What Does a Foundry Group Next Investment Look Like?
by Lindel Eakman
We always stop and consider whether a public posting makes sense whenever we repeatedly send something via email. This post comes from one of those moments. As we do more growth investments outside of our existing portfolio from Foundry Group Next (FGN), we are responding frequently with “thanks, but that doesn’t fit our strategy and what we are looking for.” So, in an effort to have something easy to point to publicly, we wanted to share an outline of what we’re looking for in an FGN investment.
We are looking for companies raising growth rounds that fit within our Foundry Group themes. These themes are horizontal in nature, applying to many different markets, rather than being aimed at one specific vertical market. You’ll see us engage on infrastructure technology around protocols and software that glues the Internet together. We’ve done a lot in marketplaces and are not afraid of hardware or anything that changes the way that humans interact with computers. We also like to see networks that create new distribution models and we’ve done a good amount of investing in business SaaS companies across these themes.
Given Foundry Group’s early stage focus, we define these “growth” rounds as quite a bit earlier than others might. We think the average company will have established product/market fit with real customer sales. In general, companies have reached the $8m ARR level with annual growth rates of over 50%.
We think of these as a round or two before a purely quantitative spreadsheet and metrics driven approach would definitively green-light such an investment opportunity. The company will likely have line of sight to cash flow break even but there might be another round after ours. The average valuation in the portfolio will be sub-$150M with a range of $50-200M pre-money for rounds where we can provide $5-20M and still have capacity for all the insiders to play in a $20-50M total raise. We would expect to own 7-12% of a company after the financing. Brad, Jason, Seth, and Ryan will be leading these on the deal side and would be the board representative for us. We try to help find these companies well before they need to raise and see if there is mutual interest, hopefully using a friendly GP as the starting point for an introduction. We’ll likely do around three of these investments per year, where we can be helpful to the company.
We’re finding two common scenarios that interest us. These financings are usually labeled as a late B or C round. The first scenario is something that is non-obvious and catching an inflection point. In this case, we almost always have a trusted referral from one of the existing investors in the company that makes us pay attention where others might blow it off.
Another scenario we find attractive is a reset round where we can come into the company, help insiders clean up the cap table, and get involved to lend a hand on the board. These are situations where a company may have gotten ahead of itself and needs to reset and perhaps upgrade the team to get next level. We feel like we can be a trusted and helpful partner on these financings as well.
The idea is to solve a potential fundraising challenge, leading a proactive round and keeping your teams out of fundraising mode and in execution mode. We want to be the investor you add when something is working or when you need supportive board members to take a company from good to great.
We’ve been very encouraged by the engagement of our friends in the venture capital community around our Foundry Group Next strategy. We find that being able to invest in funds as a supportive LP but also together on a direct basis leads to great long term relationships. It’s very rewarding to have such alignment and support across the portfolio, while bringing a few of our friends closer in our network and finding good companies to work on together!