early in the process. In the Foundry we have a very flat structure, we don’t have any analysts or associates on the investment side, just partners. So we do all of our own work. But we like to have other partners exposed to something that we’re interested in, really early. This way we have an opportunity to push an idea back and forth very quickly and have multiple short meetings in relatively short time. We track what we call the first derivative of our excitement. After all those meetings – first intro, intro for partners, product demo, the head of finance discussing finances, the head of marketing discussing market strategy – we use for socializing and we carefully track whether our initial excitement grows or fades away. If it fades, it is not a good sign. Out of the 8000 businesses that we see each year, we take at least an initial meeting with, probably, 300-400. Maybe 100 of those get the second meeting with me or another partner, where we decide, do we need additional due diligence or want some information from our network. Out of those 100 we really dig in to something about 50 and close 6 to 8 of those deals. We really get to a point in a practice where we get all the way through a process to turn a deal down. If it’s not going to come together for those 50 companies, it goes down to a few meetings, a couple of hours total of time that we spend with them. The whole process from the initial meeting with a company to the final decide may take about a month. Usually it involves going out to the company or having a company come and meet us in person as we do like to spend social time with people. Now that’s not happening, but we are still actively investing, so we meet with people online.
When investing at Series A, we usually write $5m to $7m checks. When we invest in the growth round, we may write $20m initial checks. And we have a few companies where we wrote $15m-$20m initial checks.
The truth is that just a tiny fraction of investments, much smaller than most people realise, will return 10x or more. For Foundry it is less than 1%. Foundry has been really fortunate in terms of execution, and our first fund was really strong on return, it made 5x-6x. Speaking about returns of individual company: a lot of companies go to 0, well more that 50% of investments fail to return capital. But few companies, like Admeld, which was bought by Google, and Zynga or SendGrid, all of those companies returned more than 10x of the capital that was invested. In a couple of times it was a 100x. We rely on those kinds of outcomes. Foundry is an early stage investor and we tend to have relatively high ownership. When one of our companies went public, we still owned nearly 30% of the company. When it went public and the IPO evaluation was $3b, that part was worth $1b, maybe a little bit less because of the IPO dilution, but still brought almost $1b back to Foundry.
We see the companies after a couple small rounds of investments, but typically at Series A we’re buying somewhere in the 20% to 25% range for $5m to $7m. The markets move around in terms of pricing, and 4 years ago our average initial investment was more like $4m to $5m. Now we need to put more in order to hit our desired share.
A great question and hard to answer, too, because there is a certain team dynamics you’re looking for. We have what we call “No Assholes Rule,” so we don’t invest if we don’t think that you’re a good person. We tend to invest in product obsessed leaders – not just the CEO, but all the staff of management. And we also like teams that are well balanced. The CEOs cannot be an expert in everything, moreover, the best CEO is an expert in nothing, they are just building teams around them to be those experts. So I want to see this dynamics, I want to see other people than CEO and how they communicate, how much they let their teammates to be the experts, how they leverage their teams. As a company grows, the CEO becomes more and more like a coach, a playing coach, that assembles the team of athletes and puts every player in the best position. CEOs don’t need to tell, say, to a marketing department what should be done; they need to hire right people and give them the whole power to make decisions. The same time, we’re looking for people that have a certain amount of humility, which is interesting, because entrepreneurs need to be optimistic and have a certain amount of hubris – in everyone, who makes a statement “I have this idea, and I’m going to start this business.” Still we are looking for people that have certain humility and not that much ego to be the CEO. There are too many entrepreneurs attached to being the CEO, and as the result they fail to recognise when it’s the end of the road and there is a time for them to step aside to be a founder or a chairman. We really value CEOs of this type.
Both of them were product obsessed. I don’t know, if Jobs had that humility – I don’t know him and I don’t know what he was like when he was younger. My suspicion is, despite his product obsession, we probably would have felt like he wasn’t the right fit. Unlike Wozniak, who is a more humble guy and would be a little bit more to our liking.
I guess, we have. As we don’t do seed stage investing, we don’t see many of those. The only times when we really done that were a few cases where we founded a business with someone. We have found the CEO, we had an idea that we work on with CEO, and then we decided to give them a little bit of money to go after those businesses.
Lack of humility or the CEO that is an asshole. Wу had a several very interesting opportunities where the reason why we did ultimately turn them down is that we spent the time with the CEO and the team – and we just didn’t like those people. When you go into investment at Series A, the expectation is that you’re going to work with that person for 7-8 years, maybe longer. We have very close relationships with a lot of our CEOs, and we want them to be the people we like to spend time with.
So often! We don’t have, like many venture capital firms in the US, anti-portfolio page on a website. We come a long way – we started at 2007. So you can imagine what there were a lot of very good companies that we either flat turned down or were trying to get in, but couldn’t because the valuation was too high for us. We didn’t invest in Zimride, because we couldn’t agree on evaluation and the business was something completely different in a way back. There was a company called Justin TV, and while we evaluated their perspective right, it later became Twitch, which is now a part of Amazon. There are millions of companies like that. You cannot spend too much time thinking about that, because otherwise you will drive yourself nuts.
I would prefer to put it this way: I don’t regret when companies we invested in fail. We make a decision based on the information you have at the time and you know, as a VC, that half of those businesses do fail. So that’s not a list of failed companies, because that is part of the job. There are a couple of companies we invested in, where the founder turned out to not be a good person, and we missed on that. Or where the relationship somehow soured in a way that was weird because of the founder and the management team. We do have a couple of businesses like that, where we just missed on the people. Those I would say, I regret and I would like to take a couple of those back and have my money back.
There are lots of interesting businesses in BioMed, but we are not BioMed investors. We are very cautious about Legal Technology businesses. There is a lot of really interesting companies that are being developed around it, and we have invested in one or two, but it is not an area we like to invest in. We tend not to invest in Supply Chain Management and Warehouse Management. We tend to pass on too specific verticals.
Yes, all my life I do that quite a bit. We try to investing in themes in our philanthropy as well. My wife is on the Colorado board of The Nature Conservancy, which is a global environmental organization. I’m a trustee of my college, Macalester College in the Midwest in the US. We’ve donated quite a bit to it. We’re doing a lot locally around vulnerable communities; particularly now, in time of COVID-19, we’ve done a project with the Boulder homeless shelter. We have been doing it a lot to local organisations to help people with food insecurity, particularly families. Those are some of the areas that we care about. We also did a lot of work that is somewhere between philanthropy and intestines, like a bunch of different projects in different countries in Africa and Middle East for personal reasons. We don’t like to publicise those efforts, because it is not why we’re doing it, but we do give quite a bit of money away every year.
Today it is both. If we didn’t have any existing portfolio companies, it would be a pure opportunity. But there’s no question that some companies in the Foundry portfolio are challenged. I would imagine they’ll be a number that end up selling and believing that the COVID was a reason why they failed. Which is tough, but this is the reality where we are. We do know that downturns is a really good time to to start and grow businesses, so there’s no question that we will continue to invest. We also have a very large portfolio, and we are working very actively across it to make sure that we’re doing everything we can to help those businesses.
My favourite book to suggest for startup founders right now is a book called Essentialism: The Disciplined Pursuit of Less by Greg McKeown. It’s basically a block that describes how to say “No” better. How to do more by doing less. I think, that really speaks not only to founders with all that is the pressure they feel, but to all of us and pressure we all feel. This book describes really well why there are so many downsides to that and how people can better organise their lives to do less. Of course, I like blogs. My partner Brad Feld writes a great blog. I like Fred Wilson’s blog. Of course, I would recommend my own blog. In terms of podcasts, I’m really all over the place. I love actually listen to Tim Ferriss and Joe Rogan, it is a great platform and they are both very good interviewers. I love the blog Hidden Brain by Shankar Vedantam. I really liked Slow Burn, they had a number of interesting seasons. I just started listening to Gangster Capitalism. It is more about current events. It’s been interesting to think about it, because I don’t have a long commute – I live in the town next to Boulder, I work in Boulder, so it’s maybe 15 or 20 minute driving to the office, and that was the time that I would listen to a lot of podcasts. And what is funny: now, when I don’t drive to office, I struggle to find time to listen to my favorite podcasts.
Apple needs to be on that list. I think, Amazon needs to be on that list – they changed the distribution of everything. And I think, I will put Microsoft on that list. When you think about Apple, you see that they had changed their business a few times, but Microsoft also changed it. That’s why I would put them above, say, Google or another business like that, or even Facebook, because Google and Facebook kind of do what they’ve always done. The major difference is that Microsoft shows how to adapt over the long time.
I’m, actually, looking forward to do something new. I love my job, I love the company that I created in Foundry, but I also recognise that I have real interest and desire – and that it what drew me to spend time in Africa and in the Middle East – to show all across the globe and in the US that the entrepreneurship can be a force for positive change and good, can create jobs and leed people out of poverty. I have an interest to spend more time doing those things. I’m in the process of writing a book right now about US entrepreneurial ecosystem. It is the untold stories of entrepreneurs across the US. The state of entrepreneurship in the US is changing, it’s becoming less white, less male – which is good! But we don’t recognise that and we haven’t necessarily created support structures and financial mechanisms needed to sustain that. This is my passion right now. I’m still at my late 40s, and I would like at my overtime, as I still like my day job, I take overtime to spend more time working on it. Being a venture capitalist, managing $2.5b fund doesn’t leave me much time, but I’m trying to create it to do what is important for me.
It is some mix of Go and chess. As in Go, you have a pack of stones – resources – to deliver over the board. But as in chess you need to think a few moves ahead, think where things are headed. Where are technology headed, where your own portfolio is headed, which companies are doing fine now, but are going to run into trouble later. This is a mix.