Venture capitalist Matt Hartman is shaking up the startup investment landscape with his new firm, Factorial Capital, which prioritizes technical expertise in identifying promising tech innovations. Hartman, who spent nine years as a partner at Betaworks, believes that venture capitalists need a deeper understanding of the technology behind startups to make smart bets.

Hartman's approach is a departure from the traditional venture capital model, where technical diligence often takes a backseat to evaluating consumer brands and product-market fit. He argues that this approach falls short, especially in sectors like AI, 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," Hartman said.

To address this gap, Factorial Capital relies on a network of technical founders, each focusing on sourcing deals from their own networks and areas of expertise. This model allows the firm to tap into the expertise of founders who are "best positioned to identify genuinely novel technical teams and products pre-product market fit." The firm's sourcing partners include notable founders such as Clement Delague, CEO of AI startup Hugging Face, Alex Chung, co-founder of Giphy, and Iqram Magdon-Ismail, co-founder of Venmo.

These partners can write checks individually and often invest their own money alongside the firm. When they bring deals to Factorial, they can make bigger bets, with the firm typically investing $500,000, and then receive half the carried interest from those deals. This model enables founders to work with founders, fostering a collaborative approach to startup investing.

Hartman's approach is not unique, as other investors are also betting on active founders making 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. However, Factorial Capital's model is distinct in its focus on technical expertise and its network of sourcing partners.

Hartman is targeting 30 startup investments with his first fund, the size of which has not been disclosed. The firm's portfolio already includes Substrate, Modal, Factory AI, Pika, Modal, Patronus, Nomic, Flower, and Adaptive ML, demonstrating its ability to get ahead of larger firms in investing early in promising AI startups.

The implications of Factorial Capital's approach are significant, as it could lead to more informed investment decisions and better outcomes for startups. By prioritizing technical expertise, the firm is well-positioned to identify and support innovative startups that might have been overlooked by traditional venture capital firms. As the startup landscape continues to evolve, Factorial Capital's model could become a new standard for venture capital investing.