At Freestyle, Investing Is A Family-Friendly Alternative to Startup Life

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announce themselves; we have a relationship with Kim [Barsi, an independent PR consultant], who helps launch many of our portfolio companies. Recruiting is arguably even more important. They have to go from two people to five or 10 employees. So we have a network of recruiters. Bookkeeping is a basic thing—you need to get your books in order. With some of these things we are quasi-turnkey.

JF: One of our companies, SnappyTV, which is in the social video space, needed to secure deals with broadcasters, but they were struggling with how to get their first deal done. I kind of became their business development executive, and reached out to Mark Cuban, who owns HDNet. I pitched Mark and actually closed their first deal. So in that case I was able to be an extension of their team.

DS: Josh and I also have experience from selling both Spinner and Grouper. Of the 29 companies we’ve done, seven of them have exited, and in most or all of those cases we have been part of that process with the entrepreneurs and the different acquirers.

JF: When one of our companies, Backtype, got bought by Twitter, I was sort of the banker. I have very good relationships with folks at Twitter, so I worked between the two companies to get a fair deal done.

X: What is your main selling point? If entrepreneurs have a choice of seed-stage investors, why should they go with Freestyle?

Freestyle Capital co-founder Dave Samuel

DS: I think our main pitch to entrepreneurs, and even to limited partners when we raise capital, is that Josh and I are serial entrepreneurs who had two successful exits that were sold within three years of starting the companies. We had spent $5 million in capital at each company, so we were capital-efficient operators. When we meet with entrepreneurs, they appreciate that we were in their shoes and dealt with the stresses they have to deal with.

JF: In one case, a company had a term sheet at a higher valuation, and we came in and we said we want to help you but we think it’s worth less at this stage. They went back and forth, and agreed to accept our term sheet, even though it was for 15 or 20 percent less, because they wanted the operating experience we could give him. I think you would be hard pressed to find lots of investors where the entrepreneurs see them as an extension of their management team.

X: Do you see signs of a bubble in the Internet startup world? Are seed stage valuations getting out of hand?

JF: What is amazing is how far along some of these startups are when they are raising their seed round. There are some bubbly signs, but it makes sense that valuations would be higher in the seed round, because there is less risk. Back in the early 2000s, and certainly in the 90s, [more companies were starting out with] just an idea, so you would pay less for that. Now you can see a product and a team, and they deserve more.

There are some valuations that are too high for us. There have been at least three cases where the valuation was lowered for us. Other times we just miss out because we are not willing to go higher. But there is enough high-quality deal flow that we can let some go.

X: Personally, I see a lot of early stage startups these days that look to me like me-too companies. Entrepreneurs and investors seem to think that if one Groupon is good, a dozen is better.

DS: I am actually okay with me-too companies. What if Google had said ‘”Oh, Yahoo has that figured out, why would we do something in search?” We have been around long enough to understand that even though you would think somebody has solved a particular vertical, there are unique ways to innovate and out-execute [the incumbent].

If somebody is making Foursquare for spaghetti, and every time you eat spaghetti you are supposed to check in, we are not going to do that. But I’m not scared by me-too ideas. Anybody can start a company in their garage, and with cloud computing you can do it on a shoestring. It’s our job at Freestyle to pick the winners in this vast audience of people starting companies.

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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