Oct 22 2010

There is no “Foundry Group Boulder Signaling Problem”

Forbes published an article yesterday by Maureen Farrell stating that there’s a “signaling problem” for TechStars Boulder companies who don’t raise money from Foundry Group.

“… one byproduct of [Foundry Group’s] generosity for any young Boulder company is that, if it hasn’t been funded by The Foundry Group, it must explain why. Otherwise it has a signaling problem, something that happens when a VC invests in an early round but doesn’t show up for later rounds.”

And while I’m going to argue (forcefully) here that neither my partners nor I either believe this to be true or even wish for that kind of market power, I should acknowledge that I’ve heard this before. And not just in relation to TechStars companies, but for tech companies based in Boulder more generally. I’ve been in a couple of meetings where a founder has suggested that if Foundry didn’t invest, no-one would (in both cases we didn’t invest and they did indeed find another capital source). I’ve also received calls from other investors asking why Foundry had “passed” on something (although in none of those cases did I think they were fishing for a reason to pass – but rather trying to get another data point on the business). And many, many people around town talk regularly about the overall lack of venture funds in the Colorado market (which leaves Foundry at the top of a very short list of active local investors, in large part where this perception likely stems from).

I’m extremely proud of the vibrant tech ecosystem in Boulder and the role that my partners and I have played in helping shape it, however we don’t welcome the notion that Foundry somehow controls the Boulder market. Whether Foundry has this kind of negative drag on Boulder companies or TechStars is an extremely important topic to us. We spend untold time and energy helping Boulder tech companies (not just TechStars companies and certainly not limited to companies in the Foundry portfolio) be successful, and the implication that not getting funding from Foundry is a negative mark on a business is the kind of market power that we certainly DO NOT want to have.  It’s not good for Boulder, not good for Foundry and not good for other venture firms (in part because it suggests that other venture firms simply aren’t capable (or willing) to do their own work). And while all four Foundry partners are involved with TechStars, our funding support for the program (and those in other cities) comes from us personally, not from our fund (we do this in part to try to avoid the perception that TechStars is in any way captive to Foundry, which it most definitely is not).

It is my belief that this sentiment, to the extent to which it even exists, is much more perception than reality (and at that, the perception of a very limited number of people). And while writing about it might drive some traffic Forbes.com, the reality is that there’s no due diligence line item on other venture firms’ checklists for Boulder companies that says “find out why Foundry passed”. There is no signaling problem.

And the numbers support me. Strongly.

Foundry has 28 companies in our 2007 fund (we have yet to close an investment from the new fund that we announced last week). Nine of them are based in Colorado (all of those in Boulder). Since we raised Foundry Venture Capital 2007, 64 Boulder-based companies have received funding, meaning that we’ve funded approximately 14% of the local companies taking in institutional funding since we raised our fund. Furthermore, 101 different venture firms have funded Boulder-based companies during this time period – reflecting the strong national reputation that Boulder is building among technology investors. The Forbes article cites Boulder’s funding total for 2010 through 9/31 – $91M that has been invested in Boulder businesses since the beginning of the year. With $13.6M of this total, Foundry represents just under 15% of the dollars invested in Boulder in 2010. The numbers for our participation in TechStars are similar (easy to look up since TechStars openly publishes its results).  Since the founding of TechStars Boulder 39 companies have gone through the program. Of these, 22 have received outside funding and another 5 have become profitable without the need for external financing (as an aside, this is a great track record!). Foundry has funded 3 (thats 13.6% of those receiving funding and less than 8% of all the companies that went through the Boulder program).

The conclusion here is pretty straightforward – while Foundry’s presence might seem to loom large over Boulder the numbers are pretty clear – we’re in no way driving a significant percentage of the investment activity in the area.

I recognize that my partners and I carry a certain amount of weight in Boulder and are viewed as leaders of the Boulder tech community (there are many tech leaders in Boulder – it’s one of the things that makes Boulder such a fantastic entrepreneurial city). But we don’t have the corner on TechStars nor the Boulder tech market. In fact we work hard to try to avoid this. As strong supporters of the Boulder entrepreneurial ecosystem we recognize that it benefits no one for us to behave in a way that isn’t in the interest of the entire community.

While it may be a catchy title to a magazine article, it’s just not the case. Simply stated, there is no TechStars Boulder Foundry Group Signaling Problem.

A note of thanks to Emily Mendell of the NVCA for pulling the Boulder data for me from the PWC/NVCA database.