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To make smart bets on the current wave of startups, Matt Hartman thinks venture capitalists will need a deeper understanding of the tech those startups are building.
Hartman (pictured above) spent nine years as a partner Betaworks before starting a new firm, Factorial Capital, where he’s developed a different approach to identifying the startups with the most promising tech innovations. His mantra: “To invest in software, you need to know how software works.”
It’s not that other VCs ignore technology. But Hartman said most firms are built to evaluate consumer brands and other businesses that have already achieved product-market fit; technical diligence usually comes at the very end of the dealmaking process, and is often limited to consulting CTOs at the firm’s existing portfolio companies.
This approach falls short, in Hartman’s view, especially when it comes to AI and other sectors where technical differentiation is key.
“Technology startups want capital from people who understand what they’re building, and most venture firms today were not actually set up to understand technology pre-product market fit,” he said.
Of course, it’s unlikely that a lone VC will have the technical expertise necessary to seriously evaluate a wide variety of startups, so Factorial’s model relies on a network of technical founders, each one focusing on sourcing their own deals from their own networks and areas of expertise.
Clement Delague, CEO of AI startup Hugging Face (which Hartman backed while at Betaworks), was Factorial’s first sourcing partner. Now the firm is announcing some of its other partners: Giphy co-founder Alex Chung, Venmo co-founder Iqram Magdon-Ismail, Delague’s Hugging Face co-founders Julien Chaumond and Thomas Wolf, Fast Forward Labs co-founder Hilary Mason, and Beme founder Matt Hackett.
Those founders, Hartman said, are “best positioned to identify genuinely novel technical teams and products pre-product market fit.”
Magdon-Ismail added that he’s “excited to back incredible founders like Substrate [and] Modal through this partnership.”
“Founders love working with founders, and Factorial enables that,” he said.
Hartman isn’t the only investor betting that active founders will make better investors than full-time VCs. TechCrunch recently wrote about Powerset, an investment program that provides a small group of founders with $1 million each to invest in startups.
In the case of Factorial’s sourcing partners, Hartman said they could write checks individually, and they do often invest their own money alongside the firm. But when they bring deals to Factorial, they can make bigger bets (the firm typically invests $500,000) and then receive half the carried interest from those deals.
Hartman is not yet disclosing the size of his first fund, but he’s targeting 30 startup investments. He added that the Factorial model has already allowed him to get ahead of much larger firms by investing early in promising AI startups.
The Factorial portfolio includes the aforementioned Substrate and Modal, as well as Factory AI, Pika, Modal, Patronus, Nomic, Flower, and Adaptive ML.
Anthony Ha is TechCrunch’s weekend editor. Previously, he worked as a tech reporter at Adweek, a senior editor at VentureBeat, a local government reporter at the Hollister Free Lance, and vice president of content at a VC firm. He lives in New York City.
