Founders’ Co-op turns fifteen this year. We started the firm in 2008, on the cusp of the Global Financial Crisis, and it’s somehow fitting to be entering our 15th year as the laws of financial gravity reassert themselves once again.
Our firm’s original premise was – and remains – dead simple: Seattle is a global gravity well for engineering talent, thanks to the sustained excellence and corresponding human capital needs of Amazon and Microsoft. But as a “company town” where most engineers come for a well-paying job, not as founders seeking like-minded peers, our region’s entrepreneurial support systems are surprisingly weak. Creating a “day-zero” launchpad for high-performing technical founders in the Pacific Northwest and connecting them to the global capital markets at Series A+ has been our mission since inception.
But as with most founder journeys, while our mission has remained the same, our path from concept to reality has come with plenty of hard lessons and course corrections along the way. Aviel and I are both self-taught VCs: the parts of the job we learned as founders and operators of our own companies covered just a fraction of what it means to be effective money managers, fundraisers, board members and trusted partners within the tight-knit community of professional investors.
The deepest irony of the VC business – which we understood not at all when we started but is obvious in hindsight – is that excellence in investing requires the exact opposite of what’s demanded from the best startup founders.
Startups are defined by velocity and growth, learning and adapting faster than your competitors on the path to dominance in your chosen category. By contrast, venture capital is a craft that defies both speed and scale. Funds are deployed over years, and managed to maturity in decade-long cycles. Decisions are few and largely irrevocable: once an investment is made, it’s nearly impossible to unwind until the company fails, is acquired or becomes tradable on the public markets.
The implications of this are many. First, the increment of learning in VC is investment decisions managed to maturity. The initial deployment step can be parallelized to some extent, but the rest takes time, typically five to ten years for seed-stage investments. Because the number of decisions that make up a fund are few and the feedback cycle so long – maybe 20-25 first-check commitments managed for a decade-plus – adding more bodies to a fund doesn’t add capability, but rather dilutes institutional learning and accountability. In an ideal world, the same people who make an investment decision will also be the ones who manage it to maturity and recycle their learnings into each successive commitment. By the same token, adding more capital to a fund strategy doesn’t scale the strategy, it shifts it, often into a segment of the market very different from the one the GPs know best.
If the path to excellence in venture capital is making lots of investments and seeing how they play out, the hard part is surviving long enough to reap the rewards of that slow accretion of experience. Raising a first fund requires a leap of faith by your initial investors. Raising a second demands some promising early results. But raising funds three and beyond generally means you’ve actually delivered returns and built processes that justify a repeat commitment by LPs with access to a near-infinite shelf of alternative products, a bar most managers fail to meet.
We’re currently investing out of our fifth core fund, and since inception have backed 125 founding teams as GPs. We also created the Techstars Seattle and Alexa Accelerator Powered by Techstars programs, enabling us to roughly double our investor at-bats in the same time period, with an even more hands-on approach than a typical VC (one of the reasons we chose to exit the accelerator business a few years ago).
As a team of two, it’s a safe bet that Aviel and I have more road miles as very early stage investors than all but a handful of VC managers worldwide. Along the way, we’ve made more than our share of rookie mistakes. We missed out on a generational public company because its $4M seed valuation was “too high”. We confused sociopathy with charisma more than once. And we’ve thrown good money after bad more often than that by letting companies fail more slowly than was healthy for everyone involved.
Our investing journey has also spanned one of the most pronounced and sustained oscillations of the business cycle since the VC business was invented. We began just as the GFC was dragging the global economy into its hardest reset in decades, and then experienced the slow buildup of a massive global asset bubble that finally popped early last year, investing steadily along the way.
As generalist tech investors we’ve witnessed the invention of hype cycles for dozens of “innovations” both real and imagined, hardening our own judgment about what’s real and where we have an edge (B2B SaaS, Cloud, Payments) and what’s not, or at least not for us (Crypto, Drones, AR/VR, DTC, etc). With 250+ at-bats, much of this learning came from the school of hard knocks, a more searing and reliable source of conviction than TechCrunch articles and Gartner reports.
But as wrenching as the past year has been for the financial markets, and more importantly for the many founders and early hires whose lives have been upended by the sudden pivot from abundance to scarcity, it has come as something of a relief to our partnership.
When you’ve built a firm – and a worldview – on a commitment to patient craft and dependable performance, the frenzy of an asset bubble in its final throes can lead you to question your most closely-held beliefs. Why did that team get funded at all, not to mention on those terms? How did that company get acquired, and how did they justify that price? What the hell even is a SPAC, and how can it make sense for that company to be public? Is our fund too small? Do we need more money or bodies just to stay competitive? Are we stupid, or has the world really changed in ways we don’t understand?
Only time will tell if Aviel and I navigated this past few years of market dislocation with the right mix of skepticism and shrugging acceptance, but from our perspective a general return to long-term, customer-driven value creation is both welcome and long overdue.
As we embark on our next 15 years, we’ve learned to have no set ideas about what the future will bring, but we do know a few things for sure. Even in an era of remote work and Zoom-first investing, the Pacific Northwest remains as talent-rich and investment-poor as it was when we started. Aviel and I love working together to find and develop the most talented founding teams in our region. And as much as they value our help at Pre-Seed and Seed, no team in their right mind would prefer to raise their Series A from a regional generalist fund when they can access the best specialist investors in the world for their next stage of growth. By keeping our fund sizes small and laser-focused on the gaping hole in our market, we can deliver exceptional returns for our LPs, make the most of our hard-earned institutional knowledge, and have a hell of a good time doing it.
To all the founders, investors and business partners we’ve had the good luck to work with and learn from these past fifteen years, thank you for helping us discover work we love and a community we’re proud to call home. Here’s to the next fifteen years!