FJ Labs’ investment approach stems from its roots. FJ Labs is the extension of Jose’s and my angel investing activities. We scaled our activities and processes, but we did not change the strategy.
Most venture capital funds have very well-defined portfolio construction. They invest the funds they raised over a specific period, in a specific type of company, in a specific number of companies, investing a specific investment amount, at a specific stage, in a specific geography. These funds lead rounds and the partners take board seats. They reserve a certain amount of capital for follow-ons and typically do follow-on. Fund rules are such that subsequent funds cannot invest in the companies from the prior fund. The fund does extensive due diligence and invests in less than 7 deals per year.
A typical $175 million dollar VC fund may look like this:
- US only
- Series A focus
- B2B SAAS companies only
- Invests $5-7M Series A lead checks
- Targeting investing in 20 companies over a 3-year period
- 40% of the capital reserved for follow-ons
- Follow-on in most of the portfolio companies
- Partners take board seats
- Investments take 2-4 months from first meeting
FJ Labs does not operate this way. As we did when we were angels, we evaluate all the companies in our pipeline, and we invest in those we like. We decide whether we invest or not based on two 60-minute calls over the course of a week or two. We do not lead, and we do not take board seats. In other words, you could say we invest at any stage, in any geography, in any industry with extremely limited due diligence. Those are the very words that scared away institutional investors and made us think we would never raise a fund.
Given this “strategy,” you might expect that our portfolio composition would vary dramatically over time. In fact, it has been very consistent over the years.