Dec 17th, 2007 / Written by David Isserman
What does it take to be one of the greatest technology venture capitalists and what are the secrets to identifying successful business opportunities?
I wanted to find out the answers to these questions, so I invited Jason Mendelson, Managing Director of the Foundry Group, to be interviewed for The Creative Connector.
Here are some interesting things you’ll learn while reading this interview:
- One of the characteristics commonly found among successful entrepreneurs is the ability to adapt to a constantly changing business environment
- Investing in business themes can sometimes be more effective than investing in specific sectors
- To gain trust from others, it is important to be transparent in business dealings
And in addition to Jason’s involvement in venture capital, I learned that he co-owns the record label, Toothless Monkey. The Label includes the production of his band “Soul Patch”. Soul Patch’s songs can be bought on iTunes, CD Baby, Amazon.com and can be heard for free on Facebook.
Jason, what exactly do you do?
I’m one of the five Managing Directors of the Foundry Group, which is a $225 million dollar fund for early stage technology investments. That means I’m seeking out and finding new companies to invest in and then helping those companies succeed.
What do you feel are your strengths as a venture capitalist?
I was originally a lawyer from back in the old days, but before that I was a software engineer. So I’m a guy who’s got a technical background, plus I’ve got a legal background. At Mobius, I was also in charge of the financial back office for a while and was the COO. With all of the deals that we do, I help negotiate the exits, whether they’re mergers or IPOs.
From an operations standpoint, when I was a software engineer, I worked for Anderson Consulting, which is now Accenture. They bought an 11 person software company down in Dallas, Texas, and they sent me down there to work with them. I got the startup bug back then because I was the “dude” running the 11 person shop and we built that up to several hundred people in about 6 months. From an operational standpoint, I like being able to help companies scale quickly.
What sparked your interest in the venture industry?
Working with small companies. While I’ve been successful working for large organizations, it’s not where I feel most comfortable. I feel more comfortable in a small company, whether it be the Foundry Group, which is the 11 of us, or whether it’s working for small startup companies, it’s what feels right to me.
You said that the Foundry Group is a $225 million fund. Are you still seeking out additional capital?
Nope. We went out to raise $175 million and we voluntarily had to cap the fundraising at $225 million. If we had any more money than that, I don’t know if we’d be able to deploy it correctly. So no, we’re done. Fund is closed. We can spend the next 3 to 5 years investing in new companies with that before even thinking about raising another fund.
Why did you decide to headquarter in Boulder? As a tech VC, why not the Silicon Valley?
I was in the Silicon Valley for 10 years. My partner Ryan McIntyre was there for, I think, 18. I think that venture capital, at a minimum, is a national practice and in some ways that people practice, it’s an international practice. I don’t think that you can make a career by solely investing in the backyard of the Silicon Valley. While there’s a ton of companies, there’s also a ton of VCs.
If you look at the five of us and our track record, about a third of our deals have been in California, a third of our deals have been in Colorado and a third of our deals have been national. Boulder was a really nice place to set up shop to be able to get anywhere in the Country pretty quickly.
In what ways are you and Foundry Group unique in the industry?
Well, I think, one, location. There are not too many people with $225 million early stage venture funds in Boulder. I think we’re unique in the industry in so far as we’re one of the only first-time funds that I’ve ever heard of that has a cohesive team. Most first time funds have 2 to 5 to 7 partners coming together for the first time. We’ve all worked together for 7 years and we’ve got a demonstrative track record.
Secondly, instead of looking at the world in sectors, like semiconductors, medical devices, storage, B2C and SaaS, the group of us has always looked at themes. We call ourselves “thematic investors.” Historical themes include things like email or RSS. New themes could be implicit web or human computer interaction. We like to engulf ourselves into a particular theme and learn everything about it, regardless of where it might fit into a traditional sector analysis. If it works in the RSS or implicit web theme, we’ll invest in any sector underneath that theme.
There are a lot of great ideas out there. How do you filter through and find the companies you want to invest in?
Obviously you want a strong management team and you want it in an area that you think is going to be a big market. Those are the answers that you’ll get from any venture capitalist.
The first thing for me personally is, “does the idea strike me somehow.” Like “wow, this is really cool” or “wow, nobody has ever thought of that.” There has to be some sort of “wow” factor.
The second part is when you start talking to the management team. People discount the importance of how much the management team is worth. I’ve never seen anybody make money with a poor management team.
You also need to like the management team. You’re going to be spending a lot of time with these people, for years and years to come. Once you invest, you’re “stuck”, both positively and negatively, with the investment. You don’t get to get out. If the management team seems great and they seem like they’re people you’re going to want to hang out with and work with, that is important.
I think once you get past there, you start to deep dive, do the diligence, see what else has been funded and really do the analytical part of the analysis. If that lines up, then that’s when you seriously start thinking about making an investment.
Is there a typical size for the investments you’ll make or is there a cap on the amount of money you’ll invest?
No, there’s not. We’ll write checks as small as a couple hundred thousand bucks. We’ll do true seed deals. And for first round financings, we’ll go as high as $8 or $10 million comfortably and then still have money to reserve for later on.
When you’re looking at these businesses, are there any business models that are more popular than others to fund?
Not for us. There’s certainly a lot of that going on. There are venture funds that only invest in SaaS models, for instance, we are not worried about sectors and we’re not worried about business models. We analyze themes. And if it fits in our investment theme, then we’re going to look at it seriously.
You’re always talking with entrepreneurs. Are there any common characteristics that you find among the successful entrepreneurs that make them different from the others?
There are a lot of things that make a successful entrepreneur. Obviously intellect, drive, passion and an ability to take risks are all up there. I think the most successful entrepreneurs I’ve seen have 2 qualities that are always there. One is that they know their company and they know their market better than anyone else on the planet. If I’m in a board meeting and I even think I know the company or the market better than the management team, that’s a problem. These people should be smarter than me in all of that. There are some people who know everything so cold, its awe inspiring.
I think the second thing that is really important is that the entrepreneurs are willing to adapt and be self-aware. I can’t tell you how many entrepreneurs get stuck. They’ve been successful before doing something and they think it’s going to work again. There is no playbook on how to make a successful startup. And if you think there is, I think that’s a fallacy. You’ve got to be willing to adapt. You’ve got to be willing to grow. Every organization is different. The cultures are different. The challenges are different. And those entrepreneurs who are able to grow and sit back and say, “this is what I do well and this is what I don’t do well” and fix those situations and grow along with the company and scale, those are the ones who are really going to stand out.
What strategies do you use that help you be successful in business?
My number one goal in this business is to be open and transparent. I’m not going to claim I’m always right and I’m not going to claim that I’m the smartest guy in the room. I try to be a very transparent person so that whomever I meet knows that what I say is what I feel and has no problem coming up to me and striking up a conversation. I want my door to always be open to anybody who wants to come. I think that openness, gives entrepreneurs and other people who we work with a great deal of comfort that I’m a trustworthy guy and that I’m ethical. Unfortunately in this business, there’s a lot of reputation for people not being that way. If there’s one thing that I focus manically about, it’s that…always trying to be completely straight and open.
Do you see any trends emerging in your industry?
There are some trends where some valuations for early stage companies have been getting really blown out of proportion. They may prove to be correct or they may prove to be another one of these situations where they find trouble down the road getting funding later on. If you get too high of a valuation up front, it may be hard to get follow-on financing at a valuation that makes sense.
I think that a big macro trend which has been happening over the past 4 or 5 years is the equality of knowledge in the field. A little as 5 years ago, I think that there was a lot more cloak and dagger, black-ops, and magic, behind doing these types of deals. There was a lot of disinformation. How does this get done and why are VCs doing this?
I think a lot of VCs being out there and blogging, speaking on panels and the entire user generated content ecosystem has really collapsed the dis-information gap and to where it’s cheaper for people to get deals done because the lawyers can’t play games and the entrepreneurs and the VCs are seeing more eye-to-eye. It doesn’t mean there are any less disagreements or hard times, but what I think it does mean is that there is a lot less BS being played because of inequality of knowledge.
Do you think that the downturn in the economy will have any effect on your business?
Well, it depends. It depends if the economy gets as bad as some people say it is going to and then for how long.
The economy in the early 2000s did affect our business because there was no market for IPOs or mergers.
Right now, if you look at what is driving the economy down, and I’m no macro economist, its energy prices and debt. If debt puts a squeeze on too many people so the consumers stop spending and the advertisers stop advertising, then some of our business models, which are based on advertising, don’t have the advertising dollars, then yes that will effect us. But at the moment, I’m not worried about any of that. Ask me again in a year and I may have a better answer.
What would you consider to be the most successful deal that you have done and what would you consider to be the coolest?
They are probably the one that the same. I think Stratify (http://www.stratify.com) would be my favorite deal.
What is Stratify?
Stratify is a company that doesn’t sound as sexy as it is, but one I find pretty sexy. They basically developed technology to read any document in any format in the world and take unstructured data and put it in structured format. They can read anything that you can come up with, whether it’s a CAD drawing to a Microsoft Word document to a webpage to an email. They can ready everything in any language and at the end of the day, they will automatically name folders saying, “here’s all of your accounting documents, here’s all of your stock purchase agreements, here’s all your CAD drawings, here’s all of your junk emails, here’s all of your golf outing jokes with your friends”.
The original idea was similar to a “super Google desktop on steroids” back in 2000. The technology could be used to categorize the Web for a personal experience, or used on an enterprise level. For me, I’ve worked at several larger professional services organizations, law firms and then Anderson Consulting. One of the problems that we always had was that we knew there was all of this massive information being created, intellectual property, but nobody knew how to access where it was. So the idea is that you could even use this within the enterprise and say, “Gosh, I wonder if somebody knew something about X”. It actually understands what the documents say. It’s not doing it based on linguistics. It’s doing this based on statistics. I think that technology is cool.
In 2003,for many companies, enterprise sales were challenging. One of the jokes at the time was that the only people making any money in 2003 were the lawyers and the accountants. We all kind of looked at each other and said, “wait a minute.” Within a year and a half the Company became the leading software solution for electronic discovery, for all lawyers.
The CEO was a first time CEO. He was the original CTO of the Company who became a CEO. He built a wonderful team and scaled beyond anybody’s expectations. He was a pleasure to work with, too. We recently sold the Company and are very happy with the outcome.
It’s very satisfying in that we did the deal back in 2000. There were tough times for many startups and the Company had to reposition its business plan. I remember sitting with the engineers, late at night, on the whiteboard doing screen mockups of what it would look like, seeing those mockups come to life and then seeing lawyers say, “I want that product.” Having been there with them through good times and bad, to them becoming one of the most successful companies that we’ve ever invested in – that’s pretty much the coolest and most successful company that I’ve ever been involved in.
What type of advice could you offer those readers of this blog who are interested in approaching VCs for funding?
In general, it’s always better to get an intro from somebody who knows a VC than going straight to the VC. Given the amount of plans that VCs get, it’s always nice to be recommended by somebody. In our case, that’s not necessary. My email is on the internet. Anyone can go on the internet, find my email and email me.
The advice I would give is that you’re going to get a few minutes of somebody’s time, so you’ve got to really know your business, be concise, efficient and clear enough to be able to explain why its compelling in a short period of time, whether that’s in an executive summary or a phone call.
Also, have realistic goals. I can’t tell you how many business plans I see that have $100 million in revenues in year three. I know that’s not ever going to happen. Have realistic goals, know your industry and know your competitors. I think that’s another place where I see a lot of weakness in is when I speak to people and say, “who else is out there doing it” and they say, “I don’t know”. That’s probably not a good answer. There is always somebody doing something similar.
Do you even look at the financials?
Oh yeah. When I first get an executive summary, I definitely look at the financials. The one thing that I’ve learned is that all projections are wrong – sometimes they are overly conservative and sometimes they are overly optimistic. The first pass is definitely to see how realistic they numbers are. If that test is passed, then I really start to dive in.
So people shouldn’t include financial statements in their business plans that show $100 million in revenues after year two?
Probably not, unless they can back it up. If they can back it up, then bring it on. My bias will be that it is an impossible business plan and impossible to ramp up.
Jason, thanks for spending time with me and for allowing me to interview you.