While sourcing deals is not usually a challenge for venture firms, filtering through thousands of potential early-stage opportunities takes time and effort.
Many firms solve this problem by expanding their staff or engaging external scouts, who help identify great investments.
Foundry Group, a Boulder, Colorado fund known for dozens of exits, including Zynga, Fitbit and SendGrid, takes a different approach to the “deal filtering” dilemma.
Until 2015, the firm’s founding partners, Brad Feld, Seth Levine, Jason Mendelson and Ryan McIntyre, were successful with making personal investments in emerging funds. Although returns from these small bets in such funds as True Ventures did not accrue directly to Foundry Group, relationships with outside VCs proved valuable, providing the firm insight into a large swath of early-stage companies.
It is not uncommon for individual GPs to write personal checks to new funds, but Foundry Group decided to take this LP effort to the next level when it formalized the process, allocating the firm’s capital to its partnership-fund about four years ago.
To lead this strategy, the firm brought in Lindel Eakman as a fifth partner. He previously spent 13 years as the head of UTIMCO’s private equity group. There, he made early bets on some of the best funds of the last decade, including Union Square Ventures, Spark Capital, True Ventures and Foundry Group itself.
Eakman tells Venture Capital Journal that there are many reasons Foundry Group institutionalized its LP investing, but one of the primary motives is to expand the firm’s network of early-stage companies for possible direct investments in the future. “Filtering direct opportunities is a problem, but now about 80 percent of our deals come from partner funds,” Eakman says.
Over 30 partner funds
Since 2016, the firm has added more than 30 venture partners and committed about $300 million to them. These funds range from now-established managers, such as True Ventures, Forerunner Ventures and Union Square Ventures, to the recently created Kindred Ventures and Moxxie Ventures.
Foundry Group adds up to three new managers each year. The firm aims to enter new relationships early, typically in funds below $100 million and more often below $50 million in funds one or two, writing checks from $2 million to $10 million.
In addition, Eakman emphasizes there’s more to the relationship than the investment. “We treat funds as direct portfolio companies, helping them build. We coach them on their business, including teaching them how to tell a strong story about it or to deal with the SEC,” he says.
The firm learns about new managers not only from other funds, but also by investing in the same direct deals. Foundry Group met Minneapolis, Minnesota-based Arthur Ventures while both served on the board of Leadpages.
“Filtering direct opportunities is a problem, but now about 80 percent of our deals come from partner funds”
“We became the fund’s first institutional investor and we introduced them to our LP base, which also had an opportunity to invest in Arthur Ventures,” Eakman says.
Current investments in other managers are made from the firm’s 2018 vintage, $750 million multi-strategy Foundry Group Next fund. About a quarter of this vehicle, or $190 million, is allocated for backing partner funds.
Eakman separately says that the annual pace of partner investments has been on average $80 million, which points to a nearly deployed fund, at least as far as the LP effort is concerned.
Looking forward, Foundry Group will continue to invest in technology, primarily software-focused emerging managers in the US and Canada, but these funds will likely be different from existing VC managers.
“We are a fund from the 2000s, our current partners are from 2010s, the funds of 2020s will invest in new sectors and often outside the coasts. We enjoy interacting with the next generation of VC talent,” he says.
Eakman explains that Foundry Group is organized around the “network effect.” This strategy gives the firm, its VC partners, and institutional backers opportunities to form relationships and invest with each other as LPs or GPs.
Maybe because this model is new and unproven, other venture firms have not yet adopted this strategy. But that is certainly a possibility.
“Anything that works will be replicated,” Eakman says.