The Foundry: A Word on Resources

I am fully aware of my bias and propensity to brag about The Foundry's accomplishments. Over the last 10 months, there have been some very interesting results generated from the peer-mentorship model and our unorthodox use of resources (which I'll get to in a second).

To this point, some agencies and sophisticated investors are taking note and want to give resources to the program which I think is great. The only advice that I give to any "adult" (whatever that means) is simple: slow down and listen.

My experience in the Foundry taught me that entrepreneurs don't have a resource problem but a RESOURCEFULNESS problem. When I first started Dash & Cooper, I thought that a substantial round of funding would help me solve all my problems. But thanks to the forced scarcity of the Foundry model and culture, I learned that there were a number of smaller, cheaper steps that I could take to incrementally move from the place I was (high ambiguity, anxiety, fear) to the place where most of my business classes start with (defined product perfectly matched with a defined market).

If I had been given a 5-figure investment at the beginning of the program in exchange for equity like most other accelerator/incubator programs do, my inevitable failure would have been amplified, not solved. I was (and still am) a diaper-baby and had no idea what I was doing. Forced to solve the problem with little more than $500, I broke through all the commonplace barriers that people use to explain why starting a company is hard. Being resource starved forced me to be resourceful and in the process I learned something new about myself.

Every person within every Foundry cohort faces this gauntlet. It also helps explain why the participants emerge unstoppable because we have seen (and created) what the world looks like when creative willpower combined with a social system committed to you (not just your company) gets applied to any "problem".

Of all the things that an entrepreneur can receive from the Foundry, the distinction of Resourcefulness (with a capital R) is the most valuable mainly because it costs you the person you thought you were. Which might help to explain why the underlying connection each cohort has with each other is the respect for this process - and why we, the participants, vehemently defend against thoughtless application of outside financing or other resources. Resources rob participants of the precious and painful opportunity to awaken something in yourself that wasn't there before.

They also attract the wrong crowd.

Now I'm not saying that we shouldn't have resources. There are some world class executives circling the Foundry and I would be delighted if the money showed up to bring these people in full-time. I'm sure Matt would appreciate better filming and editing equipment for his videos. Paid subscription to various software-as-a-service products, used laptops, computers, projectors and whiteboard pens have been the most useful for participants and administrators.

And food. Foundry has been known (allegedly) to run up monstrous tabs at Eva's, The Wild Grape and Dick n Dixie's - so I know that this would consume a large line item in any budget ;-)

These are the high leverage items in which resources would make a difference. And that's about it.

Now to address the issue of equity financing and attracting the wrong crowd.

Anyone that want to ports a seed fund on top of the program simply has no idea how a Foundry participant gets imprinted and this becomes the type of entrepreneur investors want to give resources to. Programs that offer resources attract people that want resources. Notice that Foundry doesn't offer resources...

The reason why Foundry participants show up, start companies, and help manage 80% of administrative tasks despite a schedule that juggles full-time school, full-time work, and family life is because they want to get what no other program offers (hint: not resources). Foundry's lightweight and methodical process of repeatedly bathing participants into the nit-and-grit of discovering businesses from scratch is the reason why it exists. It was born of unmet demand not fulfilled by other programs. Not that the other programs are wrong or not valuable - it's just that a year ago 20 of us wanted to start companies, looked around at what was available, voted with our feet and with the gracious help of Rob Wuebker, Matt Hoffman, Ken Krull, Todd Dauphinaus, Brent Thompson and Adam Slovik we invented the Foundry.

There are plenty of places for entrepreneurs to get resources, they are called business plan competitions. And we actually have a business that can help win any competition at will - CupAd. The Light brothers are happy to coach you to win competitions because we, the children, know that those things are not real life, just another variant of class - and thus don't treat them seriously.

There's nothing wrong with investing in strong teams progressing fundable ideas - Foundry is full of these types of teams and there's nothing wrong with being interested in and having financing discussions with a team or company that you want to invest in. There's also nothing wrong with getting a return on one's portfolio, it is the point of a seed fund and the fiduciary responsibility of its managers.

But if your motive is to profit from a bunch of 20-somthings or be a guy that "has a say" without regard to the process that produces the results that got you interested in the first place, then it is a signal to the *participants* that you are "Not Foundry". One earns this scarlet letter by clearly demonstrating that they don't understand (and not interested in understanding) what is involved in the 'forge' part when we say that "Foundry exists to forge entrepreneurs for life."

Focusing on the entrepreneur creates a fundable company as a catalytic byproduct. Fundable companies are the means, not the end.

Cash Money.

In a follow up to my blog post yesterday, Gary the Snowman gives us the low down on the cush life of a Venture Capitalist.

Enjoy.

Innovations in the Venture Capital Industry

Somebody bring me back some money please, hey

I got a million ways to get it, choose one

Hey, bring it back, bring it back

Now double your money and make a stack

I'm on to the next one.

- Jay-Z

I don't know a lot of about the nitty gritty of the Venture Capital industry but I presume that a majority of the decisions are made around optimizing returns for limited partners like large banks and pensions. This is appropriate - it's called a fiduciary duty - because these institutions have to manage the deposits of the customers and have fixed timelines of when they need to have the cash returned, depending on their balance sheets.

Unfortunately, this mechanizes behavior incentives to make investments in companies that would make a lot of money but don't really doing anything because they can easily attract and retain users (Twitter, for example). Because most venture capital funds have a hard deadline of returning the funds within 10 years, a firm must be VERY focussed in its ability to make good investments. Most firms specialize (appropriately) in a particular stage of company growth (seed stage vs late stage) and do not deviate. This forces them to pass up opportunities that are objectively good ones but don't fit into their investment strategy because they have to answer to their LPs and worry about having a good track record so that they can easily raise money for a new fund.

But there are some people innovating in this area:

Union Square Ventures just announced that they raised a new Opportunity Fund to keep capital in reserve for investments that are good opportunities but don't fit within their investment strategy.

Additionally, Andreesen-Horowitz announced a few weeks ago that they raised an astronomical $650M for an all-stage fund. Ben Horowitz, GP for the fund stated on his blog the reason for this:

"As a matter of core philosophy, we invest in companies, not stages. We want to be in business with the best entrepreneurs going after the biggest markets and we do not care whether they need seed money, venture money or growth money. We believe in great entrepreneurs and the products and companies they build. We do not focus on special return profiles for various stages of investment. As a result, our fund is stage agnostic... we are excited about investing $50,000 in new seed deals and we are excited about investing $50,000,000 in companies like Skype."

Specifically with the new Union Square Ventures Opportunity Fund, it is an interesting fund model: non-commitment of the entire fund, pay-for-play fees only on the money that's invested and a loosely defined investment strategy (opportunistic).

It might be interesting to align LPs, VCs, and the ever growing demand/need from entrepeneurs and early-stage companies to have on-demand investment as they pivot their direction towards reaching market validation AND be poised to make an investment to ride the upside once (if) the companies get on rails.

Of course, it's easy to talk about. Much harder to raise. Even harder to manage. USV and Andreesen-Horowitz are rock stars with great track records in building companies and good investment decisions - they have the clout to convince people that they can pull this stuff off. It will be interesting to see if the rest of the industry follows suit and tries to convince the LP community to engage in this type of risk profile in an attempt to align investment incentives with the reality of the entrepreneur.

Simply put: it seems like institutional investment is like traditional education in that they both understand that learning and growth is non-linear but seem to invest and teach in batches (investment round, classes of students) as if it was linear. *Why* we invest in rounds is something that I know nothing about (hopefully someone can tell me). Maybe because on opportunistic investment strategy provides less certainty for GPs as well as LPs and humans naturally opt for structure and the "known" even it is not optimal (ex: investing in bonds vs stocks).

One thing that might be interesting to examine is the relationship between firm performance (revenue/profit growth, probability of an exit, value at exit) and how close to on-demand investment the company receives (smaller round size, frequency of rounds and frequency and size of bridge loans in between rounds).

We have schools of thought around running lean: just-in-time inventory management, on-demand production and lean startup strategy. Why don't we have lean investment?

Maybe it's possible only in certain industries (both the firms mentioned here invest in hi-tech companies). Maybe it's possible only in certain investment stages. Maybe it's not possible at all or it's so hard that it might as well be considered impossible. But it seems like the logical move for the at least part of the industry and I imagine that we'll be seeing some retooling with the business model in the medium term.

Now I'm just a kid and I don't talk to investors and I don't have the professional experience or track record as these guys. So I wouldn't say that I'm the first to ask this question but I think it's an interesting possibility to drill down on and then build up from.

The question for me personally is whether or not anyone could do this. Could anyone follow the template model that Union Square is leading with to build regional micro-VCs? Could I help contribute to this? Anyone else interested in this?