Factorial Capital: Investing in Tech Startups

Understanding Startup Technology for Smarter Investments

Matt Hartman believes that venture capitalists require a more profound grasp of the underlying technology driving current startups to make informed investment decisions.

A New Approach to Identifying Innovation

Having previously spent nine years as a partner at Betaworks, Hartman has since established Factorial Capital. This new firm employs a distinct strategy for pinpointing startups with the most groundbreaking technological advancements. His core principle is simple: “A solid understanding of software is essential when investing in software companies.”

The Limitations of Traditional VC Diligence

Hartman acknowledges that other venture capital firms don’t entirely disregard technology. However, he points out that most are structured to assess established consumer brands and businesses that have already demonstrated product-market fit.

Technical due diligence often occurs late in the deal-making process and frequently relies on consulting with the firm’s existing portfolio company CTOs.

Why Technical Expertise Matters, Especially in AI

In Hartman’s assessment, this conventional approach is inadequate, particularly within rapidly evolving sectors like artificial intelligence where technical differentiation is paramount.

“Startups developing technology seek funding from individuals who genuinely comprehend their work, yet the majority of venture firms today weren’t designed to assess technology before product-market fit is achieved,” he explains.

Leveraging a Network of Technical Founders

Recognizing that a single VC is unlikely to possess the necessary expertise to thoroughly evaluate a diverse range of startups, Factorial Capital’s model centers on a network of technical founders.

Each founder focuses on identifying opportunities within their own networks and specialized areas of knowledge.

Factorial’s Sourcing Partners

Clement Delangue, CEO of Hugging Face (a company Hartman supported during his time at Betaworks), served as Factorial’s initial sourcing partner.

The firm is now announcing additional partners, including:

• Alex Chung, Giphy co-founder
• Iqram Magdon-Ismail, Venmo co-founder
• Julien Chaumond and Thomas Wolf, Hugging Face co-founders
• Hilary Mason, Fast Forward Labs co-founder
• Matt Hackett, Beme co-founder

Identifying Novel Technical Teams

Hartman asserts that these founders are “uniquely positioned to recognize genuinely innovative technical teams and products before they reach product-market fit.”

Founder-Led Investment

Magdon-Ismail expressed his enthusiasm for supporting “exceptional founders like Substrate and Modal” through this collaboration.

He added, “Founders prefer collaborating with fellow founders, and Factorial facilitates this dynamic.”

A Growing Trend in Venture Capital

Hartman isn’t alone in believing that active founders can serve as more effective investors than traditional, full-time VCs.

TechCrunch recently highlighted Powerset, an investment initiative that provides a select group of founders with $1 million each to invest in startups.

Factorial’s Investment Structure

Factorial’s sourcing partners have the option to write checks independently and often invest their own capital alongside the firm.

When they present deals to Factorial, they can participate in larger investments (typically $500,000) and receive half of the carried interest generated by those deals.

Fund Size and Investment Targets

Hartman has not yet revealed the total size of his first fund, but he aims to make 30 startup investments. There are no fixed quotas for individual sourcing partners.

He notes that the Factorial model has already enabled him to secure early positions in promising AI startups, gaining an advantage over larger firms.

Factorial’s Current Portfolio

The Factorial portfolio currently includes Substrate, Modal, Factory AI, Pika, Patronus, Nomic, Flower, and Adaptive ML.