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There is no “Foundry Group Boulder Signaling Problem”

Forbes published an article yesterday by Maureen Farrell stating that there’s a “signaling problem” for TechStars Boulder companies who don’t raise money from Foundry Group.

“… one byproduct of [Foundry Group’s] generosity for any young Boulder company is that, if it hasn’t been funded by The Foundry Group, it must explain why. Otherwise it has a signaling problem, something that happens when a VC invests in an early round but doesn’t show up for later rounds.”

And while I’m going to argue (forcefully) here that neither my partners nor I either believe this to be true or even wish for that kind of market power, I should acknowledge that I’ve heard this before. And not just in relation to TechStars companies, but for tech companies based in Boulder more generally. I’ve been in a couple of meetings where a founder has suggested that if Foundry didn’t invest, no-one would (in both cases we didn’t invest and they did indeed find another capital source). I’ve also received calls from other investors asking why Foundry had “passed” on something (although in none of those cases did I think they were fishing for a reason to pass – but rather trying to get another data point on the business). And many, many people around town talk regularly about the overall lack of venture funds in the Colorado market (which leaves Foundry at the top of a very short list of active local investors, in large part where this perception likely stems from).

I’m extremely proud of the vibrant tech ecosystem in Boulder and the role that my partners and I have played in helping shape it, however we don’t welcome the notion that Foundry somehow controls the Boulder market. Whether Foundry has this kind of negative drag on Boulder companies or TechStars is an extremely important topic to us. We spend untold time and energy helping Boulder tech companies (not just TechStars companies and certainly not limited to companies in the Foundry portfolio) be successful, and the implication that not getting funding from Foundry is a negative mark on a business is the kind of market power that we certainly DO NOT want to have.  It’s not good for Boulder, not good for Foundry and not good for other venture firms (in part because it suggests that other venture firms simply aren’t capable (or willing) to do their own work). And while all four Foundry partners are involved with TechStars, our funding support for the program (and those in other cities) comes from us personally, not from our fund (we do this in part to try to avoid the perception that TechStars is in any way captive to Foundry, which it most definitely is not).

It is my belief that this sentiment, to the extent to which it even exists, is much more perception than reality (and at that, the perception of a very limited number of people). And while writing about it might drive some traffic Forbes.com, the reality is that there’s no due diligence line item on other venture firms’ checklists for Boulder companies that says “find out why Foundry passed”. There is no signaling problem.

And the numbers support me. Strongly.

Foundry has 28 companies in our 2007 fund (we have yet to close an investment from the new fund that we announced last week). Nine of them are based in Colorado (all of those in Boulder). Since we raised Foundry Venture Capital 2007, 64 Boulder-based companies have received funding, meaning that we’ve funded approximately 14% of the local companies taking in institutional funding since we raised our fund. Furthermore, 101 different venture firms have funded Boulder-based companies during this time period – reflecting the strong national reputation that Boulder is building among technology investors. The Forbes article cites Boulder’s funding total for 2010 through 9/31 – $91M that has been invested in Boulder businesses since the beginning of the year. With $13.6M of this total, Foundry represents just under 15% of the dollars invested in Boulder in 2010. The numbers for our participation in TechStars are similar (easy to look up since TechStars openly publishes its results).  Since the founding of TechStars Boulder 39 companies have gone through the program. Of these, 22 have received outside funding and another 5 have become profitable without the need for external financing (as an aside, this is a great track record!). Foundry has funded 3 (thats 13.6% of those receiving funding and less than 8% of all the companies that went through the Boulder program).

The conclusion here is pretty straightforward – while Foundry’s presence might seem to loom large over Boulder the numbers are pretty clear – we’re in no way driving a significant percentage of the investment activity in the area.

I recognize that my partners and I carry a certain amount of weight in Boulder and are viewed as leaders of the Boulder tech community (there are many tech leaders in Boulder – it’s one of the things that makes Boulder such a fantastic entrepreneurial city). But we don’t have the corner on TechStars nor the Boulder tech market. In fact we work hard to try to avoid this. As strong supporters of the Boulder entrepreneurial ecosystem we recognize that it benefits no one for us to behave in a way that isn’t in the interest of the entire community.

While it may be a catchy title to a magazine article, it’s just not the case. Simply stated, there is no TechStars Boulder Foundry Group Signaling Problem.

A note of thanks to Emily Mendell of the NVCA for pulling the Boulder data for me from the PWC/NVCA database.

October 22nd, 2010     Categories: Foundry Companies, Uncategorized     Tags: , ,
  • http://newmanva.com/blog arinewman

    Seth – glad to see you talk about this openly and directly. Its a legitimate concern and certainly that comes up in conversation with investors and entrepreneurs in other areas that are looking at local deals, but the data you provided really demonstrates a different reality (which is great to see). I'm also glad to see Foundry care so much about the topic in the interest of the ecosystem/community. I'll be sure to point people to this post when I hear the whispers next time.

    • Seth

      Thanks Ari. The reality is that if enough people believe it’s an issue, than it’s an issue. Part of my strong feeling about this lies in our clear desire not to exercise this kind of power in the market, but part of it is also a reaction to what I believe is some laziness on the part of other venture firms. Why should they give a shit what we do or don’t want to invest in. Shouldn’t they be making up their own minds? What Foundry believes or doesn’t believe about a company should be irrelevant to their investment decision. Once we have enough distance behind us in this fund we’ll all get to see exactly how many times we were completely wrong (which if you believe standard venture math, in a 28 company portfolio will likely be around 10 times…)!

  • http://robjohnson.tumblr.com Rob

    Seth – I appreciate your sentiment here, but as a boulder entrepreneur who has been out on the road doing fundraising, the "did foundry invest?" question is real, and you should have a good answer for it. Of course, this is a huge two-sided coin because the "yes they did" answer absolutely IS a signal, and it's precisely the one you want to emit :)

    Boulder entrepreneurs (and by extension TechStars) simply can't have it both ways. If you want the involvement of foundry group in your company (and this actually true for any advisor who makes investments), you're signing up to have the moment of truth eventually. Either your advisor, informal or formal, will invest or they won't. It's a great win if they do because it inspires confidence in other investors.

    If they don't invest, it's a setback. But it's hardly a major one. As an entrepreneur, it's actually pretty easy to explain away why foundry (or somebody else) didn't invest, and to do it in a credible way. In fact with you guys, it's absurdly easy and here's the free template:

    "well foundry are thematic investors. we're not really in one of their themes so while they are fans of what we're doing (afterall, we did get in to techstars & they're involved as informal advisors), they didn't invest because we don't fit their premise which they represent to their LPs".

    The "signaling problem" isn't really a problem. In the worst case, it's just a softball question, and in the best case, it's a bragging point.

    • Seth

      I appreciate that it comes up Rob (although even then it annoys me) but I hope that very few firms (and certainly not the good ones) make their investment decisions based on what Foundry does or does not choose to invest in (for sure we have plenty of firms that call us up to follow on to our investments, but the data in my post show that plenty are making their own independent decision about investing here). That said, I recognize that it’s a practical reality that some companies will at least get asked this and should have thought through their response. Hopefully that won’t influence any other investor’s decision.

  • http://learntoduck.com/ micah

    Being the dude quoted in the forbes article, I think the reality is somewhere between what Rob outlines and the data you present.nnEarly on in my fundraising effort for Graphicly, I spoke to you, Jason and Brad on separate occasions, and each (rightly so) said Graphicly didnt fit your themes. “Great!” I thought, that makes answering the question easy.nnBut, it turned out not to be the case. There was still some discussion by some investors. Some question the theme concept. For example, I remember one exchange that went like this: nnVC: “Well, they only invested in Next Big Sound because Jason likes music. They dont really fit in any theme.”nMe: “Well, actually, if I could, I would have invested in those dude too, and data aggregation and analysis seems to fit Foundry well.”nnWhether there is a signally problem or not, with young seed stage companies from Boulder, Foundry and its partners loom large. They are part of the conversation (as is David Cohen to be honest – “Is David also investing?” is another common question – the feeling being that he picks his “favorite” TS companies and invests in those).nnThis is also not specific to Graphicly, but something that seems to ring true for most Techstars companies (Also, to be fair, 3 other boulder based VCs passed on Graphicly.)nnWhat can be done about it? Nothing. I think people forget that these are all businesses (Foundry, Angels and startups) and that the decisions each make are directly based on whether they improve their respective business or not.nnI think that the perception is there because Foundry has had three months to watch these companies and make an investment decision — as Jason said in the article, sometimes its easy “They dont fit our themes” — and when Foundry passes its because there is a fundamental issue with the company.nnThe more savvy investors outside of Boulder understand that Foundry’s decision to not invest is not an indication of an inherent weakness in the company, just like their decision to invest is not indicative of a hidden strength.nnAt the end of the day what can Foundry Group do about it? Nothing that they havent already done. Perception will always trump reality.nnBTW, while I think it would have been fun to have one of my friends on Graphicly’s board, I wouldnt trade our current investors for anything. Blair Garrou at DFJ Mercury has been amazingly supportive and instrumental in the success (so far) of Graphic.ly….and he never asked why Foundry wasnt investing.

    • http://www.sethlevine.com sethlevine

      The specifics of your story are pretty telling and I wish more of them made it to the Forbes article. The reality is that plenty of VCs look at your average start-up and don’t invest.nnYour perspective on Boulder is obviously well informed. I’d also add that the reality of TechStars is that there are a bunch of venture firms hanging around for the summer who get the chance to see many of the companies up close well before investor day (in fact this last year with all of us gone for the month of July, many other firms had probably spent more time than we had hanging our the bunker!). nnAnyway it all leads back to my main point which is that plenty of great companies are funded in Boulder w/o Foundry’s involvement (yours is a great example of one)…

      • http://learntoduck.com/ micah

        The truth is that a lot of Boulder startups also get funded with out Techstars…nnIm just glad that she didnt run with my response to the question “Is Dave McClure crazy?” and title it with something like “Dave McClure is crazy enough to invest in Boulder.” :)

        • http://twitter.com/bpm140 Eric Marcoullier

          Did Seth just call your startup “average”?nnI kid!

          • http://learntoduck.com/ micah

            Oh jeez. I was going to click like on this comment, but it’s hidden by that damn one true fan bar.rnrn——-rnSent WirelesslyrnMicah Baldwinrn720-248-8499rn@Micah

  • NattyZ

    Seth – well written and accurate response. I think it is fair for potential investors to ask the question if it is to gather further information on the company. What worries me are the VCs either incapable or not interested in doing their own research and want easy answers. Something I perceive as happening with increasing frequency and is ludicrous. I’d hope that part of the joy of being a VC is the critical thinking that goes into filtering deal flow and the opportunity to make your own decisions. Using your networks to inform decisions is one thing, using it as an ultimatum entirely different. nnThanks for being part of this community, we’re all much better because you are a part of it. nnRob – agree with your comment too. Good response. n

  • Roger

    Seth, great discussion and thanks for providing empirical data. @rob’s comment is certainly valid, but you, Brad et al have finessed this well in the past and are likely to continue to do so in the future. nnRock on. n

  • Seth

    Thanks Rog. The reality is that we’re never going to have the bandwidth or inclination to try to run the table on Boulder based companies and given the vibrancy of our market this will continue to be a great place for other firms to come and find outstanding companies.

  • http://twitter.com/LDEakman Lindel Eakman

    “I recognize that my partners and I carry a certain amount of weight in Boulder …” – Some more than others. The artist formerly known as your “largest LP”. rnrnI had too…rnrnAs an aside, we get that comment at the LP level in Austin. Makes no sense at all. You/we have such limited mandates, capital, & bandwidth that the odds are pretty good that we’re not going to fund all of the “great” deals. rn

    • http://www.sethlevine.com sethlevine

      Fucking hilarious! You win the best comment award hands down.

    • http://www.ryanmcintyre.com Ryan McIntyre

      :-)

  • http://twitter.com/bencasnocha Ben Casnocha

    But are the numbers you cite just internet/software sector or “any Boulder company that’s received funding”? The $91 million link is broken.

    • http://www.sethlevine.com sethlevine

      good question. i’ll grab the spreadsheet and put up the data.

  • John Minnihan

    “Boulder, Coloradou2019s only venture capital firm, The Foundry Group…”nnWith that as the lead sentence, it’s hard to take the rest of the article seriously. Is Vista no longer doing deals? What about High Country? There are a few others, but these are the ones that immediately come to mind.

    • http://www.sethlevine.com sethlevine

      Vista isn’t, but High Country, Boulder Ventures, Access and others sure are. I know that the reporter spent a few days here, but apparently that wasn’t enough to get the real story…

  • Partner

    Why dont the VC firms post their quarterly financial results on their website? If not on the website, then why dont they provide them to each of the companies they have invested in? If you are an entrepreneur/ceo interested in seeing IRR results of your venture investor then Google the LP’s name such Massachusetts Penion Fund etc and you may be able to see the IRR results of most of the venture funds. I just saw one and they are appalling but you wouldnt be able to guess that from the arrogant and flippant responses from the VC’s themselves.

    • http://www.sethlevine.com sethlevine

      I think results are becoming a bit of a less guarded secret in venture circles (in part because more and more LPs are posting results) although understand that aggregate data are effected by a number of factors, and from an entrepreneur’s perspective track record is only one factor to consider when looking for a VC partner. Also keep in mind that under FAS 157 rules, there are a lot of write-ups early in a portfolio so data on funds that are only a few years in existence (Foundry falls into this category) can be inflated. That said, I always encourage entrepreneurs that we’re working with to do due diligence on us (or whomever they are thinking about taking funding from). Best is to call other founders and ask.

    • http://www.sethlevine.com sethlevine

      I think results are becoming a bit of a less guarded secret in venture circles (in part because more and more LPs are posting results) although understand that aggregate data are effected by a number of factors, and from an entrepreneur’s perspective track record is only one factor to consider when looking for a VC partner. Also keep in mind that under FAS 157 rules, there are a lot of write-ups early in a portfolio so data on funds that are only a few years in existence (Foundry falls into this category) can be inflated. That said, I always encourage entrepreneurs that we’re working with to do due diligence on us (or whomever they are thinking about taking funding from). Best is to call other founders and ask.

  • http://communitas.tumblr.com/ tobymurdock

    It’s good to have this topic discussed prominently. nn”Is Foundry investing?” is a real question. As someone who spent a good amount of the last year fundraising all over the country, I can say with great certainty that I heard that question a lot. nnBut the truth of the matter is that I heard it almost always from VCs who weren’t really interested in investing in us and were likely just checking one last box before forgetting about us forever. Whereas the firms who were sincerely interested in us never asked the question. So my take on this dynamic is that yes, VC’s ask the question a lot, but no, you’re kidding yourself if you see this as a problem, because investors sincerely interested in your business make their own decisions. nnI’ve heard the “I’ve been blackballed by Foundry, so I’m screwed” line from entrepreneurs in Boulder, and that’s just an excuse to give up. nnThe fact is that there are other VC’s in the community, which was an incredible oversight by the Forbes writer. There are the VC firms in the Boulder area–like High Country & Access–and others who regularly invest here, like Highway 12. Sadly the local VC ranks have been thinned lately. I think we all hope that trend changes for the good of the whole community. nnAnd Seth: it goes without saying that despite the article’s depiction of Foundry as some negative-signal-shooting monster, that you guys couldn’t be any more supportive of our town’s start-up scene.

    • http://www.sethlevine.com sethlevine

      Great comment Toby. Thanks for the frank thoughts (I completely agree – this is only an issue for those companies who want to make it one). And I appreciate the props at the end of the comment. We try (seriously).

    • http://www.sethlevine.com sethlevine

      Great comment Toby. Thanks for the frank thoughts (I completely agree – this is only an issue for those companies who want to make it one). And I appreciate the props at the end of the comment. We try (seriously).