It’s hard to figure out what exactly to call Redstar Ventures. They’re a bit like a venture firm, except with a way cooler office and a very different model. They’re a bit like an incubator, with multiple companies “hatching” out of their space. And, by the looks of it, they’re a bit like a nightclub, with a bar in the office and a music venue and studio downstairs. Everything about Redstar screams different.
Of course, that’s by design.
Last week I met Redstar’s founding team of Joe Chung, Matt Beecher and Jeet Singh (Skyped in from his home in Paris) at their office in Kendall Square. Red drapes hang behind the glass wall at the entrance, obscuring the office from outside. Inside, a long table runs through the main room, seating the Redstar team. Separate tables by the windows house the companies Redstar is founding, and a wooden bar accents what you might otherwise call a kitchen on the other side of the large, open space.
Chung explains that the team designed the office to replicate the spaces in which they felt they typically had the best conversations: bars and lounges.
But the chic space isn’t what makes Redstar stand out, at least in my mind. I’ve come to hear about a VC firm that founds companies, rather than just investing in them, similar to an article I wrote recently about Flagship.
The Problem With Angels
The story of Redstar begins with a company called Art Technology Group (ATG), an e-commerce software company co-founded by Chung and Singh, and bought by Oracle in 2010 for $1 billion. Like many successful founders, the two became interested in angel investing, working with Beecher, who had co-founded the investment management firm SCS Financial. But the more they looked into angel investing, the more convinced they collectively became that, in Singh’s words, “this is a really bad business.”
Angels, it seemed to them, were mostly in it for non-financial reasons, either to give back or to feel like they were still connected to startups. Meanwhile, the VC business had its own apparent shortcomings. Among them, the three believed entrepreneurs were being encouraged to take needlessly high levels of risk, sometimes founding companies hopeless from the get-go, all to satisfy the needs of the venture capital business. The lean mentality of “just go try it” seemed optimized for investors rather than for entrepreneurs.
Over a year and a half, the three honed these ideas into a thesis for a new kind of firm that would seek to minimize risk for entrepreneurs by exploring lucrative market opportunities, and then co-founding ventures in those areas, alongside seasoned entrepreneurs. As Singh put it, “Why don’t we set up an environment that is low risk for the entrepreneur,” fitted to a space where things are generally working for rather than against you.
Once Redstar identifies an opportunity, it seeks out an experienced entrepreneur to join as co-founder alongside the firm itself, makes a seed investment, and incubates the company in its space.
Redstar’s founding and investment model revolves around three themes: the aging population, underemployment and the future of media. After many conversations and lots of research, the team identified those as areas where structural trends provided long term opportunity, and where they felt they could succeed. Hardware, for instance, was considered but dismissed as too far outside of the team’s core expertise. Consumer finance and healthcare both arose as adjacent to many of the opportunities the team is looking at, but in the end didn’t make the final three.
As described on the firm’s website, the themes sound a whole lot like thesis-driven VC, so I pushed the Redstar founders on why they insisted on their approach of founding companies themselves. They gave two reasons. First, they said, many thesis-driven VC’s end up coming to believe in a specific idea, and then wasting time searching for a fund-able team already working on that idea. They’d rather just put the idea into action. Second, they cited aggregiously high seed valuations; by founding and thereby splitting initial equity with the co-founder, they end up in the cap table from the start.
Redstar’s first investment actually falls outside of its three themes, which crystallized more recently. The core interest that led to its founding was the need for a low friction way for shoppers to give and solicit recommendations. They considered a Groupon model for big ticket items, a gamified approach to online shopping and what became LoopIt, an app for sharing recommendations with Facebook friends.
Though outside of the firm’s themes, the LoopIt founding demonstrates how Redstar approaches its hatching process. The team explored the space, formulated an idea, and in doing so tapped its network for expertise. They connected with former Oxygen Media CEO Geraldine Laybourne who serves as LoopIt’s founding mentor, and with Andrew Lau, a former VP at Endeca, who joined as CEO. Avalon Ventures has since become the company’s first outside investor.
I was curious about Redstar’s ability to attract entrepreneurs to join an idea not fully theirs, but the founders believe that their approach coincides with a growing professionalization of entrepreneurship. “Today’s entrepreneur is almost like a journeyman,” Singh said. Their interest is about more than a single idea, and if Redstar can partially de-risk a venture “the smart ones are perfectly happy with that.”
Most recently, Redstar added Gina Ashe, formerly CEO of Krush, to co-found an as-yet-unnamed company.
‘We Can Hit Doubles All Day’
The result of this level of involvement in the founding of their portfolio will be, the team hopes, a dramatically higher hit rate. “We can hit doubles all day,” Beecher said, explaining the team’s theory that it doesn’t need billion dollar exits if the success rate is high enough. As Chung put it, “We’re the opposite of 500 Startups. We’re 15 startups.”
For now, Redstar is self-funded, though it plans to raise outside capital at some point in the future. The firm’s staff is now 15, split between tech/design and ops – both of which are there to assist portfolio companies at founding – and “venture ops,” which works with the founders to identify new opportunities.
The music venue and studio I alluded to sits below the Redstar Ventures office, and is actually part of a separate media company, also under the Redstar brand. Singh is the front man in a band and just released an album, and Redstar uses the space to host get-together’s ranging from concerts to panels. It will no doubt come in handy as the group explores its “future of media” theme.
Though Redstar’s founders are encouraged by the early feedback they’ve gotten, particularly from entrepreneurs, it will be years before their model can prove itself. As Beecher admitted, “There’s no playbook for this business we’re running.”