For most founders, being seen by employees as cheap isn’t exactly a badge of honor, but venture capitalist Chris Farmer doesn’t mind. While SignalFire, Farmer’s 10-year-old early-stage venture firm, has lost frustrated employees who weren’t able to compete for business when the market was at its foamiest, he says, keeping the line on price looks poised to pay off in the long run. . last.
For one thing, the limited partners just committed $900 million to the company in four new funds, doubling in one fell swoop the amount of money SignalFire previously raised. Farmer – who says SignalFire began to “put on the brakes” in 2018 because he “saw that valuations were decoupling from the company’s traction” – is being further vindicated as valuations continue to plummet and consumer expectations founders are reset.
So what did Farmer see that the others overlooked? Data and lots of it, he says. We spoke last week with Farmer about this data — which has been a source of pride for SignalFire since its inception — and why he thinks it continues to give the company an edge, even as many other venture companies have become similar data. in the last years. decade. The questions and answers below have been edited and condensed for clarity.
You’ve raised a lot of money in four funds, but you’re not disclosing how much each fund is managing. Why?
We don’t really release it because it doesn’t really matter, (but largely) we have hundreds of millions for seed (stage companies); we have several hundred million to follow these companies through a getaway vehicle, in which most companies are alumni and there are some net new companies as well. We’ve also been doing XIR (in-residence experts) for a while, pairing operators who have built multibillion-dollar businesses with an entrepreneur they have good chemistry with and whose company typically has $5 million to $10 million in revenue; they join the board and are typically involved one to three days a week to help grow the business as an executive chairman.
And in return, they receive. . .
They receive shares from advisers. They write a check simultaneously with us. And then they get some advantage from the background.
You said earlier that SignalFire has access to 100’s of massive datasets that your “competitive data nerds” sift through to figure out what’s going on in the world, but it seems this approach has been copied by other companies, so what’s your biggest differentiator? today?
In fact, I think our competitors backed off. It’s actually shocking to me how much they haven’t caught up with us and how far ahead we’ve ever been, which is not at all what I expected. There are many funds that are doing something with data but (that basically means) having a Bloomberg terminal. It’s nothing like what we have. Every time we review a deal or decline it, the machine learns. We are the only venture capital firm with a true ML system in a closed loop.
What proof do you have that what you built works?
We have a very strong track record of getting ahead of things before anyone else because of our data. We participate in all rounds of Frame.io starting at seed; we earned our way into Serie A based on over-service delivery after losing the lead in the opening round to Accel. The company was acquired by Adobe in August 2021 for $1.27 billion. We led the Flock Freight initial round in November 2015 and subsequently participated in all subsequent Series D rounds in October 2021.
We saw customer traction on Grammarly’s credit card data and leveraged a pre-existing relationship with the founder to acquire shares in 2017 and 2019. Their recruiting team uses our talent tools to help find potential employees; is profitable and has raised $200 million as of November 2021. . .
You said your data led you to hit the brakes, starting in 2018.
We use the data to manage risk in a way that VCs typically don’t, so we started putting the brakes on in 2018 because we saw that valuations were decoupled from company traction because we can see that in the data. (We as a company) were putting the brakes on from 2018 to 2021, actually. In fact, we reduced our base cost of entry into companies during this period. We went pre-seed, took on more execution and fundraising risk. And we don’t overpay for things the way other venture capital firms do. And that’s one of the reasons why we were able to scale this capital market. Because LPs recognize that we are now going on the attack when everyone else is pulling back.
You think the ratings are definitely receding.
Yeah, I mean, a lot of the big companies are licking their wounds because they overextended themselves and put too much capital into too high a valuation, which we totally avoided doing and worked really hard to avoid. I lost people because they left the company because they didn’t think we could compete because we were so cheap. So we were definitely swimming upstream. But now we can be there very aggressively, looking for market opportunities and supporting the founders because of the new capital base, but also the systems and support that we’ve built.
Who left because they thought you were too stingy?
I won’t go into that now, but people got frustrated. For them, it was like, ‘We can’t compete with XYZ Big Name Firm term sheets.’ They wanted to close deals, but you have to win in a way that is a good fiduciary and returns the kind of capital that LPs expect. If you have an extremely high entry point, I mean, a lot of these companies are going to really struggle to grow at the valuations that they once had.
It is expected to get worse before it gets better. Despite your focus on pre-seed and seed-stage apparel, do you imagine investing opportunistically in companies that perhaps have outperformed their skis in terms of valuation?
We’re not saving a lot of companies that have raised wild valuations. We are focused on the next generation.