Freestyle Capital

Chatting with Jenny Lefcourt of Freestyle Capital

By Semil Shah

A little more than two years ago, Jenny Lefcourt, who cofounded the wedding registry startup WeddingChannel.com and a short-lived e-commerce company called Marrkit, made the leap into venture capital.

Specifically, the Stanford MBA joined Freestyle Capital founders Josh Felser and Dave Samuel at their small but growing seed-stage fund, and she’s been helping build the firm’s brand and the rest of its business since.

We caught up with her recently to talk about her newest gig.

You’re the newest GP at Freestyle, a seed-stage fund. What’s been the most surprising part of the transition?

I’m still an entrepreneur at heart and felt that being a seed-stage VC would enable me to add the most value to my portfolio companies while also being the most exciting and fulfilling for me as an investor. Compared to being an entrepreneur, I expected the highs to not be as high but the lows not as low, but I’ve been surprised by how high the highs are. [Watching] my entrepreneurs and their companies develop from tiny to thriving has been more of a thrill than I had imagined. I’ve also been surprised and delighted by the depth of relationships I’ve developed with my entrepreneurs. Being in the trenches with them creates quite a bond.

As some micro funds grow and add partners, what would be your advice as to how they integrate new faces?

My advice to a micro fund looking to add a partner would be to add someone who has a different lens on the world and that you trust and respect. Groupthink can be deadly to a partnership, so you need to ensure that you not only have differing points of view but that you have a relationship between the partners that welcomes debate. Josh, Dave and I have hearty debates, we each have unique skill sets that help Freestyle’s portfolio companies. Also, and important to me, we laugh a lot. Laughter is really underrated as the glue that holds people and teams together.

You have deep experience in retail, both as a founder and an investor. What are your views on how consumer retail transforms over the next decade? Is there any chance to find a category that Amazon won’t gobble up?

I believe there is going to be a big pendulum swing back to curation and service. The internet delivered access to so much inventory online, which was thrilling to online shoppers for a while. Now, consumers find it hard to sift through the options and are ready for fewer, more personalized offerings. This will require retailers to use the data they have on their consumers and provide more service to make a sale. Retailers will also need to truly become omnichannel — the most overused and not-delivered-upon concept in retail — to provide the unique experiences that will keep them competitive in the Amazon-versus-everyone else world that we live in.

As Freestyle grows, how have you and partners evolved your thinking around follow-on funding for your seed companies?

We’ve reserved a greater percentage of our recent funds for follow-on financings than we used to. We’re usually participating in our pro-rata for Series A and sometimes Series B, and we’ll “back up the truck” for some of our best performing companies. Our usual initial check size is between $500,000 to $1 million, and our entrepreneurs are typically raising between $2 million to $3 million. We lead rounds and write big checks for our fund size because our model is to work very hard and closely with the teams that we back.

In the context of early-stage investing, what’s something that you believe that isn’t necessarily a popularly held point of view?

I don’t seek out high-profile entrepreneurs who I know many VCs are attracted to. I find that high-profile entrepreneurs can be distracted by the many invites they get to networking events, speaking engagements, parties, advising, etc. The entrepreneurs I have backed have all been heads-down and hard-working people who surgically apply networking. Between Josh, Dave and I — and others with whom we coinvest — we can get our teams in front of just about anyone they desire to meet. So, while the entrepreneurs who attend events like Summit at Sea are smart, hard-working and fabulous, they’re not typically the entrepreneurs I choose to invest in.

Photo: Christopher Michel.

A Duo Reunites Over a New, Online Lending Opportunity

During the go-go ‘90s, an innovative company called OffRoad Capital emerged on the scene, pairing accredited investors with startups seeking funding via its online platform. A kind of AngelList 1.0, even OffRoad itself was backed by $17 million from roughly 150 accredited investors.

Alas, its timing was lousy. Just as OffRoad began gaining real momentum, the tech market nosedived, and in 2001, the company was quietly acquired for an undisclosed amount.

Now the band is back together. A year ago, in fact, OffRoad founder Stephen Pelletier and former OffRoad executive VP Denise Thomas rejoined forces to create ApplePie Capital, a San Francisco-based online loan business focused on franchise financing. Now the pair, who say they’re chasing a roughly $42 billion market, are announcing $3.77 million in funding from Freestyle Capital, Signia Venture Partners, QED Investors, and Camp One Ventures. Yesterday, I caught up with Thomas, who has taken on the role of CEO, to learn more.

Why the franchise industry?

We saw an opportunity partly because there’s a lot of data that shows the franchise segment of the small business market is a heck of a lot less risky than small businesses at large.

Where is the money coming from that you plan to loan out?

We have [access] to capital aside from the capital we’ve raised to operate our business — money from institutional and individual investors that will allow us to fully fund the loans that come on the platform. We aren’t disclosing those specific sources; that’s precious information to us. But all sorts of interesting people are involved.

Not many people realize this but on P2P lending platforms, just 25 percent of the capital comes from individuals at this point. The rest comes from institutions. They saw the performance data and realized they could base decisions on their own models to ensure they’d hit their target returns. Our model is attractive to many of those same investors, particularly double-bottom line investors with mandates to create jobs. One in 20 working Americans is employed in the franchise industry.

What interest rates will you charge, and how much will you see versus these institutional investors whose money you’re using?

Our interest rates will range rom 8 to 12 percent and could get even lower over time [as our risk falls]. We don’t make money on the spread; that goes to the investors, minus a 1 percent processing fee, and there’s no real margin there. We make money off the origination fee, which is 5 percent if the money comes entirely from our network and 3 percent if [our customers] raise money from their own network, which we also help facilitate, taking on the liability and handling processing, state registrations, loan servicing, and so forth.

Why is what you’re offering better than SBA loans, which offer more competitive interest rates?

I’ve interviewed more than 50 brands, and SBA loans have become very painful. First, they’re offering 20 percent fewer of them before the financial crash of 2008. It’s also very difficult for anyone to get a loan of less than $1 million. And though today’s rates are 5 to 6 percent, you’re not locked into those rates; they could change, unlike our rates. Not last, it can take up to four six months. We’re offering speed and flexibility. By the way, we’re compatible with SBA loans. Maybe someone can’t qualify for one today, but after they’ve owned two or three or four units, they might.

Is there a penalty for paying off your loans early?

No.

I remember OffRoad creating an index of startups that investors could back. Is there a plan to package these loans together to minimize risk for ApplePie’s investors?

Absolutely. We don’t have a fund today, but we’re already diversified across five industries, and for now, there will be two ways for investors to participate. They can either choose the brand they want to invest in, or they can talk with us about a vehicle that, let’s say, commits $10,000 across 10 deals. We can ensure that happens.

VC Josh Felser: Small Steps are Better Than None

This week, a new study found that tropical cyclones worldwide are moving out of the tropics and more toward populations of people, especially in the Northern Hemisphere. It’s the kind of news about which we should be more aware, and concerned. But in the land of social media, it commanded about as much attention as a new software update from Blackberry — which is to say it went largely unnoticed.

Josh Felser isn’t okay with that. Which explains why the successful entrepreneur turned venture capitalist is trying to change the conversation through #climate, a new nonprofit that has enticed a small but growing number of people to download its app.

Here’s how the process works, loosely: The months-old organization researches and produces information on hundreds of climate-oriented nonprofits. It then produces shareable “actions” based on users’ interests. If I were predominately focused on the Amazon rainforest, for example, I might be pointed to the Rainforest Trust organization, along with a tweetable link about saving the cotton-top tamarin. My Facebook friends or Twitter followers could then click on that link to learn more about why these small primates are endangered and, hopefully, donate to Rainforest Trust.

It’s a tall order, of course — getting people to use the app, as well as ensuring the prompts are so compelling that social media users, despite their short attention spans, take the time to click on them.

Felser argues that he had to start somewhere. “You can’t look at this as a viral media app,” he told me during a chat last week. “Getting people to focus or take action on a negative [like global warming] is hard. But we know that in the last three weeks, we’ve driven 35,000 unique visitors to various nonprofits’ sites. That’s hard to do and I feel really good about it.” (Asked if his team can track how many donations have resulted from those visits, he says the technology exists, but that getting nonprofits to change their code is “a bit of a challenge.”)

So far, certain sports and entertainment figures have had the most impact on social media, including the band Guns N’ Roses, which has been asking fans to help save the Amazon, and the NBA, which has been promoting green initiatives and sustainability.

Felser would like to see many more of his colleagues in tech take an interest, though. Tweets of congratulation on his efforts have been nice, he suggests, but as far as he’s concerned, the Silicon Valley startup community needs to get more visibly involved in amplifying the work of climate organizations.

“We’ve created climate change and we have to fix it or it will destroy us,” says Felser, alluding to drought in the Middle East and Africa and rising sea levels that are putting people at risk in coastal regions like eastern India and and the Mekong Delta in Vietnam. “It makes poverty worse, it makes malaria worse, it makes everything worse.”

Felser says not everyone has to get behind climate change, though he thinks they should. Eventually, his organization will broaden its mandate to include many other causes.

Either way, he persuasively argues that the tech industry is missing an easy opportunity to be helpful. “I’m not sure that people in tech understand the impact they can have, with their knowledge, expertise, and reach. All are underutilized resources. They’re so passionate about entrepreneurship and tech that many forget the substantial impact they could have on the world if only they’d apply [themselves] to a cause.”

Sign up for our morning missive, StrictlyVC, featuring all the venture-related news you need to start you day.

Waiting for Seed Funds to Sprout Cash

Over the weekend, venture capitalist Marc Andreessen tweeted, as part of a broader conversation, that there are “definitely too many new small angel funds. That seems clear.”

The comment kicked off a spirited debate on Twitter about small funds and their perceived merit. But if anyone knows what’s happening in the broader world of seed funds, it’s Michael Kim of Cendana Capital, a four-year-old investment firm that has made its name by backing micro funds, including Freestyle Capital, Founder Collective, IA Ventures, K9 Ventures, PivotNorth Capital, Lerer Ventures, SoftTech VC, and Forerunner Ventures. Kim, whose firm is managing around $90 million and is raising a fresh $55 million, talked with StrictlyVC yesterday about what he’s seeing.

You’ve backed lots of micro VC firms. What’s your criteria?

We look for groups that lead or co-lead their deals. There are plenty that just chip a bit into a seed round. But for us, it’s really important that the funds we invest in focus on ownership and on being the largest investors [in a startup’s seed round], as well as having substantial reserves. We’re looking for a firm that does three to five deals a year, putting in a million dollars [into each deal] and owning 15 to 20 percent.

Most of your funds are in the Bay Area. Is that by design?

We do think about the ecosystem: it has to feature high-quality entrepreneurs, high-quality co-investors, and lots of opportunity for follow-on capital. So L.A., for example, doesn’t have a good seed ecosystem; it’s too reliant on the Sand Hill Road crowd to fund its companies.

More funds has meant more specialization. Is that a good thing or do some micro VC fund managers run the risk of backing themselves into a corner?

I think it’s very important to stake out what your value-add is. Forerunner Ventures specializes in digital commerce, so pretty much anyone who starts in that space wants to meet with [founder Kirsten Green]. IA Ventures is known for being a big data investor; Founder Collective is known for being [comprised of] ex-entrepreneurs who want to help other entrepreneurs. Assuming it will become a much more competitive world, any seed fund really needs to think about its market positioning.

How many micro VC funds are you aware of?

A lot. When I started Cendana, the clear pioneers were Steve Anderson [of Baseline Ventures], Michael Dearing of [Harrison Metal] and Mike Maples [of Floodgate]; but I’ve probably met with or interviewed more than 260 groups since then, mostly in the U.S., because we don’t invest outside of the U.S., but also from Russia, Turkey, Berlin, China.

It seems like many more micro VC funds are being founded by venture capitalists.

A subset of them are definitely younger VCs from more established firms, which is an indictment of a lot of big firms that haven’t done enough about succession issues.

Tim Connors [of PivotNorth] was at Sequoia and [U.S Venture Partners]; Chris Rust was at USVP and is starting a fund; Mamoon Hamid [also formerly of USVP] quit to join [former Mayfield Fund and Facebook exec] Chamath Palihapitiya at The Social+Capital Partnership; Aileen Lee left Kleiner Perkins to start Cowboy Ventures; Matt Holleran left Emergence Capital to start a fund [called Cloud Apps Management, which focuses on cloud business applications management]; Ullas Naik left Globespan Capital Partners to start [Streamlined Ventures, a seed-stage investment firm focused on infrastructure software]; Kent Goldman has left First Round Capital to start his own thing.

Do you think VCs who launch seed funds have an advantage over ex-operators who launch seed funds?

We think entrepreneurs have the most credibility with other entrepreneurs, because they’ve built their own companies.

The one element I’m wary about is a lot of ex-entrepreneurs’ [experience]. A lot of them haven’t seen investing cycles, and one of the quickest ways to destroy a portfolio is through follow-on rounds – investing so that you suddenly have a $2 million hole instead of a $500,000 hole [from an initial investment]. So they have to have discipline about follow-ons, bridge financings and the like.

How are all of these funds doing? Is it still too early to know?

They look promising. A lot of the established players I mentioned [like Baseline Ventures and Floodgate] and older groups like First Round have promising portfolios. But in terms of returns – aside from [Baseline], which had a huge hit in Instagram – I suspect a lot of it is [high but unrealized IRRs]. Things have been marked up hugely on paper, especially if you’re in Uber or Pinterest. But LPs are very focused on cash returns, and while last year was a great year for venture firms like Greylock, Accel, and Benchmark, which returned substantial capital back to LPs, there aren’t a lot of seed funds that could say [the same].

In the meantime, can things possibly remain as collegial as they have in past years between seed investors?

A lot of new seed funds are relatively smart about focusing on ownership. At the same time, you can’t have four funds trying to get 10 percent [of a startup]. I do think we’ll see some sharper elbows.

Sign up for our morning missive, StrictlyVC, featuring all the venture-related news you need to start you day.

VCs and Twitter: A Simple Relationship Turns Complicated

Over the weekend, New York Times reporter Jenna Wortham wrote of Twitter that it “seems to have reached a turning point, a phase in which its contributors have stopped trying to make the service as useful as possible for the crowd, and are instead trying to distinguish themselves from one another.”

If Wortham is becoming disillusioned with the platform, she’s hardly alone. Even venture capitalists – among Twitter’s savviest and earliest users –no longer view Twitter with the same zeal they once did, with a growing number turning away from the service for longer periods of time, if not logging off altogether.

Chris Dixon of Andreessen Horowitz talked with investor-entrepreneur Semil Shah last November about why he no longer tweets as actively as he once did. “I actually think Twitter has changed,” said Dixon, whose tweet count is nearing 15,000. “Part of it is Twitter just got more popular…For me, the golden days of Twitter were 2010 maybe, 2011, where it was a bunch of early adopter/startup people…now, everyone realizes that if you say something wrong, it’s going to be excerpted and put on Business Insider…so I just think everyone is vastly more on guard, and it’s just not as fun.”

On New Year’s Day, another power user, Shervin Pishevar of Sherpa Foundry, announced that after an astonishing 34,777 tweets dating back to 2007, he’d decided to “take a break” – for all of 2014. It was time to “disconnect from this overtly present present and live in the moment more,” Pishevar wrote on Medium, the newest publishing platform launched by Twitter’s cofounders.

In a more recent renouncement of the platform, Paul Lee, a general partner at Chicago-based Lightbank, tweeted last Wednesday that he was “Going to be taking a break on twitter for a while (at least trying).”

When afterward, I asked Lee why, he explained that Twitter “ended up taking a lot of mindshare and creating a lot of noise in my head.” Though Lee consumes more than he publishes (over the last six years, he has sent 2,342 tweets), he finds Twitter just as distracting as someone who more actively participates in conversations.

“Imagine you’re in a meeting and you have eight people sitting on your shoulders,” he said. After logging on, even for brief periods, “It kind of felt like that. My mind was going 100 miles per hour.”

Plenty of VCs still actively use Twitter, of course. Homebrew cofounder Hunter Walk says that among the ways it helps him as an investor is his ability to share his thoughts, meet new people, and “lazyweb” questions about who is working on what.

Walker, who says he spends “toooo much” time on the platform (he has composed more than 18,000 tweets), says it doesn’t exhaust him primarily because he tries to use it “as a human being who also happens to be a VC.”

Josh Felser, a cofounder of Freestyle Capital, similarly says that his approach is not to overthink things but rather “say mostly whatever I want.” Felser (12,600 tweets) also notes that Twitter is “helpful in building my business brand” particularly given that “most entrepreneurs are on it.”

Lee acknowledges the same value in Twitter that Felser sees. In fact, he says Lightbank has funded two startups that it sourced through Twitter. “So from a branding perspective – meaning branding of [Lightbank] and self-branding – it’s been really effective.”

Still, Lee says he’s prepared to avoid it for a while, even if he’s uncertain for how long. “It’s only been a few days,” he told me Friday morning. He said he was already feeling “less tied to it, less compelled to check it.” But he was also quick to call it “an experiment. I don’t want to get ahead of myself.”

Meanwhile, the Twitter fatigued might pay special attention to Marc Andreessen, someone known for the shrewd way in which he has marketed his venture firm. A big fan of “counterprogramming,” Andreessen has taken to Twitter with great relish over just the last month.

In the six years prior, he sent out two tweets.

Correction: The original version of this story referred to Wortham by her Twitter handle, @jennydeluxe.

Sign up for our morning missive, StrictlyVC, featuring all the venture-related news you need to start you day.

Series A Investors Take the Gloves Off

In recent years, there’s been a lot of talk about the symbiotic relationship between seed-stage and Series A investors.

But things are becoming a little less symbiotic of late, suggests Josh Felser, co-founder of Freestyle Capital, a San Francisco-based seed-stage firm that recently closed on a second, $40 million fund. Felser says that he has encountered a number of Series A deals recently that “pitted the entrepreneur against the seed investors.”

Here’s the scene that Felser has seen playing out more and more: A VC agrees to invest $5 million into a company with a $20 million pre-money valuation, giving the startup a post-money valuation of $25 million. The company’s seed investors, presumably holding convertible notes, ask to invest an additional $2 million in the Series A round to maintain their pro rata rights. But the VC refuses to go above the $25 million post money, telling the entrepreneur that if he or she wants to make room for those seed investors, the company will have to accept a lower pre-money valuation.

It isn’t a new tactic. It’s always been the case that some VCs don’t play nice with seed-stage investors. In certain situations, too, there are simply too many seed-stage investors to accommodate; if everyone maintains their pro rata rights going into the Series A, it doesn’t give the VC firm enough of an ownership stake to make the investment worth its while.

Still, in recent years, some Series A investors have either left room for seed investors or at least been upfront about their designs to maintain specific ownership levels, thus giving entrepreneurs the opportunity to look elsewhere.

That’s changing, says Felser, who has been involved with two recent investment rounds where VCs have put entrepreneurs and their seed backers in precarious positions by not disclosing their true intentions until very late in the game.

Felser tells me of one startup raising a Series A round that asked Freestyle to invest less than the $750,000 it had planned after the Series A investor laid down some inflexible terms. Felser and Freestyle co-founder Dave Samuel — successful founders themselves — reminded the entrepreneur of how much work they had poured into the startup. (As Felser jokingly tells it, for effect, they refreshed the entrepreneur’s memory over lunch in a darkly lit nightclub that opens out into an alley.)

Ultimately, the founder made room for Freestyle, accepting a lower pre-money valuation in the process. But Felser says the trend is “something [for early investors] to be worried about” and calls relations between seed and Series A investors “symbiotic still, but tense.”

Says Felser, “We depend on each other.” He acknowledges that “fixing the post-money [valuation of a startup] can make a ton of sense,” too. But he doesn’t like that some VCs are starting to play hardball, or that it’s happening “sneakily deep in the process” all of a sudden.

“It’s something we’re mindful of,” he says.

Photo courtesy of Freestyle Capital.

Sign up for our morning missive, StrictlyVC, featuring all the venture-related news you need to start you day.

Freestyle Capital

Related articles