We’ve written a lot about how our investing work at Founders’ Co-op connects to the broader global market for innovation finance (see The Venture Capital Stack or Regional Seed Investing), but we’ve never said much about where our own fund’s capital comes from.

Recent events have shined a bright, and ugly, light on the source of much of the money driving the current Venture Capital boom, and fellow investors and industry journalists are now advocating for greater transparency about whose money you’re actually taking when you accept a VC check (see this post from USV’s Fred Wilson, or this Techcrunch piece from Jon Evans).

As our earlier posts have described, global allocators of capital like Saudi Arabia aren’t much interested in regional or seed-stage investing; they have to deploy money in such huge volumes and with such frequency that only the biggest and most global platforms (like Softbank) are a fit. So if you’re curious, we never asked, and they certainly didn’t come calling.

But we do care, a lot, about where our money comes from. And while it’s not something we talk about publicly, at Founders’ Co-op we’re as proud of our investor base as we are of our investment portfolio.

Our work is intensely local, and intensely personal. We invest in exceptional people who have chosen to build their companies here in the Pacific Northwest. When they succeed, companies like Remitly, Outreach and The Riveter provide exciting, well-paying jobs for hundreds or even thousands of people who live and work here in the region. The leaders of those companies also become civic leaders who give back to our community, and they model the kind of pioneering courage that put our region on the map in the first place.

Our investors trust us to produce a compelling financial return, but they choose us over the thousands of competing alternatives because they believe what we believe: that building great companies in the place where you live produces returns that go way beyond a check in the mail. Well-paying jobs. Engaged citizens. A leadership role in the global economy. Thriving cities that are magnetic to talent from around the globe.

Given the values we practice as a firm, it should come as no surprise that our money is almost entirely local: founders and early leaders from our region’s most successful companies (including many of our own portfolio companies); families and family foundations with a long history in the region, who want to leave it a better place for their children and grandchildren; and even state governments with a voter-endorsed commitment to reinvesting in the next generation of local jobs and growth.

We know our investors and they know us. Our work is personal, and we take it personally.

When Rudy Giuliani declared “Truth isn’t truth” in defense of Donald Trump, I cringed. Not just for the obvious reasons, but because as I absorbed the absurdity of his statement, it hit uncomfortably close to home.

How do startup leaders think about truth, especially in the age of Theranos? What’s a true statement in or about a startup? Things move so fast (especially in the really early and high growth phases) that something that is true today often isn’t true tomorrow.

With the pace of change (both macro and micro), communicating progress can feel like an exercise in reporting on the status of Schrödinger’s cat. What complicates things is that as founders and leaders it’s surprisingly hard to tell employees or investors “I don’t know”. It’s even worse to not communicate at all. You’re pressured to have an answer, and if you don’t, it looks like you don’t understand your business. But when you’re wrong, you lose credibility.

That’s where we as investors can do better to help founders be as truthful and transparent as possible about their business, because the more we know, the more we can help. But investors don’t always do the best job of making founders comfortable with vulnerability and instead can reinforce the overconfident salesy mode of operation that’s often a requirement for leading a growing company through its inevitable struggles. This is one of the many reasons why it’s so important that founders select investors that they trust and connect with vs. the one that offered the best terms. But even then, talking about all the inevitably broken or at best partially broken and uncertain things in your business can be hard.

To make these kinds of conversations easier, I’ve found it useful to categorize judgements and statements about startups into 4 categories.

True as in “We closed a seed round”
Something that is objectively true.

Temporarily true as in “We’re going to hit next month’s revenue goal”
An outlandish goal that helps motivate and drive alignment. An optimistic view into something you’re trying to achieve that you think (hope) you will.

Temporarily false as in “We are the market leader”
Something aspirational and often visionary. Said more cynically… unmalicious and purpose-built self-deception.

False as in “We pay a competitive salary”
Something objectively false.

The reality is, if you’re a founder, you’ve probably said all of these things at one point or another to your customers, employees, and investors. Depending on when, you’d also probably categorize them differently. If you’re lucky, you’ve been successful enough to transition all 4 of those statements to true.

The temporarily true things are your rose-colored glasses. They are your rallying point and the overly optimistic claims that motivate people into making your goals a reality. They help keep people excited through the hard times when progress looks like one step forward and two steps backward.

The temporarily false things are the little lies that you’ve decided to tell as part of achieving a goal where in the ends justify the means. You have every intention of making these things true, and really do believe that by the time it actually matters it will be. In enterprise SaaS, you’d never land your first customer if they knew how bad or incomplete your product was. Your first employee would also never join if they knew how close you were to not being able to pay them.

Or would they? That’s where things get complicated.

Reality distortion fields, while effective, are a powerful but blunt instrument. In the hands of an outwardly confident but intellectually honest and inwardly reflective founder they can be a fantastic tool and let you pull the future backwards into the present. Used too often though, or by someone lacking self-awareness or integrity, and they can be the most destructive thing possible.

But with great power comes great responsibility, the difference between you and Theranos is not a giant chasm, it’s the slippery slope of transitioning your aspirations into your realities and what you’re willing to risk to achieve that. When something is only temporarily true, you need to recognize that. When it’s temporarily false, you need to recognize that too.

And while it can seem like 80% of your job as founder (and especially founder-CEO) is being a confident visionary, that’s where I think founders start to run into trouble. Startup founders are always fundraising, always recruiting, and always telling their story. Once you repeat it so many times, add charisma to it, pour your life into it, and maybe even say it on stage in front of hundreds or millions through the press, it becomes challenging to maintain your intellectual honesty. It’s like drinking a bottle of wine every night and trying not to become an alcoholic.

This self-deception is the slippery slope I’m referring to. It’s more dangerous than lying because it can become impossible to bifurcate those parts of your business that are truly enhanced by your ability to influence reality vs. those that can be destroyed by it. You can find yourself suspending reality when you actually need to be embracing it.

It can make great teams underperform and in extreme situations can make good people do bad things.

Worst of all, it’s nearly impossible to self-evaluate self-deception, and that’s where diverse leadership teams and great founder/investor relationships become paramount. Because while creating a reality distortion field is a powerful, and probably even required tool for building a successful startup, being grounded and intellectually honest is a more consistent factor in success. But you can’t ground yourself, you have to surround yourself with great people who bring out the best in you and make you your best self, even if it’s uncomfortable (it’s usually very uncomfortable).

Nothing in startups is simple and the truth is almost always complicated. In the sense of Schrödinger’s cat, your startup can both be crushing it and about to be crushed at the same time. It’s okay to recognize that, and with the right tools and hard work, the cat will be alive when you open the box.

Thanks to John Scrofano, whose feedback on the first version of this post was so impactful and widely incorporated that he’s now a co-author.

As seed phase investors (H/T to Hunter Walk for the term), we invest in companies that spend the majority of their time learning and iterating, and yet when it comes to fundraising conversations too many founders think that what I want to talk about the most is their solution and why it’s going to make a billion dollars.

The truth is, while I certainly care about your product in the context of how it evolves towards a big vision, I care a lot less than you think about what you’ve built thus far and are planning to build over the next year. Companies that go on to IPO as well as those that go nowhere both pretty much uniformly have bad products (if one at all) at the stage we invest. Like really, really bad barely usable products that are also probably at least 50% wrong for the customer. In some cases, and even with incredibly successful companies like Outreach and our Techstars Seattle portfolio companies Skilljar, Zipline, and Leanplum, it can be closer to 100% wrong.

But it’s not the founders’ fault for pitching us this way, it’s on us as early stage investors to help them better frame the conversation. After all, since you likely don’t yet have revenue, what else can we talk about besides your product and how exciting and potentially lucrative its customer is, right? But at the seed stage specifically, I’m not investing in what you’ve built thus far, nor am I investing in what you think you should build next. And it’s a waste of time to try and convince me why your envisioned solution is so exciting, because again… what you build is likely going to suck and at best be just good enough to not be bad.

What I am interested in investing in, besides the founding team, is the sum of what you’ve learned thus far about your business opportunity and what you’re planning on learning over the next 18 months.

Fundamentally, when I invest, I’m investing in a team and a process, not a product. I want to know what your process looks like, how well it works, what you’ve learned evolving it, and how you’re going to use it to build a big business. That’s what excites me.

The customer problem your product is solving isn’t interesting yet and your product doesn’t yet have any intrinsic value (see bad). A good product in an early stage startup is actually just an agile research tool. Something that can be used to test hypotheses, get closer to the customer, and search for a business model. The better you are at this, the more excited I am.

The first product we built at Simply Measured was a really awful social analytics tool designed for one purpose, to validate whether marketers were willing to pay for easier to access social media data. Our next iteration of the product tested their willingness to pay for reports. Our third iteration tested marketers’ appetite to pay for owned-media reporting.

Armed with those learnings, we went out to pitch our investors and asked for $750k to see if enterprises and larger agencies would pay large amounts of money for our solution. We told investors what we had set out to learn, what we did, and what we were planning on learning next. We found folks as excited about the answers to those questions as we were, and because of that, they invested in our company.

If you want investors like Founders’ Co-op to love you and love your company, pitch your team, pitch your process, and pitch me some really interesting questions that you’re the best-suited person in the world to answer. Don’t pitch me your product.

As an investor, I care a lot – and I mean A LOT – about founders’ motivations for starting a company.

Over the past couple of years, nearly every relevant Bay Area technology company has opened up an engineering office in Seattle and our hometown heroes Amazon and Microsoft are also attracting an unprecedented amount of technology talent to the region, many of whom are itching to start their own companies. With all those new potential founders in town, I’m getting asked a couple of times a week, “How much money should I save up before leaving my day job?”, and “What’s enough market validation to justify me going full time?”

These are the wrong questions.

Let me start with my story…

When Damon Cortesi and I initially founded Simply Measured, we came at it from different backgrounds, but made the decision for the same reason.

For Damon, he felt an urge to move from being a breaker of software to a builder. And more than anything he wanted to cultivate a company culture where people would be proud to tell others about their job. He also found himself spending his evenings working on things entirely outside his field of security and wanted to turn his passion projects into his career. He was willing to walk away from a juicy six-figure salary to do that, and while he didn’t have much saved up, he also wasn’t all that leveraged, so he figured we had a year to make it work.

I was two years out of college and drawn to the unknown. I just wanted to build something great and enjoy myself doing it. While I had what most entrepreneurially-minded software engineers would consider a dream “first job”, writing code AND getting to be customer-facing at a rapidly growing venture-backed startup, I was entirely uninterested in our customer (the healthcare marketer). My job felt too much like well… a job. Unlike Damon, I was living comfortably on $50k/year and had a chunk of cash set aside which gave me a safety net. But like Damon, I found myself pouring all my free time and energy into my passion projects in the evenings, and after joining forces with him on one of them, could no longer focus at my day job.

Our side projects had no customers, no market validation, and were simply products that we couldn’t stop ourselves from building. In our case, we loved social data and how social networks were changing the ways that businesses interacted with consumers. Thinking about this shift, and the opportunity it presented, consumed us.

And while our personal financial situations should have been relevant to our decisions, we didn’t even consider them at the time because our drive to found was so strong. We wanted to invest our time into something we were passionate about and didn’t think once about how much money we’d make, how that compared to what we were walking away from, nor how we were going to support ourselves more than a year out.

This is the best way to start a company.

There will always be many more rational reasons NOT to found a company than the other way around, and the best founding decisions are often irrational and motivated solely by a burning passion to work on one specific thing and pour your life into it.

Founding a company is a huge risk, and the reality is that we both in our own ways could afford to be irrational and take that plunge. As fathers now in our mid-30s, making that decision to start the company like we did back then would have come at a much higher cost.

Everyone’s situation is unique, there isn’t a certain amount of savings required to start a company nor some magical level of level of traction that tells you that you won’t be wasting your time. But there is a level of drive and passion that gets founders to not care about their answers to those questions. Until you find yours, you aren’t ready to quit your day job.

My question back to you is, “What are you so passionate about doing that the answer to those other questions doesn’t matter?”

With Aviel’s announcement last week, and a new website up at Founder’s Co-op reflecting our new partnership, I thought it was a good time to revisit the themes from my 2013 keynote at the Geekwire Awards: Turtles and Flywheels. Back then I said:

“The truth is, it takes time to build anything of lasting value…[t]he better something is — the more powerful and lasting — the longer it takes to build”

It has been 10 years since we created Founders’ Co-op to provide first-check support to the best founding teams in the Pacific Northwest, and this month I started recruiting for the 10th Techstars Seattle class (that program will kick off in 1Q19). It’s incredible to look back at how far our startup ecosystem has come in that time.

Seattle in 2013 was a different place. It wasn’t until five days after that 2013 Geekwire event that Tableau held its IPO, and only six months prior that Amazon surprised many by paying $200 million to purchase three blocks in the Denny Triangle just north of downtown. As I mentioned in my talk, we had made just 40 investments at Founders’ Co-op then, and those companies had raised a relatively modest $140 million in follow-on capital.

Fast forward five years. Amazon has added more than 20,000 new hires here in Seattle, bringing their total local headcount to more than 40,000, and has transformed Seattle’s downtown with a new headquarters campus coming to life on on those Denny Triangle blocks. With three tech IPOs in 2018 alone, our market is adding new anchor tenants at an accelerating rate. And a resurgent – and acquisitive – Microsoft is giving AWS a run for its money and cementing Seattle’s reputation as the center of the global cloud infrastructure business.

Founders’ Co-op has grown along with Seattle. In 2015 we closed our third and largest fund to date, allowing us to double-down on our strategy of filling the seed-stage financing gap in the Pacific Northwest. We also raised a new Techstars Seattle fund, allowing us to cast an even wider net for great Pacific Northwest founders, and to deliver even better results for those founders, and the region.

Ten years of steady effort investing in our community has snowballed into something bigger than we ever imagined. Since 2013, Founders’ Co-op has more than doubled the number of companies we’ve helped to start here in the region (from 40 to 91) and those companies have gone on to raise TEN TIMES the follow-on capital they’d closed in 2013 (from $140 million to $1.4 BILLION).

On the Techstars side, the 2019 class we’re recruiting for now will lift the total number of Techstars Seattle alumni to over 100. With the addition of The Alexa Accelerator, Powered by Techstars, a second local accelerator program which we created with Amazon’s Alexa Fund in 2017 and which is run by my Founders’ Co-op partner, Aviel, we’ve doubled our capacity for impact via the accelerator model.

But while breadth of impact is important, the long-term health of our ecosystem depends on our ability to create new category leaders here in Seattle, delivering the same scale and long-term contribution as our most important platform companies. That’s why our new site showcases a few of the companies in our portfolio that are most clearly on a path to massive impact, both here and around the world. We were lucky to meet the founders of Remitly and Outreach when they were just getting started, and by leading their seed rounds and serving on their boards in their early years were able to play a small role in the success of two of our region’s most important high-growth companies.

I’m thrilled to have Aviel – a founder from our first Founders’ Co-op portfolio – joining me as an investment partner for our next decade, and beyond. We are doing work we love, in a community to which we’re deeply committed, on behalf of the most incredible founders we’ve ever known. Thanks to all of you who have been a part of our journey to date, and looking forward to the next ten years.

The flywheel is picking up speed.

 

I’m thrilled to publicly announce the really poorly kept secret, that after almost 4 years of working alongside Chris DeVore and the rest of the Founders’ Co-op team, I’ve stepped into the partnership with both feet as a General Partner. Going forward the investment team will be myself and Chris, with Rudy Gadre and Andy Sack remaining involved as Venture Partners.

In transitioning from entrepreneur to investor, the lifetime of hard earned lessons from my journey as a founder of Simply Measured won’t be going to waste, and I’ll be working just as hard as ever leveraging those experiences in this new challenge, both the good and the bad. Those eight years of operating, growing from two people in a coffee shop to 150 employees, ruthlessly forged my understanding of my strengths and my weaknesses; my limits and my opportunities for growth. With that, where I can create the most value and grow the most is not as a founder, but as an investor working with founders by supporting and challenging them.

And the timing couldn’t be better.

From the investment world, to the tech world, to well… the entire world itself, it’s abundantly clear that we’re in a time of transition. We’re long past business as usual, but in many ways we’re still pretending, which is all too easy as public markets continue rise seemingly against gravity. Except for Facebook and Twitter this past week…

As early stage investors, you’d imagine that elevated uncertainty makes our jobs harder than ever. So my timing isn’t great, it’s terrible! Right? After all, most companies we work with are only 15% of the way on their journey in terms of time and 1% in terms of execution when we invest. 99% of what makes it a good or a bad investment simply hasn’t happened yet. It follows then, that the less we know about the future and the less trusted the patterns we have to match against, the riskier the proposition.

But it’s in these types of environments that Founders’ Co-op’s strategy thrives, because our success isn’t contingent on us predicting the future. You can look to history to understand what happened in a market and sometimes even why, you can even use it to gauge volatility and the likelihood of disruption, but you’re much smarter than we are if you can use it to decipher exactly how things will evolve in the future and invest around that, especially in today’s climate.

Our conviction at Founders’ Co-op is grounded in our belief in what won’t change. We aren’t a thematically driven fund, we invest in self-aware and intellectually honest, execution focused founders who don’t need the world to change in a specific way for them to be successful. That magical combination is rare, but part of what makes the Pacific Northwest so unique is how much less uncommon it is here than anywhere else, and we’re not this way by accident.

The Pacific Northwest is home to Amazon and Jeff Bezos, who summed up this ethos perfectly when he said, “I very frequently get the question: ‘What’s going to change in the next 10 years?’ And that is a very interesting question; it’s a very common one. I almost never get the question: ‘What’s not going to change in the next 10 years?’ And I submit to you that that second question is actually the more important of the two — because you can build a business strategy around the things that are stable in time.” Most of our greatest successes come through this mentality. Sales people will continue to sell, money will continue to be transferred, and development teams will continue to build software… just in new and better ways.

Cryptocurrencies, XR, machine learning, voice assistants, and autonomy will all be significant drivers of change over the next decade, and while individually they’ve all already begun to reshape our everyday lives, their combined potential impact and the specific outsized opportunities that will arise as a result are unclear. At Founders’ Co-op, we don’t chase these technology-driven opportunities in themselves, and instead back founders that leverage these emerging technologies to solve the tangible human problems of both today and tomorrow, the things that won’t change. We love founders that follow the customer and not the technology.

With that, unlike some other venture firms, we don’t expect the majority of our companies to fail. Good execution and meaningful value creation will in almost all cases create real value and outcomes that both investors and founders can celebrate. In this model, we also don’t model for the single outsized success that defines traditional venture, and because of that, we also may never return 10x our fund. But what we do expect, and enjoy, is consistently healthy returns and strong alignment with our founders. I am one of those founders, having raised my first $150k for Simply Measured from Founders’ Co-op’s first fund. Our founders are why we get up in the morning and why I’m taking on this new role.

Our model is not the only model for venture, but we evaluate our own strategy the same way we do our company’s. How will ICOs and other fundraising mechanisms change the seed stage investment world? With more liquidity, how far will the once clear line between investor and trader blur? We don’t know. But we do know that the best founders will continue to build the best companies, many of them in the Pacific Northwest, and we know how to help them.

If you are one of them, let’s talk.

Why did you start Outreach?

At the core, I’m an entrepreneur and have always been interested in building my own business. That’s what led me to enroll in TechStars’ 2011 class, along with my three business partners. We founded a company that was essentially a marketplace to connect teams of developers to the companies looking to hire them. But we were struggling to handle the volume of prospecting required to build both sides of that marketplace, so we built our own platform to help our sales team of one operate like a team of 10. The companies we sold to were much more interested in buying that platform than our recruiting service, so we eventually doubled down on building that out. That was the genesis of what has become Outreach.

Why did you choose to work with Founders’ Co-op?

Founders’ Co-op understands the very early stages of a startup. The days when things don’t scale, when product market fit is a moving target and success is unclear. It takes a special kind of partner to ride alongside of you in the early stages and make sure you make it to the next milestone, even if it means doubling down in support of you when things look more uncertain than ever. That’s Founders’ Co-op!

Why Seattle?

Because a combination of cost of living, outdoors, and Microsoft/Amazon/Google/eBay makes it easy to recruit top notch talent and scale out your team efficiently and quickly.
The bay is a quick 1hour and 15 mins away, so its like being local in the entire west coast!

Nugget for founders?

Don’t run your business by pattern matching. Patterns only work until they don’t. Operate out of first principles.

Why did you start Remity?

I started Remitly after traveling to close to 100 countries around the globe while living in Nairobi, Kenya, where I ran mobile and internet banking for Barclays Bank Kenya. Through that experience I learned how painful it was to send money internationally. I was getting paid in British pounds, living on Kenyan shillings, and eventually had to get money back to US dollars. It was a pain for me, but a much bigger pain for a lot of my Kenyan friends who were getting their income from relatives that lived in Europe and the US. After seeing the sacrifices that those family members made, and then how far that money went for my Kenyan friends back home, it felt like a really meaningful problem to solve. With the pace and the growth of mobile phones, it also felt like the right time to solve it.

Why did you decide to work with Founders’ Co-op?

Founders’ Co-op is not just capital, and that was clear from the conversations we had even before they invested. Chris DeVore had been through the journey before and was incredibly responsive to the crazy needs we had early on. He was hands-on with the company in the early days, and not just in the sense that he would take calls at all times of the day or night to help us work through issues, but he’d lean into the seemingly never-ending blocking and tackling we had in front of us early on. As an example, back when we started, getting a new state money transmission license meant our directors needed to sign off personally. Chris dropped in on short notice, literally 49 times, to get his fingerprints taken and sign the paperwork. To me, this was the perfect example of who he is as an investor, he’d always roll up his sleeves and do what was needed. He was also the one who pushed us the most, but also was at the same time the most supportive of everyone because of the way he did it. He’d been in our shoes and his empathy for our challenges was real. I would work with Chris and Founders’ Co-op again and again. He’s such such a phenomenal guy.

Words of Wisdom

This sounds sounds cliche, but surround yourself with phenomenal people, it makes or breaks a company. People oftentimes take this to just mean focus on team, but I think that it’s equally important to surround yourself with phenomenal investors. I think that a lot of entrepreneurs just say to that “beggars can’t be choosers, I can’t really decide who I take capital from”, but I think the more confidence you have around it being a two-way interview the more likely you’ll be successful raising capital.

It’s important to really push on investors to understand how they add value and find out what kind of partner they’ll be once they’ve got a seat at the table. When you push on Founders’ Co-op and do your references, you find nothing but glowing reviews. But then you actually take capital from them and it’s exponentially better than the reputation you found them to have in the community.

Why are you building Remitly in the Pacific Northwest?

When I moved back in Kenya I moved to Boise initially, but knew that I wanted to be on the west coast. I saw only two choices and very intentionally picked Seattle over San Francisco because I thought that the talent here was world class, and that’s not only still true today but it continues to get better and better. When you look at talent to funding as a ratio, there’s just less capital in Seattle and so for those that want to come out of an Amazon or Microsoft there are fewer startup opportunities, which is a huge advantage for anyone building their team here. I think it’s a legitimate competitive advantage to start a company in Seattle over San Francisco.