Founder’s Co-op Gets Warm Reception, Wants Startups That Will Survive Cold Recession

10/16/08Follow @gthuang

Andy Sack’s favorite coffee drink is a 12-ounce, single-shot, non-fat latte. But if you’re meeting with him to pitch your latest technology startup idea, be advised that he’s probably on his second or third cup already. These days, his schedule is filled with meetings and networking—most of it pretty informal. “I’ll have coffee with anyone,” he says.

On Tuesday morning, he sat down with me at Louisa’s Cafe near Lake Union in Seattle. It’s where Sack hosts his weekly “open coffee” hour, drawing a regular crowd of entrepreneur types looking to network over coffee and pastries. (“They don’t have the best coffee, but they have the best blueberry scones,” says Sack—and he’s right.) I wanted to get the full story of Founder’s Co-op, the startup fund run by Sack and fellow Web entrepreneur Chris DeVore, as well as hear feedback from the community. Back in June, I reported on the background and motivation behind the half-year-old venture. Then, just a week ago, Luke reported that Sack and DeVore have raised a new round of funding and announced 14 limited partners in the fund, all of them tech entrepreneurs who are well-known in Seattle innovation circles.

It’s a unique model, and Sack began by clarifying the terms of the new financing. The fund is $2.5 million, with each limited partner (LP) putting in $150-200K, which buys each of them a stake in all of the startups to be funded. They will meet as a group six to eight times a year. “It’s a peer-to-peer, seed-stage fund,” says Sack. “Chris and I are the decision makers—it’s not a democracy. As a group, the LPs provide deal flow and help guide our investment strategy.” Crucially, they will also provide mentoring and connections for the portfolio companies, which Sack says will typically be made up of small teams of young, first-time entrepreneurs (usually just two people).

The peer-to-peer aspect is a big part of what makes Founder’s Co-op different from the Y Combinator and TechStar incubators of the world (we’ve covered those here and here). The firm’s limited partners include Ben Elowitz and Kevin Flaherty of Wetpaint, Andy Liu and David Niu from BuddyTV, Adam Brotman from Corbis and Barefoot Yoga, and Geoff Entress, formerly of Madrona Venture Group. I asked a few of them about their involvement in the fund, and what’s special about it. “The model is special because it really helps entrepreneurs jump start their businesses,” says BuddyTV’s Niu. “They don’t have to worry about some associated startup infrastructural costs like phones, Internet, etc. if they move into the co-op’s office. In addition, they can access a wide range of ideas and experiences from Andy [Sack] and other LPs who have successfully started their own companies and want to give back to other local entrepreneurs.”

As for why he joined, Niu touts “the opportunity to work with Andy and the other LPs. I have a great amount of respect for what they have accomplished individually, and I think pooling their collective experiences will be a formidable asset that portfolio companies can tap…Of course, there is much less certainty and a higher chance to see failure when you invest in something early stage and unproven. At the same time, you can have an outsized positive influence and guiding hand to hopefully channel them towards success.”

Kevin Flaherty of Wetpaint echoes the sentiment about Sack and the other partners. “They all have miles of experience in the startup world. Being able to experience how they evaluate potential investments is a great learning opportunity for me. From a purely financial standpoint, there is a great need in the Seattle startup community for this type of investment. Matching that need with good insight provides a great opportunity for a solid rate of return,” Flaherty says. “We’ve already seen less venture interest in certain types of businesses and renewed focus on certain business metrics that for a while were undervalued. That being said, I expect there to be significant startup activity that is uniquely suited for Founders Co-op. Two folks in a garage are perfect for the fund.”

I also gathered some reactions from people outside the co-op—local angel investors and entrepreneurs, in particular. They were generally positive and welcoming, while remaining realistic. “The Founder’s Co-op can serve a critical need, especially in this economy. Angel groups will have a higher bar for new investments given the downturn,” says Rebecca Lovell, program director at Seattle-based Alliance of Angels. “Andy and Chris are getting in earlier, investing capital, providing sage advice, and helping these burgeoning companies hit some critical milestones. Unique to their model, they’re putting money in and giving advice, not charging fees for consulting…Whether the co-op’s investments better prepare their portfolio companies for larger angel rounds or bring them to profitability, it’s great to see they’re ready to put fuel in the engine.”

At least one entrepreneur not involved with Founder’s Co-op expressed great confidence in the model. “They’ll add value far beyond the cash they invest,” says Dave Schappell, founder and CEO of TeachStreet. “[Andy] and Chris bring actual hands-on experience to the companies they’re investing in. I like their focus on revenue-generating businesses—that isn’t a strategy that sprung up in the last two weeks (AKA ‘Sequoia memo’), but a way of thinking bred from experience.”

I also asked Tony Wright, co-founder of RescueTime, for his take. Wright knows a bit about the climate for seed-stage investment, having come out of the Y Combinator program in Silicon Valley and having closed a Series A round last month. “I think it’s a great model—or at least the small investment for small startups part. I think the co-op part is interesting,” says Wright. “There’s a definite need for this in Seattle.”

But Wright also points to some challenges that Founder’s Co-op must address, like deal flow and the existence of competing seed-stage funds. “Maybe all of the people they raised money [from] can funnel aspiring startups that direction, but any way you slice it, I think deal flow will be a challenge.” Y Combinator and Colorado-based TechStars, he points out, “are plugged into the young entrepreneur community worldwide and have blogs and essays that get insane amounts of attention, which gets them hundreds or thousands of aspirants for 10-20 slots every 6 months.”

As for Founder’s Co-op, he says, “they’ve got a few interesting differentiators, but it’s a hard sell to say that they could help your startup more than” Y Combinator or TechStars. “Give the Co-op a few successes and people might start lining up in a few more years.” Wright points out that Y Combinator and TechStars have well-attended “demo days” with hundreds of people focused on seed-stage software companies. “One of the big values of these outfits is ready access to follow-on investors…Can a Seattle firm compete with that? My gut is that there aren’t enough early stage software investors in Seattle to feed into,” he says.

In talking with me, Sack addressed those issues, explaining that while Y Combinator puts in on the order of $10K for a few months, “We’re trying to build businesses…We take fewer bets and support companies longer, focusing on ‘where’s your revenue stream coming from?’” He says Founder’s Co-op is in the process of closing several deals already—mostly in the Seattle area, though they are also looking in the Portland and Vancouver areas. And he emphasizes the importance of the local entrepreneur network and mentoring that is provided by his partners.

Looking forward, Sack says he hopes to see signs of promise in the portfolio within about two years, around which time he’ll look to raise his next fund, which “hopefully will be a little bigger.” In terms of where Founder’s Co-op will fit in compared to venture firms, Sack draws a clear distinction. “I don’t see us becoming a true venture fund,” he says, pointing to his limited partners’ skill sets as entrepreneurs. “Venture has too much money, and doesn’t have the knowledge and expertise…Venture investing has slowed down, and they’re going to sit on the sidelines for a while.”

That means more than ever, even with the economy tanking, there’s an early-stage funding gap to be filled. “I’m pretty jazzed, even with the downturn,” Sack says. “It plays to the kinds of deals and overall structure of Founder’s Co-op,” he says, meaning that he and DeVore are used to taking risks and are focused on capital-efficient, revenue-focused businesses that are “gritty and bootstrapping.” As a final thought, he adds, “We were committed to doing this with or without the LPs. Now everyone’s in, we’re 90 percent in cash, and people are feeling bullish.”

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and the Editor of Xconomy Boston. You can e-mail him at gthuang@xconomy.com or call him at 617-252-7323. Follow @gthuang

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  • http://medtechiq.ning.com Conrad Clyburn, Co-Founder, The Clymer Group

    Interesting concept. Sounds like a hybrid between a pre-seed capital fund and an angel network. I love it, just what is needed in the medical technology space between academic laboratory (generators of med innovation) and colonizing small businesses (the one’s that take the risk out of prototypes, secure FDA clearance & create initial markets). Perhaps they should look at syndicating the model regionally to other underserved tech clusters.

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