Maveriqs Profile: Jason Mendelson, Managing Partner, Foundry Group
By Lamin Turay
Jason Mendelson is a Managing Partner at Foundry Group, a Boulder, Colorado based Venture Capital Firm that supports early-stage technology startups through investment and business coaching. He works to turn entrepreneurs and their ideas into market-leading companies. We were able to spend some time with Jason to talk about his philosophy around investment, running a successful startup, and how entrepreneurs can prepare themselves to better attract funding from venture capitalists like him. Here's what Jason had to say:
How did your entrepreneurial journey begin?
My journey began when I was a kid - when I was a drummer. I needed to make money. I could have went out and got a job at a pizza shop, or been a golf caddy, but I figured out a way to sell myself against professional drummers who were 10, 15, and 20 years older than me. I basically set up a business that was a teaching academy for younger kids. I also went out and made audio recordings and handed them out. I had a business about drumming. That’s when I had first decided to take matters into my own hands.
Later, I started a company called Shareholder Rep Services, which is the largest company of its kind in the world. Finally, the third company I co-founded is the one I have now with my business partners Seth, Ryan, and Brad here at Foundry Group.
Thanks for sharing. What was the motivating factor that made you want to become an investor as well as an entrepreneur?
I think it came when I realized that I had a level of experience where it would make sense. I was a software engineer in a prior life, I was a lawyer in a prior life, I was a COO in a prior life, and I had a basket of tools that would allow me to help others not make the same mistakes that I had. Part of it was just mentoring. Long before I had officially become an investor I mentored people, and I really enjoyed it. In many ways I got more out of that than what I was doing for work at the time.
When you’re allowed to mentor, plus help people get off the ground with money, it feels like a job where you can do well by doing good. It’s one of few jobs where that’s the case. If I make some money, the investors have made a lot more, and the entrepreneurs have made even more than that. That makes me feel good about the job.
Many entrepreneurs struggle with raising money in the early days of their business. As a savvy investor, what would you suggest they do to overcome that obstacle?
First of all, it’s important to realize that it is not unique for first time entrepreneurs to face that obstacle. I also understand that many individuals may have special circumstances that make it even harder to overcome this. The first step should be to find a mentor who has raised money before. Or find a mentor that is an investor, but doesn’t want to invest in your company, and who will be honest with you.
Most entrepreneurs that I know who are starting out, are very strategic with their company idea. They’re incredibly brilliant, bright, energized, and engaged. They know what they want their company to do, but they’re lost or not strategic on the fundraising side. They make a lot of rookie mistakes that turn off investors. Those mistakes may make investors feel like, “Well if they’re gonna be that sloppy in raising money, how are they going to be running the company?” Things like that stand out. So I say, find that person in your network who has raised money and can take you through the paces. Find a VC (Venture Capitalist) who you’re friends with, and will give you the straight talk of how the process goes.
What is your best piece of advice to entrepreneurs who are pitching their business to a venture capitalist like yourself?
One... Be prepared! That means knowing everything you should know about your own company. Why is your idea so compelling? Why does the world need this? Why are you the person who will be successful at this? What’s the business model? What do you know about the company so far? Keeping in mind that a lot will change depending on what stage your company is in. If you’re very early you’ll know less. If you’re in a later stage you should know more.
You should also know who you’re speaking to. If you come to Foundry Group and pitch us, is that a different situation than if you were to go over to our good friends at True Ventures? What’s different about our two firms? What do we look at differently? It’s a must to understand these things. Also, be prepared to get interrupted a lot. A VC who is interested in you will do their homework ahead of time, read your materials, study the market, ask a lot of questions and be engaged. Don’t get scared or be put off when you’re interrupted. In fact, be excited that they did their homework enough, because they’re excited to meet you.
Can you share your thinking on how you identify a company as a great investment opportunity? What makes you think, “I’ve got myself a pretty good lottery ticket here!”
I love that you refer to it as a lottery ticket. The odds might not be as bad as winning the actual lottery, but they’re up there. There’s a lot of skill and hard work that goes into this, but there’s also a lot of luck.
When I meet with an entrepreneur there are two things that I’m thinking about. One, am I personally excited about the idea? If you came in and told me that you had created the cure for the common cold, I wouldn’t necessarily be interested. I don’t do hard science. I don’t get interested in that. I’m a software nerd and a hardware nerd. I need to personally want to get involved. The other thing I’m thinking about is the opportunity to work with the entrepreneur directly. The average U.S. (United States) marriage lasts about 7.8 years. The average relationship between me and a CEO, when I invest in them, could last upwards of 10 years. So I’m making a huge decision when I invest in a company. The opportunity is not just about the idea, but also about being in a relationship with this other human being for the next decade of my life.
The entrepreneur has to be someone that I like, someone that I get inspired by, someone that I can learn from, and someone that I’m going to work well together with.
Find a VC (Venture Capitalist) who you’re friends with, and will give you the straight talk of how the process goes."
What are the key ingredients to a successful startup?
There are a lot of them. There are both cultural and tactical ingredients.
I think from a cultural standpoint you’ve got to be resilient. You also need to have a lack of expectations or entitlement. You need to be smart, and to have people around you that value the same cultural norms like honesty, transparency, hard work, etc. All these things that you hear, are what lead to respect in the workplace. Respect is not a norm. It’s something that happens because you achieve these other things. This will lead the team to have a sense of pride and ownership in what they do. Culture is normally set by the first two or three people that you hire, which makes those very critical hires. I’ve never seen a startup with a bad culture be successful. It doesn’t mean that there’s only one type of culture that works, but there are aspects of culture that you need to have.
From a tactical standpoint, the number one job of a CEO is to not run out of money. Do not go on ski trips and spend a bunch of money. Always keep an eye out for competition. Always be open-minded to changes in your business plan. This doesn’t mean that you don’t need to have conviction, but don’t be myopic and have your head in the sand. You also need to be insanely focused on product, and making sure your customers are delighted. When you put all those ingredients together, those are the companies that get ahead.
As an investor, what are some of the key things that you wish more entrepreneurs knew?
A lot of what I wish entrepreneurs knew is what we put into the book that Brad Feld and I wrote, “Venture Deals: Be Smarter Than Your Lawyer & VC.” We want entrepreneurs to know how to do deals right, and we also want them to know what makes VC’s tick. In other words, “What are the pressures I have on myself? Who are my bosses? Who are my investors?” and also, “What are the politics at a venture firm that might affect the entrepreneur?” I think entrepreneurs would be well served spending time figuring out how VC’s work because at the end of the day we’re all driven by incentives. If our incentives are aligned, then the boat can travel well. If our incentives are not aligned, that’s when VC’s and entrepreneurs get cross with each other.
Most of the time when VC’s and entrepreneurs have an issue, it’s the VC’s fault. I think most VC’s, meaning over 50%, are pretty worthless and/or mean people, but I wish entrepreneurs spent more time really figuring out how the VC firm ecosystem worked. That way they’d understand how my incentives and the pressures of my job can potentially affect them.
You mentioned that you co-authored the book “Venture Deals: Be Smarter Than Your Lawyer & VC,” what else do you have on the horizon? Any upcoming projects?
We’ve got version three of the book coming out. It’s in the final stages of proofing at the publisher. We worked very hard on a substantial rewrite with this version. We’ve added new sections about crowdfunding, more sections about how VC firms work, and talked about alternative fundraising methods. It’s been really exciting to get back into the weeds and update everything to be the latest and greatest version.
We also recently announced that we’ve closed our latest venture firm, which has $500 million in commitments from our investors. So we have a new half a billion dollar fund. We brought in a new partner as well. That’s been a very exciting project.
I think for the foreseeable future I’m going to do my regular job of sitting on boards and finding great entrepreneurs to work with. No other major projects on the horizon, although I am tempted to do another music video. For those of you who’ve may not have seen, we’ve done a couple music videos called “I’m a VC,” and “Worst of Times” and I think number three could be around the corner.
We’ve taken a look at some of your investment portfolio, and we're pretty wowed. Being invested in multiple companies, what is your specific “why” for the ones that you’ve selected?
I’d have to go back to one of the previous questions, and say that it’s the idea and the team. At the end of the day when you ask, “Why?” there’s a gut instinct that reverberates. At first you think, “Oh my gosh, I really like this person or idea.” Then the intellect kicks in, and you start evaluating the data that you’ve been given. Is the data good? Is it exciting? You put it through an intellectual lens, then you kick it back up to your heart. You say, “What’s right here?”
It’s not that dissimilar from dating, right? You meet somebody, you go on a date, you have a great time, there’s great energy, and you get together. The next date may be a lot of the same, then on third date you start thinking about things. Like, “Hey! Do I want to spend the next bit of time with this person?” or “Do I like how they treat other people?” With all the data you have over two dates you start intellectually evaluating and then eventually you make an emotional decision about whether or not you want to be together. It’s very similar on the VC side.
So when you ask, “Why?” It’s both an intellectual and an emotional exercise. It’s also pretty similar and pretty standard across all companies in the portfolio, regardless of what they do.
How do you make the decision to shut down, sell, or keep funding a company?
Well, as an entrepreneur you don’t necessarily have a lot of control in that. If you run out of money you’re going to have to shut down, and there’s an old saying that goes, “Startups are bought, not sold.” It’s hard to sell things when you have to sell them. “To keep going or not to keep going?” That’s the question, and it’s a very hard one to answer. It’s the hardest decision an entrepreneur will have to make. It’s also the hardest decision to make as a board member.
If a company is doing “ok,” do you keeping paying? Do you keep funding? When is enough, enough? It doesn’t always line up. The entrepreneur may not always agree, but unfortunately for them, we’re the ones funding it. So if we stop providing those funds, then the company will shut down.
There’s an intellectual answer to this. If you feel like you’ve tried your best, and you haven’t gotten to where you want to be, if you can take a deep look in the mirror and say, “I couldn’t have done anything differently,” that’s probably the time to shut down. If you’re in a situation where things aren’t going well and you can look in the mirror and say, “Wow, I should do X, Y, and Z things,” maybe that’s an indication that you should take another swing at it. In that case you can go try one last time, assuming you have the funds to do so. It’s a really hard question that a lot of people face, and there’s never an easy answer.
We want to thank Jason for taking time out to educate us about how venture capitalists think, and what we as entrepreneurs, can do to be better prepared for working with them. You can follow Jason and Foundry Group at their website www.foundrygroup.com or check out more of their hilarious music videos on their YouTube Channel. Let us know if you have any additional questions for Jason in the comments below.