"The New Builders" - The True Future of Business with Seth Levine, Managing Director, Foundry Group

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Seth Levine is a co-author of The New Builders, a book that brings you Face to Face with the true future of business.

A long-time venture capitalist, Seth is a co-founder and Managing Director of Foundry Group, a Boulder, CO based venture firm. He's a passionate advocate for entrepreneurship, Seth also spends time as an advisor to venture funds and companies around the world.

Seth's story & how he started Foundry

I've been an investor for a while now. When I graduated from college, which was a long time ago now, I had a number of different jobs. I was in corporate development, did a lot of deals, was in banking briefly and eventually ended up in an operational role at a public company and spent a bunch of time managing some divisions at that company and then sort of rode the bubble and the bubble burst back in 2000 and 2001.

I was kind of looking for something new in my career and I had some offers to go be like a general manager again and I enjoyed that, but I thought I would try venture. And so I had a bunch of friends from banking that had gone into venture sort of better timing than I did because they were there in the late 90s. But I ended up kind of networking with a bunch of folks and eventually one of the people that I met with was my now partner, Brad Feld. And so we hit it off and it's a longer story behind it, but eventually I ended up starting to work for Brad at what was then called SoftBank Venture Capital. It was later renamed as Mobius. This was in 2001. Did a lot of workouts, a lot of troubled assets and some challenged businesses, but it was a great way to learn venture.

Obviously, Brad was an incredible person to learn Venture from. And then in 2005, we started talking about sort of maybe doing something on our own. Mobius wasn't able to raise the next fund that they had wanted to raise. That's what led to the conversation that eventually became Foundry, which is the firm that I founded with Brad and two other partners, Ryan and Jason, in 2006. And that timing was great.

We raised our first fund in 2007, took us the entire year. That'll be an interesting story if you want to get into it, but eventually did raise that first fund, and that went really well. And that was almost $4 billion ago. In terms of assets under management, we've grown up a pretty big platform now.

How hard was it to raise the 1st fund for Foundry?

It was extremely hard to raise. There wasn't such a thing as emerging manager. Right now, everywhere you look, there's like new, younger emerging managers, falling off of every tree. By the way, that's good for the venture industry. I think actually that's important. And I think one of the things that we've learned over the last 15 years is that really good returns can come from anywhere. That wasn't the way that the world viewed venture as an asset class in 2006 and 2007 when we were raising.

The adage back then was if you really weren't in Sequoia, et cetera, then it sort of wasn't worth being in the asset class. And there weren't really emerging managers. Union Square had raised one of their funds, but this was pre Zynga, pre Twitter, sort of before they had really kind of broken out. First Round had raised a fund. So there were a few people out there, but none of them had any returns to speak to at that point.

And fortunately for us, we found a couple of LPs, specifically the University of Texas Endowment, that believed in sort of the potential of these new managers. But it was hard. And I actually remember a moment we really kicked off fundraising in sort of the end of January 2007, and by probably about May, it was pretty clear to me that we weren't going to raise a fund. And I actually remember coming home, and this was back when you had to write a PPM and offering documents, things like that. There was huge amount of legal cost, not to mention travel, et cetera.

I sort of made and lost money in the bubble, so I didn't have a lot in savings. I had staked my entire savings to start Foundry, like my portion of it. I had a little bit of money, but nothing to write home about. And I put it all on the table for Foundry, and I remember coming home and saying to my wife, “hey, I don't know that this is going to work. I think I may have just blown up what little savings we had, and I don't even know what I'm going to do”.

I've been a VC now for whatever it was four or five years, and I didn't really feel super qualified to do anything else. Fortunately, in the next month after that, you, Tim Co, came in and said, hey, we want to be 20% of your fund. And as these things go right, as soon as a couple of people say yes, Morgan Stanley quickly said yes after that. And then all of a sudden we went from struggling to raise what we wanted to raise, which was 175 Million at the time, to having to pick a hard cap or a cap, and we ended up capping it at 225 Million. And that was a great fund.

The first company we invested in was Zinga, which obviously went public. We did really well. On the third company was a company called Admill that was bought by Google. We did a seed round in that business back when seeds were 3 million posts, and they were bought by Google three or four years later for nearly half a billion dollars. So we had some really good early wins. Obviously there was Fitbit in that fund as well. And then all of a sudden, we never had any trouble raising money.

It was interesting how quickly we flipped from that, but it was hard. And I'm glad that the industry has changed. I think that there are as someone who now is an active investor, initially personally, along with Brad Ryan and Jason, and now institutionally, because our fund invests in other funds now in this asset class, in this emerging manager asset class, there are some really interesting people that are running venture funds right now, and I think that they deserve to be funded. So I'm glad that the industry has moved on from the, hey, there's only three or four venture funds worth investing. And it's the truth is there are lots of interesting funds out there. 

Isn't $175 Million too big for fund I?

Well, I mean, you have to remember a couple of things. One is just that there weren't these smaller many of these small funds running around. I mean, really, that was sort of maybe a little bit on the large side for sort of a first time fund. And there wasn't this sort of same concept of seed back then. It was really companies went straight to series A, mostly because the cost of starting a business was just much higher. We hadn't modularized technology and so we didn't have platforms that enabled you Shopify if you wanted to set up a shopping cart or SendGrid if you wanted to deal with bulk email or whatever. There's Twilio for tech and we didn't have any of that stuff.

And so the result was that it was more expensive to get things going because there was just more development work that needs to be done. Because of that, the fund sizes, I think, were a bit bigger because it really just didn't make sense back then to have a $25 million slug of capital. It just wouldn't go far enough. So there weren't very many funds like that. So it was maybe a little bit on the large side for back then, but it wasn't as large in that context as it sounds now with all these $25 and $50 million funds running around. And by the way, it can do quite well because you can put a seed round together where a seed might be a few million dollars across a handful of funds, and that didn't really exist as much back kind of back in the day. There might have been some seed rounds that were a few million bucks by two funds, but they really had to be prepared to kind of take the next step and fund the next round. 

Reverse Inflation in Venture Capital

I appreciate the opportunity to talk about it. I'm really proud of this work. I wrote it with a journalist friend of mine, Elizabeth McBride, and it was a number of years ago she and I came together and we were talking about we met over some entrepreneurship activities that were going on in Palestine of all places. And she had an interest over there. I continued to do quite a bit of work over in Palestine and Middle East more broadly and we would trade stories of interesting entrepreneurs kind of around the world. And at one point she was coming through Boulder and she and I sat down and we really talked about this was probably five or six years ago.

The fact that we felt like no outlets, no mainstream outlets were really talking about interesting stories of entrepreneurs building businesses outside of the Valley. And different types of entrepreneurs. We knew that women and people of colour were starting businesses at high rates. It didn't seem to be reflected in the world in which she and I lived in. She was a business tech journalist and obviously I'm in the middle of venture and venture capital. And so we started by just thinking like, well, let's tell these stories. And when we dug into it, we realized that there was a really important story that needed to be told. This narrative that entrepreneurship in the US has actually been lagging. It's not something that people realize. And in fact, when we took some of our early findings to our friends in business journalism and venture capital, the most common response we got was, well, that's wrong, right? Your data are wrong. And we showed it to them and reminded them that really only 1% of companies take money from venture capital.

So the world in which we live in is very much sort of, I want to say a fantasy land. It's sort of off on its own is probably the better way to say it. I mean, it doesn't reflect entrepreneurship more broadly in the United States, obviously, venture and venture backed companies are really important. I mean, many small businesses that aren't venture backed, make use of venture backed technologies. And of course, there's a lot of money and quite a few jobs that get created by the venture ecosystem. But more broadly, most businesses don't look like Silicon Valley companies. They don't look like the companies that you talk to on your podcast and I work with in my day job.

And in fact, a couple of trends were really interesting and very powerful. In particular, women were starting businesses at a rate that's four times that of men. White men are actually the minority now of business owners in the United States. And in addition, black women in particular are starting businesses at a very high rate. Over 60% of all women started businesses are businesses started by black women. But yet we have not done a very good job of connecting capital with these new builders, right, these people that are actually starting businesses.

Our view is that those two things are combining to create these challenges in sort of the new business ecosystem in the United States. We're not recognizing that the business landscape has changed and we're doing little or nothing to change the way that we support these businesses and change the way that we fund these businesses, allow them access to capital. And that could be bank financing. It could be friends and family. It could be community loan funds. I mean, there's all sorts of ways that small businesses receive financing. And I think what's lost potentially in this larger narrative that we're spinning around the power of Silicon Valley and these businesses that can grow really quickly is the value of a small business, right?

And some of whom may grow quite large, and many of which will remain small and be powerful, even though they are small and be run by people that are strong community members, that are important people to their local ecosystems. And I think we sometimes lose that by all this talk about unicorns and how big your business is growing and whether you'll be worth a billion dollars. And we've lost the sense and the realization that small businesses in and of themselves are also valuable. And so the book really speaks to all of these trends. And we do it by highlighting we put the new builder label on these businesses because we wanted sort of a rallying cry, we wanted a way to describe them. And we really liked “The New Builders”. It's positive. It speaks to the future.

Importantly, the new builders themselves that we talk to really love that label. And so in the book, we sort of marry facts and figures. It's very research based. I didn't count them, but there are hundreds of end notes, where we cite various references and things like that. And so we marry those facts and figures with stories of new builders, and we highlight maybe 20 new builders in the book. And so many of the chapters sort of start with a story of a new builder and then weave in some background information that's more broad about the overall ecosystem to punctuate that story. I don't know. It was a labor of love. I mean, no one just sort of falls out of bed and writes a book. And it was not an easy book to write. Like, a lot of VCs write books where they sit down in front of a computer and they pontificate for a while and they write a couple of hundred pages of that. And by the way, those are some great books. And these are people that have great background.

This book was very different than that because of all the research that went into it. And we spent a solid year not just meeting and interviewing new builders, but reviewing many hundreds of studies and research documents and things like that before we were ready to really put pen to paper. And so I'm really proud of the effort. I really feel like I think it's an important book and I'm really glad that we wrote it and I'm glad that I participated in writing it. I know Elizabeth feels the same way.

Our day jobs don't always align with what we talk about in the book. And I'm spending more time in that world now because of what I learned in the book. But it's a long way of saying it's something I hope your listeners will pick up and read because it's a really powerful and important thing for people to understand about our economy right now. 

Is entrepreneurship in the US in a state of decline?

If you just measure the net new number of businesses started. So the number of businesses that are started, less than number of businesses that fail in any given year. That number has been declining since they started measuring, which essentially after World War II, and in fact, in the Great Recession, it ended up becoming negative for the first time since they started recording it.

So in whatever that was, 50 plus years now, there's been a bit of a blip with COVID right. Which is, I think, hopeful. The number of license applications for new businesses has gone way up. Some of that may be people participating in the gig economy and forming LLCs to do that. And by the way, and we can talk about the gig economy as well.

The gig economy is sort of a separate form of entrepreneurship that I think is one that is worth recognizing. Because I think that more and more people are becoming more entrepreneurial by participating in the gig economy. There's upsides and downsides to that.

In some ways we talk about stories of people sort of being enabled by their work in the gig economy. They can use that money to go back to school, et cetera. But there's also a dark side to that where there are some platforms that don't really allow their drivers or their users participants to make sort of a living full and living wage that seems to take advantage of them. So there's a double sided coin there. But in any event, those are the numbers.

The net new number of business starts has been declining. There are some other measures as you think about it. The concentration of large businesses has gone way up. The chances that a new storefront opening is actually just another storefront for an existing business versus an initial storefront for a new business. It's much more likely today to be a storefront from an existing business opening a new location. So there's this sort of higher concentration of larger businesses in our economy right now which again we believe to be pretty pernicious to the overall economic dynamism of the US economy.

I should also say that the book is not a Big Business is Bad, small business is Good at all. Right. We talk about the balance of big and small and how these businesses come together to form sort of a certain ebb and flow in our economy. But that ebb and flow needs to stay at least somewhat unbalanced and it feels like it's become quite out of balanced and that's important for us to recognize.

Definition of Entrepreneur

It’s interesting when you chase the history and we do in the book of not just the word entrepreneur but also how it was used, especially in the United States and 100 years ago entrepreneur, almost everyone in the economy. I mean, most people were small business owners. There were far fewer large businesses maybe 150 years ago and that was a term of endearment and it meant something to be an entrepreneur.

Interestingly, it was it was Ronald Reagan in the 1980s who started to significantly narrowing what he meant when he said the word entrepreneur. He was using entrepreneurship and in particular Silicon Valley style of entrepreneurship. He had been the governor of California, and really he was the governor of the birth of Silicon Valley.

Then fast forward to when he was President in the 80s. He was using entrepreneurship as a diplomatic tool. He was trying to contrast communism and central planning with capitalism and free markets. And he loved the image of sort of the entrepreneurial cowboy. And as you know, Reagan was a rancher. So that imagery and of course, he starred in a bunch of Western movies when he was an actor, that imagery really spoke to him. And so when he talked about entrepreneurship, he really meant tech entrepreneurship. It really differentiated the United States from Russia, from the Soviet Union back then.

He used it in that way to really kind of narrow the definition. And since then, we've sort of just allowed that to take hold. And so these days, it was interesting to talk to many new builders, and we would often refer to them as entrepreneurs, or we'd ask them about their entrepreneurial journey and their responsibility. Oh, I'm not an entrepreneur. Right? That's not I'm not running a tech business. And after we talked to them for a little while, they just sort of have this awakening moment, an eye opening moment where they'd really get it, like, no, no, wait, you're right. I am an entrepreneur.

It's only in the last 30 years that we've narrowed that down. And I think that's a mistake. I think that entrepreneurship is something that should be celebrated more widely. And when I tell people only 1% of businesses take money from venture capital, again, they generally don't believe me. But that's the stats. That's what we're talking about. And again, venture power is a really important part of our economy. And certainly those companies punch above their weight. They impact certainly far more than 1% of our economy. So I'm not suggesting it's not important, but it's really important to think about how we're getting capital and mentorship to these other businesses, these 99% of businesses that don't become part of these formal venture capital networks, which are so good at helping promote businesses, but not always great at promoting and funding businesses started by the people that are starting businesses today. Women and people of colour. 

Who are “The New Builders”?

The New Builders are everywhere. But “The New Builders” is a term that describes the women and people of colour, in particular immigrants and other folks that are starting businesses today. And there are also people that are a little bit older than folks recognize. So it's intended to be a blanket term. It's not intended to exclude white men who are starting businesses, but it's intended to highlight the fact that the people that are starting businesses today are new. They look a little different than most people expect. And so that's how we think of new builders.

We think of them as incredibly gritty, incredibly powerful, incredibly impactful in their communities. The stories that we tell really kind of describe that. But they're in trouble in the sense that, as I mentioned earlier, we're not doing a good job of getting capital to them. Only about 17% of companies take money from banks. So 1% from venture capital, 17 from banks. That's over 80% that are sort of left to fend for themselves. And that's really challenging for groups of people who have historically had lower wealth profiles. The average black family, across all income and educational attainment levels, has less wealth, significantly less wealth than the average white family. On average, it's one 10th. The average Hispanic family has one 7th the wealth of the average white family. This speaks to hundreds of years of systemic racism and lack of access to power and to economic mobility for these groups of people.

And yet we're asking them to fund their businesses essentially on their own. Someone said something to me, the quote didn't make it into the book because she said it to me after we finished writing it. But it's a woman who runs a network to support black women founders, and she said “When you give someone a small amount of money, you force them to think small. And when you give them a larger amount of money, you enable them to think more broadly and to think bigger”.

And I think we've made the mistake in the US. Of thinking that businesses started by women and people of colour are less successful because they were started by women and people of colour and therefore lack access to capital. Actually, the reverse is true. And there have been study after study that has shown if you normalize for the amount of capital that was available, they are at least as successful, if not more successful, than businesses started by their white counterparts. But we are not doing a good job of getting them capital. So we're forcing them to think small and then we're blaming them for not being bigger. And that's completely backwards. Now, even when they get into the banking system, we know that the banking system has systemic bias in it.

There have been a number of studies around this. We cite a bunch of them in the book that describe women and people of colour as applying for lower loan amounts, being approved for lower loan amounts, paying higher interest rates, and being less likely to even try to get a loan than their white male counterparts, presumably because of those things I just said. And so there are all sorts of ways that we were not supporting these ecosystems.

And by the way, one of the other things we talk about in the book, which is also, I think, a real challenge in our economy in many ways, is the massive consolidation in the banking sector. Four banks now comprise 80% of US deposits, which is essentially the underpinning of loans. And the community banking sector has just been decimated.  And those community banks are the banks that often times will have a less formulaic underwriting criteria. They are also subject to different regulations in the large bank so they have more flexibility to loan money to new builders or people that maybe don't qualify under the same sort of algorithmic tests of money. And that's really challenging.

If you go back 20 years, there were 14,000 banks in the United States today. In the book, we cite 4800. Today, it's fewer than 4500. Most of that consolidation happened at the lower end of the banking sector. And so we really lack infrastructure to allow new builders to access capital sort of across any way that they're trying. Again, these are trends we talk about in the book. And we do, by the way, should say, offer chapter 16, offer some ideas on, okay, well, what do we do about this? It's not a policy book, but it's an uplifting, actually book, despite some of the challenges that have outlined. And in that chapter, we wanted to offer just some practical suggestions for, well, what can you do if you care about this and you want to actually make a difference in your community or in the country more broadly.

What can we do to help “The New Builders”?

Well, given that your listenership skews venture and tech, let me start there. And this is not something we particularly talked about in the book, because we don't focus on sort of the venture gaps, because, again, it's 1% of companies. So that wasn't something that we really covered.

But what I say to my venture colleagues is, having spent now a couple of years really immersed in extending my network, in meeting new builders, and in trying to help diversify Foundry's own investment portfolio, that you need to be willing to get a little uncomfortable, and you need to be willing to be in rooms where all of a sudden you're the minority.

I mean, it's so rare as a white male, especially one who's wealthy and is a check writer, right in our world, where I show up in a room where I'm in the minority. And yet that's happened over and over and over again as I try to expand my network. And I think that it's really easy to stay comfortable. And if you're not being challenged, if you're not uncomfortable, if you don't occasionally say something that's maybe not quite the right thing to say and be open to that feedback, you're really closing yourself off to the ability to sort of expand these networks. And for Foundry and by the way, it's not just work that I'm doing. My partners and I are doing this together.

That's resulted in a significantly more diverse set of GPS that we funded over the last 3 years or so when we really started leaning into this. But even before that, this work predated that. So that's why I say on the venture side.

But on the practical side, as it relates to new builders, we talk about a handful of things in that sort of practical chapter on things to do that start with just sort of recognizing new builders everywhere, right? I mean, it's one of those things where I walk down main streets in towns where I am very differently and I'm much more likely to go into that shop that looks like it's an independent shop, and I'm significantly much more likely to just talk to the person behind the counter and ask them about the shop. Oftentimes it's the person who owns it. So they're the chief merchandiser. They do the accounting at night, and oftentimes they're they’re manning the counter to keep the shop open. And I found that to be really powerful just to sort of understand who they are and what they are. There are networks of support systems for new builder businesses, I think, about organizations like EforAll, where you can be a mentor. And it's nothing wrong with being a mentor in Y Combinator or being a mentor in Techstars or some other program like that, but you know, maybe from time to time see if you can find a business that's a bit more sort of local oriented and not necessarily in the tech ecosystem, who lacks access to the expertise, perhaps, that you have. And so getting involved more directly in that way, I think is really is really important.

And then there's some legislative things that we can do to encourage our legislators to consider small business in the policies that they put out. And the truth is, big businesses have budgets for lobbying. Small businesses really don't. There's not really a small business lobbying association. And so the result of that is that they're often kind of left out of these bills. Even with bills that are funded or proposed by, wellminded, legislators who really want to do the right thing for small business, they often don't really know what that is.

And so I think if you have access to legislatures at either state level or the federal level, really lending your voice to say, hey, small business is important. We need to figure out better ways to enable loan funds to be started right. Or to enable capital to flow to these businesses or to have policies that level the playing field a little bit more for small businesses. I mean, this sort of push to lack of regulation, I think actually belies the fact that there are some regulations that do a really good job of leveling that playing field and big businesses are, generally speaking, in a better position to take advantage of kind of a freeforall and lack of regulatory oversight. And that's a mistake.

I think both parties who talk about the power of small businesses. We trace the history of that actually in the book as well. But both political parties who say they care about small businesses should be a little bit more thoughtful about sort of what red pens they take to the regulatory frameworks that in many cases protect these small businesses. So those are just a couple of ideas. We talk about a few others in the book, some of which are a bit bolder, but ideas that could really help spur entrepreneurship and really prevent us from this continued decline in entrepreneurial activity. 

Who should read The New Builders & where to get the book?

I think there's a couple of main audiences. One is all of our peers in venture and tech business. I think that it's important that they understand the broader ecosystem, the broader landscape of entrepreneurship. I would strongly encourage all of them to read it. And then also new builders themselves. Right. A lot of times what we heard from New Builders is they felt very much alone. They didn't really have networks, they didn't understand that other people were experiencing the same journeys that they were. And really, it was really powerful for them to witness them realize that they were part of a broader movement and a broader network. In many respects, those people are the people we really wrote the book for. So that's who should read it.

People can pick up the book. If you go to our book website at thenewbuilders.com, not only can they figure out how to buy the book, but also to the extent to which there are people listening who are teaching entrepreneurship classes and things like that. We created an entire syllabus out of the book which you can take specific chapters from or you can teach an entire class on The New Builders and that's all up there for free. We know we've got a number of professors across the country that are teaching The New Builders as part of their curriculum now. And in fact, there will soon be a Harvard case study on one of “The New Builders” that is currently being worked on by a Harvard Business School professor. So lots of material for people to dig into and hopefully people will visit the site, buy the book and more. 

Rapid Fire Round

Which sectors and regions you invest in?

So we invest across the country, and we don't think about the world and sectors. We think about it more in terms of themes. So the themes that we tend to be most excited about right now are marketplaces. We've done a lot of marketplace investing and done well with it, as well as connective technologies. We’re investing across the US.

What stage you typically invest in?

We typically invest in series A or series B. Many of our investments, in fact, most of our investments follow our network of partner funds, we call them, but underlying funds that we made investments. And we have about 46 venture funds that we're investors in. So most of our investing follows them, and we tend to follow the round. After that, they invest, so they often do the seed round. And then we like to come in the Series A, sometimes the Series B.

What's the typical check size?

We typically invest between five and $8 million for our first check. We can write checks up to 25 million. We occasionally do like, a later stage deal where we'll write a check that large. But our typical investment, initial investment, is between five and eight, and our total investment in the business is between somewhere between ten and 15.

Where can they pitch you?

First, they should go to our website at Foundry.vc  and make sure they check out what we've invested in and what we're interested in, how we describe our themes. All of our contact information is there. My email is seth@foundrygroup.com or Seth at foundry.vc. Either one would work, and they can feel free to reach out to me there.

Where can I listen to follow you?

They can follow me on Twitter. I'm at @sether. That's probably the best way to find me. That's where I'm most prolific. But they can also go to my blog at sethlevine.com. I've been writing for a long time on various topics related to venture and sometimes more broadly, politics and what's going on in the world.

Get the book: https://thenewbuilders.com/

Seth's blog: https://sethlevine.com/

Foundry Website: https://foundry.vc/

Follow Seth on Twitter: https://twitter.com/sether

Follow Seth on Linkedin: https://www.linkedin.com/in/sethjlevine/

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