I was about to start a series of posts on marketplaces covering how FJ Labs gets its deal flow, how we evaluate startups and our current investment thesis when I realized I had to start with the genesis of FJ Labs and our investment philosophy as they are intricately related.
I have always been both an entrepreneur and an angel investor.
FJ Labs is a hybrid venture fund and startup studio that allows me to scratch both my entrepreneurial and investing itches. It is not a given that entrepreneurs should also be investors, especially at the same time. Somehow that has always been true for me. It started back in 1998 when I built my first venture backed startup. By virtue of being a visible consumer Internet CEO, other entrepreneurs started approaching me for advice and investment.
I wondered if it would be distracting from my core mission to be investing in other startups, but I realized I was meeting many entrepreneurs to try to help them anyway and this only aligned me with them. I was literally putting my money were my mouth was. Besides, I loved hearing their ideas and struggles while trying to be helpful. If anything, I felt it made me a better entrepreneur as I kept my fingers on the pulse of the market and understood the latest trends and approaches.
Given that I was pressed for time and had little capital and experience, I used the same selection criteria I used at that time for myself to evaluate their businesses simply layering on my perspective on the entrepreneur and the deal terms.
In the 1998-2000 period, I invested in 7 startups. One failed after a few months. In 2001, if you asked me how the portfolio was doing, I would have told you all were bound to fail. I was shocked years later to be contacted by an investment banker asking me for my banking information because one of them was going public. Eventually I had successful exits on 6 out of the original 7! I had gotten lucky thanks to the grit, tenacity and staying power of this original batch of founders.
I did not invest again until 2004. My original startup had not been the success I expected it to be and tech entered a nuclear winter where no capital was available. I had to reserve what little capital I had for my second startup, Zingy. I started investing again after I successfully sold Zingy in 2004, especially as I was itching to get back to marketplaces.
As OLX started growing in traction and visibility, other entrepreneurs started once again reaching out for investment. Given how busy I was running OLX, which at that time had hundreds of employees, and hundreds of millions of unique visitors a month in 30 countries, I decided to focus on marketplaces as I felt I could evaluate them rapidly. I came up with a strategy to evaluate startups based on a one-hour call and started investing.
I opted for radical transparency. On the 1-hour call or meeting I would tell the entrepreneurs if I was investing and why. In 97% of the cases I passed on the opportunity and would tell them what would need to improve to change my mind.
As an entrepreneur I hated that VCs never told me where I stood. Many times, they knew they did not want to invest, but did not want to say so to preserve optionality. I also hated how they dragged out the investment decision process both to see how we performed during that time and to get consensus within their firm. I also abhorred how they would take weeks to reply to emails if they deigned replying.
I am sure this frustration is related to my personality type. I hate indecisiveness. It drives me crazy when people hedge when they talk. I love clarity of purpose and thought. If an entrepreneur and idea resonate, I owe it to them to invest and not drag the process.
In that period, 2004-2012, I did not have an investment thesis. I did no outbound. I did not have a specific number of investments I wanted to make. I merely reviewed all the inbound deals and invested in whatever struck my fancy. On average I tried to invest $100k in each startup, but I did not have a minimum ownership threshold. If less was available, I invested less. It led to a large variation in the number of investments as some years I was more inspired than others, but in general I was investing in 10-25 startups per year so rapidly became known as a “super-angel.”
It is funny that most people saw me as an investor rather than an entrepreneur because my name would more often be associated in the press and Techcrunch with investments I made rather than the company I was running.
In the process of making the investments I came to realize I loved talking to the entrepreneurs and talking through their startups but hated all the administrative work around it. From lack of interest and time, I decided not to review any of the legal docs ever sent to me. I had my assistant auto-sign everything automatically for my first 100 investments. This includes auto signing all subsequent docs entrepreneurs wanted signed without ever reading any of them. It goes to show that the vast majority of people are honest as it worked out great in the end.
As you can imagine I also did no real due diligence beyond my evaluation of the entrepreneur and their business during the 1-hour conversation. To be honest I never really understood why due diligence took so long. Most of the companies were so young there was not much to diligence and I was not about to ask for bank records or access to their Stripe account to verify that the gross sales numbers they were telling me were real and not fabricated. I took the entrepreneurs’ word for it.
Likewise, I realized that reference checks on founders often gave the wrong signal. Some of the absolute best entrepreneurs had horrible references from their former employers because they were bad employees. They were independent thinkers who talked back and often were working on heir future startups on the job. I stopped doing reference checks. I am not sure doing them would have allowed me to catch the one case of misuse of funds we had in the 600 investments we made to date, but it would certainly have slowed down our investment process and led to worse investment decisions.
As you can imagine my hatred for all thing administrative and bureaucratic extend to every element of my life including my entrepreneurship side. It would have served me well to have a partner during my first startup. I hated dealing with lawyers, stock purchase agreements, legal agreements, formal employee reviews and the like. When I decided to start OLX, I partnered with Alec Oxenford. I met Alec in 1999, while I was running my first venture backed startup. He was introduced to me by a former McKinsey colleague who told me of this amazing team of entrepreneurs from Harvard and Stanford who were thinking of launching a startup in Latin America.
I met Alec and his many cofounders in June, confirmed their belief they should launch an eBay-like site in Latin America and agreed to provide them with the technology and business plan to do so. On a handshake deal we launched them out of our servers in Paris before helping them transition to their own platform.
I reconnected with him after he sold Deremate. On paper Alec and I looked similar as we were both ivy-educated former management consultants who had been CEO of online auction sites. We never discussed responsibility splits but found a balanced partnership. We both had an equal say in strategic decisions. I ran product while he ran operations. It just worked.
While I was working with Alec on OLX, he re-introduced me to one of his Deremate co-founders, Jose Marin. I must admit I did not really remember Jose. He had been one of many co-founders at Deremate. We only interacted a few times in the decade since the original 1999 meeting. Given his look and accent, I just had the impression he was a Latin playboy without much substance.
On the behest of Alec, I started spending more time with Jose and realized I was unfairly prejudiced. There was depth and substance behind the look. It turns out Jose was a successful angel investor and entrepreneur in his own right. He had specific expertise in real estate and travel was building a successful startup studio in Brazil.
As he was busy building his startup studio, he was happy to partner on angel investing. For the sake of scale and efficiency, we decided to pool our activities starting in 2009. It helped me significantly improve my deal flow while adding expertise in key verticals. As an added bonus, it turns out he was a super detail oriented master negotiator who took real pleasure in making sure all the i’s were dotted and the t’s crossed and that we had important investor rights: preemptive rights, information rights, tag along etc.
After I left OLX in December 2012, it was not obvious we were going to create FJ Labs. As you can read in step 3 of my framework for making important decisions, I tried many things. I aspired to run Craigslist. I tried to buy eBay Classifieds. I applied to run a special economic zone in Cuba. I tried many other ideas. They all failed, mostly because they required other people’s approval. By contrast it took no one’s permission to invest or start new startups. We kept doing it while I was pursuing other ideas and it just kept scaling.
As our profile as investors grew, our deal flow kept increasing and the number of investments we made kept increasing. As we yearned to remain entrepreneurs, we also started building 1 or 2 new startups every year. While we scaled both our startup studio operations and our angel investing activities, it was still not a given that it required the creation of a venture fund. We do not lead rounds as we do not want to compete with traditional VCs. Instead we want them to see us as valuable thought partners and a source of differentiated deal flow. This puts a rather low maximum check size we can invest in any given round.
After back testing our model, it looked like we could deploy $100M per year without changing our strategy. Given that we were not successful enough to deploy anywhere near that amount of money, we considered raising external capital. Despite the performance we had to date with 62% realized IRR on our exited investments, we failed to raise capital from traditional institutional investors who were horrified by our investing approach. I must admit I hated the process of trying to fund raise for FJ Labs. It was slow, repetitive, and boring. It also made me realize I would hate the reporting and bureaucratic processes that would come along with having traditional external investors.
We considered dropping the idea of having external investors altogether when we were approached by Telenor, a Norwegian telecom operator with a large presence in South East Asia and 174 million subscribers. To my great chagrin, Telenor had funded Schibsted in its war with OLX which is ultimately what led me to sell OLX to Naspers. That said, OLX’s merger with Schibsted in Brazil and other markets was very profitable for Telenor and gave them direct ownership of several classified assets in South East Asia. Given Telenor’s digital and marketplace ambitions, they reached out to us to see if they could invest in us in order to have a looking glass into the future by having exposure to US tech trends to either defend against them or bring them to their markets.
It was a win-win partnership. They got visibility into marketplace trends while making attractive returns, and we got more investing firepower and a small fee base to start building a real team. FJ Labs was formally born in January 2016 with a $50M investment from Telenor complementing our personal capital and the small entrepreneur’s fund we run on Angelist.
As the relationship proved successful all around, we agreed to scale up the partnership and open it to other strategic investors and family offices. Our second institutional fund should close in the coming months with $175M of external capital.
Interestingly having external investors strengthened my relationship with Jose as I realized I would not have a fund without him. Auto-signing legal docs without reading them is fine when you are managing your own money but is not appropriate when you are the custodian of other people’s capital. He has worked hard to make sure we are both professional and reactive. Likewise, he enjoys the type of interpersonal relationships and socializing that I see as a burden.
This has allowed us to get FJ to where it is today. As of April 30th, 2020, we invested $284 million, of which $114 million was provided by Jose and I, in 571 startups. We had 193 exits with a 62% realized IRR. We started 13 companies and we are a team of 32.
We are still at the beginning of this journey and I cannot wait to see what comes next!