Network Driven Investing
by Seth Levine
We are strong believers that the pace of innovation over the next 20 years will dwarf that of the last 20. Technology is no longer an isolated sector. It touches all aspects of our economy, speeding change and creating opportunities at every turn. The power to introduce new products used to be reserved for large corporations and the occasional startup. Now, that power sits at kitchen tables, in garages and in the minds of dreamers everywhere. Good ideas, capital to finance them, and the competition to nurture visionary founders are expanding in amazing and surprising ways from coast to coast and throughout the world.
We created Foundry in 2006 as champions of innovation and entrepreneurship, believing that great companies could be created and built throughout the United States, rather than only in a few cities. Through our involvement in organizations like Techstars and Kauffman Fellows and thought leadership through books such as Venture Deals, The New Builders, and Startup Communities, our goal remains to support and nurture entrepreneurship broadly.
As a network of founders, funders, and operators, we drive leading-edge change. Foundry is not a pilot, but a guide to power the founders and partner funds in our portfolio forward. It is the collective power of the network that creates our advantage and drives our unique approach to investing.
The Power of Community
We’ve long believed in the power of community and, since the beginning of Foundry, have tried to foster strong ties between those with whom we work. We are attracted to humble, hardworking founders who recognize the power of community. The early members of this group set a tone that has become the cultural underpinning of our network. We often hear from founders that they feel a special connection to community through Foundry’s investment in them. We are deliberate about our efforts to strengthen these connections.
In the early days of Foundry, when we were investing out of a series of four early-stage funds (each $232M in size), our network primarily consisted of the founders and CEOs of our portfolio companies. We gradually expanded the network to include other executives working at the companies Foundry invested in, and periodically held get-togethers and events for different groups of executives.
This thinking started to evolve in 2016 with the formation of Foundry Group Next and the expansion of our investment focus to include investing in venture funds – what we call our partner funds. We had long been personal investors in other venture capital funds. Institutionalizing this work, and greatly expanding the capital we had to invest in individual funds, significantly changed the nature of our relationship to the GPs we backed. We were now an important LP and one that didn’t look like any of their other institutional LPs, given our role as GPs at a venture fund. This puts us in the position to be sought-after investors and to have a closer-than-typical relationship with the partner funds in our portfolio. We share a GP experience with the managers of the funds in which we invest. As this partner fund network evolved and grew, it became a powerful lever for us. Through it, we in effect have over 100 GPs working with us as an extension of our team.
Through our partner fund network, we have become investors at the seed stage in thousands of companies throughout the country, in communities, and in some cases in domains, that we could not reach on our own. Strong and mutually beneficial connections with talented GPs in our network give us a different and expanded perspective on technology and investment trends.
Themes vs Sectors
This expanded view has also helped us evolve our approach to investing. In the early days of Foundry, themes almost exclusively guided our investments. Themes are different from sectors (which was the traditional way that many venture investors described their investing activity). Common sectors include SaaS, crypto/blockchain, enterprise software, and consumer. To us, this is a stovepiped way of thinking about the technology landscape and tends to describe a target market instead of underlying technological attributes. In contrast, themes describe long-term, technology trends.
Our themes are horizontal in nature and are often based on protocols, standards, or market shifts that we believe are on the cusp of widespread adoption. The technology underpinning them has the potential to drive a cycle of innovation and company creation for decades and to spawn many companies. Our themes have evolved over time, sometimes consolidating, as in the case of what we called “protocol,” and at other times spinning out as when we started describing “adhesive” as separate and distinct from “glue,” which was how we first categorized adtech companies that fell in our glue theme. Some of our original themes are no longer areas in which we choose to invest (for example, “digital life” is an area we don’t focus on anymore). We arrived at other themes as markets changed and matured (“adhesive,” mentioned above, and “marketplace” are two examples of this). In many cases, we created not just content around our themes, but entire conferences (our Glue conference is still running, attracting nearly 500 attendees annually to talk about the future of connective technologies). These themes, evolving and changing as they do, have guided our investment lens and have focused our work.
From Thematic Investing to Network Investing
Given the extensive breadth, depth, and quality of our partner fund network, the majority of our deal flow at Foundry now comes from this source. While we sometimes look outside of it for opportunities, our main focus is the many compelling companies in our extended Foundry network. By combining our expertise with that of our partner funds, we’ve expanded the areas in which we invest, relying on the signal from our partner funds. We have an opportunity to see companies develop from an early stage. This provides a unique and strategic advantage in the market. While our investment themes have shaped our expertise and still inform our interests, we now invest beyond these themes, expanding our aperture by leveraging our network of more than 40 partner funds, and over 100 GPs and investment professionals.
Across our portfolio of partner funds and companies, we look for compelling founders obsessed with the problem they are solving. We focus on companies where technology is core to the business, especially where it creates defensibility in large markets or markets that don’t currently exist, but which we think will develop into large ones. Foundry focuses on the U.S. and Canada but within that, we are geographically agnostic. We were early believers that great companies can be built anywhere, and that holds true today more than ever.
Network-driven investing gives us an effective way to pick up the signals that lead to fast-growing technology companies – especially those operating in new markets or pioneering new technologies. Through our partner funds, we’re on the cap table of promising companies early and can move quickly with a Series A investment (or occasionally a B or C round). It’s also how we’ve always liked to work: in collaboration with others. As seasoned investors, we offer our expertise to our partner funds, while we continue to stay curious and learn from them and our network at large.