At Freestyle, Investing Is A Family-Friendly Alternative to Startup Life
Josh Felser has three kids. Dave Samuel has four. You won’t hear any highfalutin business-speak from these former tech entrepreneurs about why they started Freestyle Capital, their San Francisco-based seed-stage investing fund. They say they did it because they recognized that it’s pretty hard to create a business and be an involved parent at the same time.
“If we could balance the lifestyle of being a founder/CEO with having large families, we would likely still be entrepreneurs,” says Felser. “But we can’t, so this is the next best thing.”
Felser and Samuel started building companies together 14 years ago, and in one sense that’s what they’re still doing: Freestyle is known as a hands-on fund where startups get recruiting, public relations, and business-development help, as well as cash, in return for their equity. But what gave them the flexibility to become investors, rather than starting over as entrepreneurs once more, was a pair of healthy exits. The Internet music service Spinner, which they co-founded in 1997, was acquired by AOL Time Warner in 1999 for $320 million. Their next venture, the video network Grouper, was acquired by Sony in 2006 for $65 million in cash. (It’s now known as Crackle.)
The pair got back together to start Freestyle in 2009. After a two-year shakedown run in which they invested only out of their own pockets, they’ve now raised $27 million, and have completed 29 investments averaging about $500,000 each. They get investing help from a trio of startup veterans, including Joe Stump, the former lead architect at Digg and the co-founder of SimpleGeo; Lane Becker, the co-founder of Adaptive Path and Get Satisfaction; and David Bill, a veteran of Spinner and the ex-CTO of CoTweet.
For rookie investors, this team has a pretty good batting average: already, seven of the Freestyle portfolio companies—About.me, Backtype, Cardpool, CoTweet, Indextank, SimpleGeo, and Typekit—have been acquired.
I’ve seen Freestyle’s name turn up in so many interesting seed-stage deals since I got to San Francisco that I wanted to meet Felser and Samuel in person and hear their whole story. I visited their Mission District office—which doubles as the headquarters of Typekit, now part of Adobe—back in November. Felser introduced himself as “the talky one” while Samuel is supposedly “the quiet one,” but to be honest, I didn’t notice much difference. In any case, what follows is a compressed version of our conversation.
Xconomy: Is it really easier to be an investor than a founder? How are your lives different now?
Josh Felser: Venture investing is a way to be close to entrepreneurs and have a family without being an entrepreneur or starting a business. We have complete flexibility about work location. As a founding CEO, you have to set the culture and tone in the office, and there is no way to do that, that we have figured out, and to spend time with our young kids. Being an investor, I am still working as hard as I did as an entrepreneur, but I can do it from anywhere. I can go online from home at 8:00 pm and work until midnight.
Dave Samuel: I think that’s definitely true about the lifestyle, but there is also a little bit of ADD in each of us. We are able to have our hands in a bunch of different, great companies. Josh is in charge of five companies per year and I am in charge of five. So we are able to leverage our experience and background across numerous companies.
JF: We sat back and said, ‘What can I do with my life that would at least let me have dinner with my family, and also be part of creating really interesting, world-changing companies.’ There aren’t actually many opportunities to do that, if you try to put those things together. Early stage investing was the best fit.
For the first two years, we were just investing our own money, to make sure we liked it, and we didn’t try to run those companies. We were decent at it, and we were able to check off a lot of the boxes and then raise a larger fund of other people’s money.
X: Why do seed-stage investing? Why not become partners at established venture firms?
JF: You don’t ever stop being an entrepreneur. We enjoy helping entrepreneurs like us get their businesses off the ground. If you are doing the kind of seed investing we strive to do, you are an extension of the management team. Typically, there are only one or two of them, so they don’t have a head of marketing or business development or sales or finance or operations. So we tend to jump in and fill in, in the hope of increasing the odds that they will be successful.
Some of our companies have now raised Series A and Series B money. We are very active in the first year—we are typically the most active investors in any of the companies we invest in. But that should absolutely change once another lead investor takes over in the Series A. As they hire more people they have bigger teams and they need us less.
X: What did you learn as founders at Spinner and Grouper that affects the way you make investments and advise startups?
JF: We probably had 60 investors say no to us, across the two companies. It was an important learning experience for us. When we say no to entrepreneurs now, we say that 60 people told us the same thing. We also tell every entrepreneur we meet that we are going to evaluate them as if we were starting the company. To invest in so few companies, we have to be passionate about each one. What makes us nervous? What excites us? Is it big enough? To really know, you have to have actually done it as an entrepreneur.
X: You fund Internet startups. Within that area, what’s your investment focus?
DS: Our focus is on pure software. We are not doing hardware deals, or even software deals that require pieces of hardware. Our biggest filter is that we want the company to prove that they’re on to something big in the first year. We are not going to do [anything that requires] a long development or sales cycle. We are not going to do hardcore enterprise software. We will do light enterprise, like Get Satisfaction or Typekit.
Many of our 29 portfolio companies are doing things where we’re like ‘Oh, wow, I wish we’d had that technology at Spinner or Grouper.’ We wish we’d had the ability to unlock more fonts on the website—that’s Typekit. We wish we’d had a great customer service toolkit—that’s Get Satisfaction. Crowdflower is winning in the automated, distributed workforce market—we were constantly taking porn video down from our site and we could have done that in a much more streamlined fashion.
X: How do you find companies to invest in?
JF: [Across the Freestyle portfolio] we have probably 100-plus employees and former employees out there starting companies. They’re aware of what’s happening and they are a good source of deal flow. Then, just our friends and peers. The individuals who source investments are probably 95 percent entrepreneurs. When we get deals from VC firms they are typically not good fits for us.
X: How much do you invest?
DS: We are typically leading with half a million and filling in the round with other friendly investors. So it’s somewhere between $750,000 and $1.25 million overall, and our average slug is $500,000.
X: So you’re the most active investors, even though you’re putting in half or less of the cash?
JF: We are not going to get paid extra to be active. [Entrepreneurs] trust that we are going to be active and mind the store. They like that we are not getting paid extra.
X: What form does your involvement usually take in the first year of a startup’s life?
DS: We want to be supportive of the founding team. Our philosophy is that it’s really more about support than making decisions. One of the key things that happens when a company raises capital is that they need to 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?
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.