A year or so ago I wrote a series of posts sharing some of my lessons learned from my past five years as a “professional” early-stage investor.
As some readers (very gently) pointed out, those posts were billed as an update to a pair of Investment Thesis posts I wrote in early 2008, but in fact they offered very little in the way of concrete guidance for entrepreneurs seeking financing from Founders’ Co-op.
Transparency is powerful, so here’s a crisper and more specific articulation of some of the themes and patterns that I apply when screening new investment opportunities on behalf of our fund.
These aren’t meant to be exhaustive — seed-stage investing is a highly subjective business, with decisions based as much on subtle emotional cues and interpersonal dynamics as rational analysis — but since I say these things out loud in meetings I figured might as well write them down here as well…
Talent
- Founders’ Co-op doesn’t just invest in companies, we back specific teams of founders. That means we can only work with teams that we believe have the combined skill, grit, intelligence, insight and leadership ability to build a really big business.
- Even the most exceptional individuals can’t cover all these bases, so solo founders are (usually) a red flag for us.
- As software investors, technical product execution is the heart of the companies we back. By extension, a software company without technical founders isn’t really a software company.
- Teams that can spot valuable problems and build products to solve them are always interesting, but we really get excited when those teams include founders who are on fire to prove themselves.
Opportunity
- We love entrepreneurs and want to help them any way we can, but as a fund we invest other people’s money alongside our own. If we don’t believe an investment has a chance of returning the fund — with all the risk and dilution we’ve learned to expect along the way — we can’t make it, no matter how much we like you.
- Venture returns are driven by a small number of extraordinary companies — those that come to dominate the category of opportunity they choose to attack. We are drawn to founders that show they understand this — both through “dominance-seeking” opportunity selection and in their methods of strategic execution.
- “Scratching your own itch” isn’t usually a good source of startup ideas, especially if your life experience is limited. We like entrepreneurs who combine unique domain expertise, imagination and empathic listening skills to uncover big opportunities in places most people wouldn’t think to look.
- Venture investing is more about growth than value, but (probably to a fault) we’re drawn to companies where real problems are solved and real money changes hands. Recent evidence to the contrary, we believe the laws of economic gravity still apply.
Stage
- Founders’ Co-op is a seed-stage venture capital firm (other names for what we do include “Super-Angel” and “MicroVC” investing).
- We typically invest $100K-$500K in a company’s first fundraise of $500K-$2MM. We also hold reserves for follow-on, and will support our successful investments up to a (self-imposed) limit of 10% of total fund capital allocated to any one portfolio company.
- Sometimes we invest by ourselves, but we also like to work with other professional seed-stage investors who have complementary skills and networks.
- Our mission is to help exceptional entrepreneurs navigate the often-rocky road from initial idea to a high-quality Series A venture raise, one led by the most effective partner at the best VC firm for their specific opportunity. We don’t disappear after Series A, but if we’ve done our job right the new investors will be much better at helping companies through that next stage of growth than we are.
Location
- We’re based in Seattle and have a strong preference for companies located in Cascadia — from Portland, OR up through Vancouver, BC. We know that market-dominating public tech companies can be built here and we want to help make that happen over and over again.
- When we invest outside the region (which we do about 20% of the time), it’s usually because we had a prior relationship with the founders that allowed us to get to conviction about the team despite their remote location.
- We believe that world-class innovation companies can be built anywhere, but we also believe that the world’s best market for innovation finance is Sand Hill Road, and that most successful growth companies will ultimately be financed from a major money center like San Francisco or New York. Helping our portfolio companies build relationships with high-quality follow-on investors is a core part of our work.
If you’re out raising money for your startup it’s useful to remember that investment funds aren’t (generally) operating companies — they’re partnerships, and the partners are just ordinary human beings, with all the quirks and peculiarities that come with that.
My work as an investor is highly personal — I do it because I love it — and the values that guide my decisions reflect who I am as a person (for better or worse). I hope this post makes it easier to understand how I approach that work — and by putting it out there I’m also deliberately inviting you to challenge my thinking so I can get smarter and better at what I do.
Great and informative article! As someone working on a startup project, I’m often wondering what the spurs investment from investors. The market that I came from prior to this one in Seattle had a very different startup mentality and so it’s great to see the honesty and detail! As a question, though – and one that I’m sure the answer has many variables – where do service / product industries fit in with seed funding? Is there a model or more consistent type of company often invested in? C2C as opposed to B2B, service versus product, etc. Thanks!
This novel idea that a startup must be a team to be successful is a dangerous fallacy. One that is hampering the rise of great inventors while limiting the scope of creativity. If Edyson or Da Vinci were waiting to have a team to shine they would have failed. Neither Gate nor Trump waited for a team to rise. If you fund the right visionary he will sure get a great team to take his vision (and/or inventions) to great heights. The startup revolution is a good one. The advent of funding for new companies is superb. We need original inventors we must give them the chance to bloom!
This is a great post. Transparency in the seed stage is so helpful. Especially when you are doing this for the first time as a start-up founder. – PLEASE MAKE GRAMMATICAL CORRECTIONS BEFORE POSTING THINGS ONLINE! IT IS PAINFUL TO EVEN FINISH READING COMMENTS LIKE YOURS!
Great post, even if it’s a few years old! I assume all of the information is still relevant. I look forward to starting this fundraising journey with our own tech startup. Thanks!