What Does a Foundry Group Next Fund Investment Look Like?

by Lindel Eakman

We recently shared an outline of what we’re looking for in a Foundry Group Next (“FG Next”) direct investment. Our FG Next strategy not only allows us to continue making direct investments in high-potential startups that fit within our themes, but also to scale up our ability to support venture firms and funds whose vision and values align with ours. Through this activity, we hope to spread the Foundry Group values and DNA further into the overall venture and startup ecosystem.

Broadly, we’re looking for sub-$100 million funds that invest in early stage technology companies and are based in North America. We seek to identify and support the next generation of great venture fund managers. We think our partnership should mean more than just committing capital. We seek to serve as the “insider LP”, counseling new managers on the growth of their own platform and helping them work through and avoid some of the common mistakes, especially those that we have made ourselves over the years. We want to partner closely, providing capital from our funds and connecting our LPs directly to venture managers.  We’ll have a separate post on how we source, evaluate, and partner with GPs.  However, our engagement model feels like important context for understanding our portfolio construction and the types of funds that fit with our strategy.

We’re targeting a pace of 5 to 10 fund commitments per year. Our fund investments fall into two categories: “Primary” positions and “Emerging” positions. Our primary positions range from $5 million to $10 million and our emerging positions range from $1 million to $2 million. Overall, we’re targeting 10 to 15 primary positions and 15 to 20 emerging positions. Whether a fund investment will be a primary or emerging position depends on several factors, including fund size, level of experience, and the strength of our existing relationship.

FG Next is largely driven by ecosystem— we want to leverage our existing ecosystem to identify great investments and also bring in new managers to grow it. While many of our fund investments will come from inside our ecosystem, we will save a few positions each year for those unexpected good opportunities that come to us, often spinouts or new managers.  Our goal is to bring our friends closer while also supporting the next generation of outstanding VCs.

To date, we’ve made 10 fund investments, which are listed here. These investments fall into two general categories: existing colleagues and emerging managers. We’ve made several investments in managers with whom we have strong, existing relationships. These are firms that have proven or are beginning to prove themselves; we already know them well, have looked at and/or invested in deals together, and want to be closer to them. Our emerging managers are less proven and are often raising their first or second institutional fund. These are generally sub-$50 million funds, have little data or track record, and less developed team, strategy, and portfolio ideas. We’re willing to invest and partner for the right manager/strategy and would even be happy to be $1 million of a $5 million fund.

Our $1 million to $10 million allocation size allows us to invest in smaller, early stage funds, which is where we believe we can achieve outsized returns. We’re targeting mostly Seed and a few Series A funds. We believe that the venture risk profile has meaningfully changed due to lower costs and faster proof points. We view the organized seed market as akin to the risk profile of Series A from 10 to 15 years ago. Moving up the stack, Series A funds now have more data and more opportunities with the reduced friction to found a company. Our funds may invest in multiple rounds throughout the lifecycle of a company, but we’re targeting those that make their initial investment in the earliest stages.

With respect to geography, we expect most of our investments to be in funds in the Bay Area, New York, and Boston, but we’re also looking for funds that target companies outside these major markets. We’re interested in secondary markets, but are cautious of secondary market funds that don’t have an ability to source outside a single market. We expect that several of our funds will make a small number of international investments, but our focus is North America.

At Foundry Group, we invest in technology companies and take a thematic approach to investing. The broad, horizontal nature of our themes has led to a diverse portfolio of software, hardware, enterprise, and consumer companies. We’re looking for funds that invest in technologies across these categories and overlap with some or all of our themes. Because of our unique position as a VC that also invests in other VCs, we believe we can add value beyond a capital commitment. To that end, we want to partner with funds where our expertise will be advantageous and where we might even be able to help finance later stage deals with a direct investment.

More than anything, we’re looking to invest with smart, great people. We will try to support the #OpenLP movement and keep updating our thoughts. Stay tuned for a separate post about how we evaluate fund managers.