January 19, 2017

Relationships Can Change a 'No' to a 'Yes'

As part of the Eureka Park Marketplace at CES® 2017, Techstars sponsored the Startup Stage, which provides an opportunity for tech leaders to share their knowledge and experience with conference attendees. This post focuses on a conversation between Brad Feld, co-founder and Managing Director of the Foundry Group, a Boulder, Colo.-based venture capital firm, and James Park, CEO of Fitbit. Mr. Feld also co-founded Techstars.

As the title of the talk suggests, "Fireside Chat with Fitbit: From Inspiration to IPO," Mr. Park discusses the timeline and various challenges he and his colleagues encountered as they launched the company and developed the product. As a hardware company, Mr. Park talks about the importance of managing engineers to overseeing production to logistics. "I remember spending a whole week evaluating third-party logistic providers, visiting them, trying to understand what made one company better than another." I commend Mr. Park's efforts to understanding the ecosystem of his business and its industry, which is essential if a new business is going to overcome the odds of startup failure.

Messrs. Feld and Park then talked about the first time they met, which took place via a telephone conversation at a time when Fitbit was attempting to raise a Series B financing. Todd Bishop of GeekWire summarizes Mr. Feld's reflections of the process that led him to invest in Fitbit:
It was in 2010, during a major snowstorm at his home in the Colorado mountains, and [Brad Feld] was too distracted by intermittent power outages to give serious attention to an investment pitch from a fitness tracking startup. 
'Pretty much my entire goal during that call was to get off the phone,' Feld recalls. 'I wasn't in any sort of headset or mindset about investing. I was interested in the idea of human-computer interaction, but I hadn't really processed this notion of what a Fitbit was, or why I would want to instrument myself yet. We were just at the very beginning of that thought process.' 
So he passed. But nine months later, Feld heard from his fellow investors Jeff Clavier of SoftTech and Jon Callaghan of True Ventures, urging him to take a serious look at Fitbit again. 
Clavier sent Feld an email that basically read, 'Brad, don't be f—ing stupid, you need to pay attention to this,' as Feld recalled. When Feld continued to express ambivalence about the investment, Clavier forwarded the same email again and told him to save it. 
Feld, who had been using a Fitbit in the meantime, relented. 
His firm, Foundry Group, ended up leading a $9 million Series B investment in Fitbit with SoftTech and True Ventures in 2010, and continued to invest more after that. When Fitbit went public in 2015, Foundry Group’s 28.9 percent stake was reportedly worth nearly $1.6 billion.
I cannot emphasize enough the importance of capitalizing on established relationships. In 2016, I was approached by a young man in Seattle, Wash. about making an investment in his company. The entrepreneur and I had a positive meeting at my office where we talked about the problem his company was trying to solve, his short-term goals and long-term vision, and his ability to lead the company to profitability.

Among the number of documents the entrepreneur provided to me as the meeting was nearing its conclusion was a spreadsheet that listed the current shareholders/investors. Upon an initial review, I recognized two individuals on the list and asked if it would be okay for me to contact them to learn why they had invested in the company. The entrepreneur said he was okay with me contacting the two investors.

I spent the next few days reviewing my notes from the meeting as I was seriously considering making an investment in the company. Like with every startup, there were a number of risks to consider. I was interested in the product the company developed and I felt certain key risks could be mitigated. However, I did not contact the two individuals whom invested in the company (primarily because I was focused on more pressing matters relating to my other business interests). Ultimately, I decided not to invest.

While the entrepreneur's initial response to my rejection was understandable disappointment, he expressed his appreciation for my time and respect for my decision. However, a key mistake he made was not taking the initiative to ask the two current investors to contact me. He should have asked these individuals to contact me and convey their reasons for what led to their decision to invest. Hearing their story about why they decided to invest could have positively influenced my decision to write a check to the company. In other words, a short conversation with an investor whom I know and respect could have been the deciding factor of going from "no" to "yes, I will invest."

Do you have a similar story, either as an entrepreneur or investor, to share? How do you utilize relationships in your business dealings? 

The entire conversation between Messrs. Feld and Park may be viewed below or through this link.

Aaron Rose is an advisor to talented entrepreneurs and co-founder of great companies. He also serves as the editor of Solutions for a Sustainable World.

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