Chris Farmer, a venture capitalist, doesn’t mind being labeled a cheap founder by employees. Farmer’s 10-year-old, seed-stage venture firm SignalFire lost frustrated employees who couldn’t compete for deals when the market was frothy, but holding the line on price appears poised to pay off.
For one, SignalFire raised $900 million across four new funds from limited partners, doubling its previous fundraising. Farmer, who says SignalFire began “pumping the brakes” in 2018 because it “saw the valuations were decoupling relative to company traction,” is being vindicated as valuations continue to fall and founder expectations reset.
What did Farmer see others missed? Data, he says. Last week, we spoke with Farmer about SignalFire’s data, which has been a source of pride since its founding, and why he thinks it gives the firm an edge even though many other venture firms have become data-driven over the last decade. Clearer questions and answers are below.
You raised a lot of money across four funds but aren’t disclosing how much each fund manages. Why?
We don’t break it out because it doesn’t matter, but broadly, we have hundreds of millions for seed-stage companies and several hundred million to follow on those companies through a breakout vehicle, most of which are alumni and some net new. We’ve also been doing XIR [experts-in-residence], pairing operators who have built multibillion dollar businesses with an entrepreneur with whom they have good chemistry and whose company typically has $5 million to $10 million in revenue. They join the board and get involved one to three days a week to help scale the business in an executive chair mode.
Advisor shares. They write a check alongside us. They get fund upside.
SignalFire’s “competitive data nerds” analyze 100 major data sets to figure out what’s going on in the world, but other companies have copied this approach, so what’s your biggest differentiator today?
Our competitors may have retreated. I wasn’t expecting us to be so far ahead of them. Many funds use Bloomberg terminals to analyze data. Unlike ours. The machine learns from every deal we consider or reject. Our closed-loop ML system is unique to venture capital.
How do you know your creation works?
Because of our data, we’re often first. After losing the seed round to Accel, we won Frame.io’s Series A by over-delivering. Adobe bought it for $1.27 billion in August 2021. We led Flock Freight’s seed round in November 2015 and every subsequent round through the Series D in October 2021.
We bought Grammarly shares in 2017 and 2019 after seeing credit card data customer traction. Profitable and raising $200 million in November 2021, its recruiting team uses our talent tools to find candidates.
Data prompted you to slow down in 2018.
We use data to manage risk, so we started pumping the brakes in 2018 when we saw valuations decoupling from company traction. From 2018 to 2021, our firm braked. We reduced our company entry cost during that time. Pre-seeding increased execution and fundraising risk. We didn’t overpay like other VCs. That helped us scale into this capital market. Because LPs realize we’re attacking when everyone else is retreating.
You believe valuations are falling.
Yeah, a lot of the major firms are licking their wounds because they overextended and put too much capital in at too high a valuation, which we avoided and worked hard to avoid. People left because they thought we were too cheap. We swam upstream. Our new capital base and systems allow us to aggressively pursue market opportunities and support founders.
Who left because you were cheap?
People were frustrated. They thought, ‘We can’t compete with XYZ Big Name Firm’s term sheets.’ They wanted to win deals, but you have to win so you can be good fiduciaries and return LP capital. If you have a very high entry point, many of these companies will struggle to grow into their valuations.
It should worsen before improving. Do you consider investing in overvalued companies despite your focus on pre-seed and seed-stage companies?
We’re not saving crazy-valuated companies. Next generation is our focus.