I love reading Mark Suster’s annual survey of venture capital Limited Partners (the large-scale institutional allocators who actually supply the money that VCs invest), but as the manager of both a regional seed fund (Founders’ Co-op) and regional startup accelerator (Techstars Seattle), I’ve always felt like more of a spectator than a participant in the industry he reports on.
Why? Because for as long as I’ve been in this business, regionally-focused seed-stage venture investing has been largely dismissed by professional allocators as unworthy of their time and attention.
Some of the reasons are simply structural: most institutional LPs are responsible for allocating large blocks of capital, from tens of millions to billions; most seed funds are too small (sub-$100M, and often lower) to absorb such a big check. Some are more perceptual: for most of the past 20 years, the Bay Area has both absorbed and deployed most of the LP capital in venture, creating a closed-loop system in which other geographies are perceived as either irrelevant or de facto lower quality. (In our last fundraise for Founders’ Co-op, the leader of a well-known seed stage fund of funds told me he “didn’t believe there was a seed-stage opportunity in the Pacific Northwest”).
But Mark’s / Upfront’s analysis shows promising cracks in both the non-Valley and seed-stage armor among institutional LPs. On the “anywhere but Silicon Valley” front, he notes:
“… some of the best performers in the past decade have been what a decade ago were emerging managers (or non-existent) such as First Round Capital, Union Square Ventures, Lowercase Capital, Foundry Group, Spark Capital, IA Ventures, Founder Collective and many others. Note that all of these names were not started in Silicon Valley.”
And on the growing recognition for seed stage as an opportunity worthy of institutional allocation, he adds:
“LPs believe that the venture markets have permanently changed and there are now three distinct buckets in venture: seed, A/B and growth stage… [s]eed fund investing is acknowledged likely to be a permanent force in our industry with too many great funds to list.”
So if “out-of-Valley” and “institutional seed” are on the upswing, does that mean that regional seed funds will now be able to break into the club? I haven’t tried to raise a new fund for several years (we closed FC3, a $20M regional seed fund, back in 2015) so I don’t have fresh data on that, but I do know that our strategy is working, so maybe I’ll get a chance to find out.
Because at the end of the day, what capital allocators really care about is returns, especially returns that deliver performance at or above benchmarks with consistency, prudent risk management and strong operational discipline. And with seven (soon to be eight) Techstars Seattle cohorts and three Founders’ Co-op fund cycles worth of data, it’s getting harder to defend the idea that there “isn’t a seed opportunity in the Pacific Northwest”.
Let’s take a quick look at the numbers:
Thanks to Jed Christiansen’s fantastic side-project, seed-db, you can now look up performance for any major accelerator program, down to the company level. While the numbers (sourced from Crunchbase) aren’t perfect, they give a pretty good sense for the overall performance of a given program or cohort. Grabbing the data for Techstars Seattle’s seven completed cohorts, you’ll see that we’ve graduated 71 companies since 2010, which have gone on to raise an aggregate $350M in follow-on capital. And while this includes some outliers (like Remitly at $100M and Zipline at $89M), it also includes plenty of “smaller” ($10M+) raises, and doesn’t even capture others (like Outreach, reported at $1M but actually having raised $30M). And the investors in these companies aren’t exactly “dumb money” either: Andreesen Horowitz, DFJ, IA Ventures, KPCB, Mayfield, Scale, Trinity and True Ventures all saw enough to like in our alumni to write them a check.
On the Founders’ Co-op side, I don’t have Jed’s engineering chops so I don’t (yet) have a public listing to share, but can report that we’ve made 79 total investments since 2008, of which 67% are still in operation (16% have failed and 16% have been acquired). Those companies have gone on to raise an aggregate of more than $750M, and have a combined enterprise value of just under $2B.
Now, most of the companies listed above are still privately held, so most of the LP “returns” from both Techstars Seattle and Founders’ Co-op are still just theoretical paper gains. And there’s also some overlap in the two populations, because Founders’ Co-op has also been a direct investor in 22 Techstars Seattle companies over the years. And unlike many of the funds I admire the most, we don’t have a single “unicorn” in our portfolio; we’ve built the portfolio values outlined above on a deep and broad bench of rock-solid operators who (as is typical in the Northwest) focus more on performance than flash.
This post is in part an invitation to those with better data than mine to tell me why the Pacific Northwest still isn’t a credible place to deploy seed capital. But I’d like to believe that Mark’s LP survey results plus our region’s real and tangible track record of performance for LPs will widen the cracks in the dam and unlock at least a trickle of LP capital to a region that desperately needs it.