What is a non-Valley seed fund good for?

We all want to believe that our work matters — that the 50 or 60 or 100 hours a week we spend away from our families actually makes a difference in our professional community and, if we’re lucky, in the wider world.

As a self-taught venture investor — Andy and I started Founders’ Co-op five years ago, after nearly 20 years as entrepreneur/operators — I’m always testing my assumptions about the role I believe I can play in the innovation community, and the meaning I want that work to make in my own life and the lives of others.

This post is a public unpacking of those assumptions, and an invitation for anyone who cares about these topics to challenge my thinking and make it stronger.

Like many entrepreneurs, we started Founders’ Co-op on a hunch — really a pooled set of observations from our experience as founders in two more-established startup markets (Boston for Andy, SF/Bay Area for me) who had moved to Seattle and together started a venture-backed company here.

Our original thesis was very simple and went something like this:

  • Seattle’s a great city with a ton of software engineering talent — mainly because of the massive entrepreneurial successes of Microsoft and Amazon.
  • For some reason all that success, money and talent hasn’t translated into a very active or high-performing startup scene.
  • It’s kind of a bummer to be an entrepreneur in a city that doesn’t have a strong culture of entrepreneurship.
  • We’re here, we like working together and we want to build something cool — maybe we could do some good, *and* make some money — by trying to change that.
Today — five years in — that simple set of ideas is still the animating spirit behind what we do. 
But along the way we’ve learned a ton about what it really means to run a seed-stage fund — from raising capital and sourcing deals to managing a growing portfolio of companies through both success and failure. (Taking on TechStars Seattle in 2010 accelerated our learning about fund management at least as much it has helped the participating teams).
In the same half-decade, the entire venture capital industry has been buffeted by a series of changes, some cyclical and some more fundamental: poor aggregate financial performance, collapsing startup costs and the resulting emergence of a new, pre-venture tier of company formation and financing. The current “Series A crunch” is just the latest symptom of these changes, and the anticipated Federal approval of startup crowdfunding will be yet another disruptor of the established patterns for innovation finance.**
Our ongoing journey as professional investors — cross-threaded with the accelerating changes in our operating environment — has led us to a much deeper understanding of the opportunity we intuited five years ago:
 
We now think we know what a non-Valley seed fund is good for, and we’re hell-bent on filling that role in a way that makes us uniquely relevant to the entrepreneurs and investors we work with.
This post is already deep into tl;dr-land so I won’t attempt to itemize the entire catalog of observations, personal mistakes, wise counsel from others and accidental insights that produced this view (though I’m happy to get into all of that 1:1 if you’re interested). Instead, I’m just going to make a series of assertions about our evolutionary niche in the current landscape of software innovation:
As a non-Valley seed fund, our mission is to scout extraordinary founding teams currently operating outside the Bay Area and help them build businesses that the best venture capital investors in the world want to back.
This mission is informed by the following beliefs about high-performing (i.e., “venture-grade”) software innovation:
    1. Innovation finance is — and will remain — geographically concentrated.
      Sand Hill Road is the Wall Street of Venture Capital, and the leading Series A+ venture firms will continue to produce the best economic outcomes for both founders and early investors.

 

  • But innovation activity is increasingly diffuse.
    The collapsing cost of software innovation and globalization of entrepreneurial culture means that elite founding teams will be increasingly be distributed among a growing number of global innovation hubs (e.g, those identified in the Startup Genome ecosystem report).

 

 

  • Early-stage innovation finance is highly contested within innovation financial hubs…
    Incumbent (VC) and insurgent (super-angel / Micro VC) finance players compete aggressively for access to elite founding teams located within the top innovation finance markets: SF/Bay Area and (more recently) New York.

 

 

  • …but few money-center investors are effective at systematically sourcing quality early-stage deals in secondary innovation markets.
    Most traditional money-center firms still expect founders to relocate; those willing to invest outside money-center hubs still struggle with weak sourcing and diligence networks pre-deal, and weak oversight and support systems post-deal.

 

In the context of these assumptions, the role of a seed fund in a secondary (non-money-center) market is crystal clear:

Secondary market seed funds are market specialists, building a fabric of relationships and on-the-ground founder support that connects the growing pool of high-performing global innovation markets with the few global hubs for innovation financeDoes this mean you can’t build a Tier 1 Series A+ VC firm outside the Bay Area or New York? Brad Feld’s success at Foundry Group (located in Boulder, CO) suggests otherwise.

Does it mean that every early-stage investor outside the money-center markets has to build deep ties to the Valley? Obviously not: a tiny percentage of startups in any market are really a fit for VC; many will go on to build terrific businesses with the help of local angel investors.

But for me and my work at Founders’ Co-op these assumptions create an operating framework that’s both simple and clear

  • I am a market-maker, matching world-class founders in secondary markets with the “best” (most effective / most ethical / deepest market understanding) money-center venture investors for their stage and focus.
  • My #1 job is to find amazing entrepreneurial talent in markets that are overlooked or under-penetrated by money-center venture investors.
  • When I find them, I must do everything in my power — from money and relationship access to hands-on hustle — to prepare them and their companies for success in the next tier of the capital markets.
  • To maximize their odds of capital markets success I must also develop trusted “buy side” relationships with as diverse a cross-section of Tier 1 venture investors as possible, so I’m able to make relevant founder/investor matches with speed and accuracy.

If I do these things well, repeatedly, for years and years:

  • I will help amazing founders achieve their dreams and make a difference in the world
  • I will make money for my investors
  • I will make money for myself, my business partner and my family
  • I will be able to raise a new — small — fund every few years so I can keep on doing it.

I’m aware that the world is full of urgent needs and I’m not sure my work will do much to meet them, but helping gifted makers make is what I love to do. I’m grateful to have found this work while I still have time and energy to learn a new craft, and I honestly can’t think of anything else I’d rather do.

The world is changing fast and I’m sure I’ll have to revise my plans accordingly, but for the time being you know where to find me — hammering away at creating the best damn secondary market seed fund I can build.

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**NOTE — if you want to dig deeper into the accelerating structural changes among tech/innovation funders, investors and entrepreneurs, a few research papers worth reading include:

  • http://twitter.com/bwertz Boris Wertz

    Nicely laid out, Chris – the mission of my own fund Version One is very similar with the exception that it is exclusively thesis-driven (marketplaces / platforms, SaaS, e-commerce) and completely geography-agnostic (so I woudl do deals in primary markets like SF or NYC)

    • http://www.crashdev.com Chris DeVore

      Thanks for the note, Boris + that’s why I like working with you: our networks are different but our view of + commitment to the work is very much aligned

  • http://www.verespej.com/ Hakon Verespej

    I don’t pretend to know the performance of Founder’s Co-op, but I suspect the “I will” list can be turned into “I have and will continue to”. For sure, this applies to helping founders achieve their dreams and make a difference.

  • http://adamlieb.me/ Adam Lieb

    As a Seattle area entrepreneur, I appreciate you laying out your core beliefs and thought process so clearly.

    I am curious if your/Andy’s central thesis has materially changed over the years (deep tech pool, non active/low performing, weak culture of entrepreneurship)? What has changed the most?

    • http://www.crashdev.com Chris DeVore

      Thanks for the note, Adam – our thinking has evolved a ton over the past 5 years (I’ve written about those changes at some length in earlier posts), but the core observation is that – even with all the right ingredients in place – building a functional startup ecosystem takes decades. Only with successive generations of significant startup success and recycling of talent and capital can you truly build a self-sustaining / accelerating system. We’re on the right path, but we have many years of work ahead of us.

      • http://adamlieb.me/ Adam Lieb

        Glad to be apart of it.

  • DavidSandrowitz

    I think you are spot on here. What I’ve noticed working and living in a secondary market is that the best native talent often migrates to the top tier centers while the local market “makers” are still doing a fairly poor job of either identifying said talent and helping them to become world class in their execution and results or of finding the crop of latent talent that needs a bit of a push to become reality. This isn’t because market makers can’t be more, but that the new crop of makers are simply responding to a market gap as business people might and not because they are the best fit to fill it. In other words, in my region, too many of these folks are focused on things like community, events, speaking engagements, etc and simply don’t have the ability to connect local startups to those money centers that matter as the startups grow over time.

  • http://www.Empower.me/ Bryan Starbuck

    This is a great model. We in Seattle are lucky to have you and Andy. Keep up the great work, Chris.