20 VC 088 David Frankel @ Founder Collective The Most Founder Friendly VC in Existence

Summary Notes


In this episode of the "20 Minutes VC," host Harry Stebings interviews David Frankel, Managing Partner at Founder Collective, a top-performing seed fund with investments in Uber and other notable companies. David shares his journey from founding Internet Solutions, Africa's largest ISP, to becoming a super angel investor and eventually co-founding Founder Collective with Eric Paley and Michael Rosenblum. The fund uniquely comprises entrepreneurs who have firsthand startup experience, aligning closely with founders' needs. David emphasizes the importance of the founding team, being sector-agnostic, and the potential in overlooked industries. He also discusses his investment approach, which includes both leading rounds and participating in ones led by others. Additionally, David touches on the influence of geography on startups and offers advice on networking, maintaining curiosity, and the value of long-term relationships.

Summary Notes

Introduction to Founder Collective and David Frankel

  • Host Harry Stebbings introduces the feature week with Founder Collective, a top-performing seed fund.
  • David Frankel, a managing partner at Founder Collective, is the guest.
  • David founded and was the CEO of Internet Solutions, a major ISP in Africa.
  • After selling Internet Solutions, David became a super angel investor.
  • Founder Collective is a seed stage venture fund with a team that has firsthand experience starting technology companies.

"This week I am so extremely proud and excited to be bringing you an incredible feature week with one of the world's top performing seed funds. It is, of course, Founder Collective, with investments in the likes of Uber, Chris Dixon's hunch about me makerbot and many, many more incredible companies."

"David was the founder and CEO of Internet Solutions, one of the largest ISP providers in Africa. And following his acquisition, David made his move into the investing game, becoming one of the very first super angels following exceptional success in this field."

The quotes highlight the significance of Founder Collective in the venture capital industry and David Frankel's entrepreneurial and investment background.

David Frankel's Route into Venture Capital

  • David Frankel's journey in venture capital began with founding Internet Solutions in Africa.
  • He describes his entry into the field as being at the right place at the right time.
  • Internet Solutions was self-funded and had paying clients, allowing for internal venture opportunities.
  • Post-acquisition, David went to Harvard Business School, where he met numerous entrepreneurs.
  • After graduating, he invested in many of his classmates' ventures, becoming a super angel investor.
  • David's investment strategy involved being the first or entire check for early-stage companies.

"Harry, I was classical story of being in the right place at the right time."

"But I guess that was how I kind of got into venture and post selling is and working out a service agreement and remaining on the board of Dimension data, which we listed in London."

"I found myself with capital amongst some truly wonderful, inspiring entrepreneurs. And I was lucky enough to back pretty much all of my classmates who started something out of school."

These quotes outline David's serendipitous entry into venture capital, his experience with Internet Solutions, and his approach to investing in startups founded by his Harvard Business School classmates.

Founding of Founder Collective

  • David Frankel, along with Eric Paley and Michael Rosenblum, founded Founder Collective.
  • The fund was created to institutionalize seed stage investing.
  • Founder Collective aims to combine the agility of super angels with the structure of an institutional fund.
  • The challenge was to maintain the independence and quick decision-making of super angels within an institutional framework.

"And then one thing led to another, and before I knew it, within about three years after leaving business school, I backed 27 companies where I was either their first check or their entire check."

"And that was the beginning of founder collective. And the challenge of founder collective was how do you institutionalize seed stage investing?"

The quotes convey the evolution of David's investment activities into the formation of Founder Collective and the fund's objective to institutionalize seed stage investing while retaining the agility of super angels.

Founder Collective's Investment Approach

  • Founder Collective is exclusively a seed stage fund.
  • The fund does not lead follow-on investments but may participate in Series A rounds with a lead investor.
  • The strategy is to maintain focus on seed stage investments without the pressure of lifecycle funding.

"We're totally seed stage, we're not a lifecycle fund."

"We did no follow ons whatsoever from our first fund. In our second fund, we will never lead a follow on. We may follow in the series a if there's a lead."

These quotes detail Founder Collective's investment strategy, emphasizing their commitment to seed stage funding and their approach to follow-on investments.

Alignment with Founders

  • The fund aims to be the most aligned with founders by aligning economic interests upfront.
  • Not being a net buyer in board meetings allows the fund to hear all aspects of the company's situation, not just the positive updates.
  • Early engagement with startups is key; the fund acts as a confidant and gets heavily involved if they see potential.
  • The belief is that the fund can make the most difference at the initial stages, where common startup challenges occur.

"What we set out to do was create the most aligned fund for founders."

This quote outlines the primary mission of the fund, which is to establish a deep alignment with the entrepreneurs they invest in.

"So you hear a lot of board meetings, but come up to the board meetings when the company is about to raise money and you only start to hear the good stuff because we're not viewed as the next funder. We hear everything."

This quote emphasizes the comprehensive understanding the fund has about their startups by not just focusing on potential funding rounds but being involved in all aspects of the company's growth and challenges.

"Our view is we can make the most difference up front."

This quote reflects the fund's strategy to provide the most value in the early stages of a startup, where they believe their impact is greatest.

Evolution as an Investor

  • Experience has led to a demystification of board experiences and a realization that all members are human with their own experiences.
  • Initially focused more on the individual entrepreneur, now also considers the business aspects, such as margins and market dynamics.
  • Recognizes the importance of a balanced entrepreneurial team with commercial, operational, and technical skills.
  • Emphasizes the need for self-awareness in investing, acknowledging that emotional states can influence decision-making.

"I think I used to invest and do an enormous amount of time in thinking about the individual."

This quote reflects the early investment approach focused heavily on the entrepreneur's capabilities and personality.

"I think that you need this unique combination of commercial, operational and technical."

This quote highlights the recognition of the importance of a well-rounded team with diverse skill sets in a startup.

"I think I'm spending more time on that now and also trying to not risk kind of analysis paralysis."

This quote indicates a shift towards a more balanced approach to evaluating both the entrepreneur and the business, while avoiding over-analysis that can lead to inaction.

Board Participation and Founder Relationships

  • Willing to step down from a board unless specifically asked to stay by the founder.
  • Takes pride in being asked to serve on the board in a non-investor capacity, as it shows trust from the founder.
  • Legal advice was sought to ensure no conflict of interest in serving in a common seat on the board.

"And we'll actually, at that point, unless we're asked to stay on, and we're really asked to stay on."

This quote signifies the fund's respect for the founder's decision-making and their readiness to relinquish board positions if they are no longer adding value.

"Where the founder asked me to take one of the common seats, so I don't have an investor seat."

This quote demonstrates a unique situation where trust and alignment with the founder led to a non-traditional board role, emphasizing the fund's founder-friendly approach.

Working with Chris Dixon

  • Chris Dixon is described as brilliant, a clear thinker, and technically knowledgeable.
  • As a partner at A16Z, Chris looks for startups that are significantly outperforming, not just making incremental changes.
  • Working with strong characters like Chris Dixon can be challenging but also rewarding.

"Firstly, Chris is brilliant. He's just such a clear thinker."

This quote conveys admiration for Chris Dixon's intellect and clarity of thought, which are valuable traits in a partner and investor.

"It's almost a waste of time to show Chris anything that is incremental."

This quote underscores Chris Dixon's investment philosophy, which is focused on finding companies that have the potential for substantial impact and growth.

Networking Advice

  • The question of how to create or maintain a strong network was raised but not answered in the provided transcript.

(Note: The transcript provided does not contain a response to the networking advice question, so no quotes or summaries can be provided on this theme.)

The Value of Long-Term Relationships in Entrepreneurship and Investing

  • The importance of being aware of one's peers from educational and professional environments.
  • The advantage of having a history with potential business partners or team members.
  • The reduction of partnership risk when there is a pre-existing long-term relationship.
  • The encouragement for entrepreneurs to collaborate with "superstars" in their networks.

"I'm a strong believer that you should be very peripherally aware of the people that you go to school with, or the people go to college with, or business school."

This quote highlights the belief in maintaining awareness of one's peers from educational institutions as potential future business partners or contributors to entrepreneurial ventures.

"When I look at a team and they've worked together in a previous job, or they've spent ten years together, my concerns around kind of partnership risk dissipate."

The speaker emphasizes that a history of collaboration among team members reduces the perceived risk associated with forming business partnerships.

"I think people that you've known for a long time and you think are superstars, if you're really entrepreneurial, you should try to do something with them."

The speaker encourages entrepreneurs to seek out and collaborate with highly talented individuals within their existing networks.

The Role of Curiosity and Social Interaction in Venture Capital

  • The necessity of being genuinely interested in people and their stories.
  • The balance between being extroverted for networking and introverted for thoughtful analysis.
  • The implication that successful venture capitalists often possess some level of extroversion.

"I'm a humanist. I love hanging out with people. I love hanging out with interesting people."

This quote reflects the speaker's enjoyment of social interaction and interest in others, which is crucial for building a strong network.

"You have to be an extrovert, too. It's a very nuanced business."

The speaker suggests that venture capital requires a blend of extroversion for networking and introversion for thoughtful decision-making.

Investment Strategies and Recognizing Potential

  • The distinction between leading investment rounds and participating in fast-forming rounds with smaller contributions.
  • The recognition of credible ideas, founders, and investors as a basis for investment decisions.
  • The unpredictability of a startup's success and the importance of founder expertise.

"We have a bifurcated strategy where there are opportunities that are very much for us to lead, and we do lead, and then there are opportunities that we see where the rounds are coming together fast."

The speaker describes their investment approach, which includes both leading investment rounds and participating in quickly assembled rounds with limited investment opportunities.

"It was a credible idea, totally credible founders, but not in a million years could we have envisaged where it would go."

This quote acknowledges the inherent unpredictability in startup success and the surprise at the extent of Uber's growth, despite the credibility of the idea and founders.

"I think something extraordinarily special about the founder, feeling that the founder is all over their subject."

The speaker stresses the importance of a founder's deep knowledge and thoughtful approach to potential risks in their field as a positive indicator for investment.

The Naive Founder Debate

  • The acknowledgment of the naive founder's potential to succeed despite a lack of industry knowledge.
  • The recognition that naivety can lead to high volatility in startup projects, particularly those from non-commercial backgrounds.
  • The contrast between projects from engineering students, which may have high volatility, and those from business school graduates, which tend to be more commercial.

"I was personally, outrageously naive founder. If I had really looked into the regulations... I would never have started the ISP."

The speaker shares personal experience as a naive founder, suggesting that a lack of industry knowledge did not prevent them from starting a successful business.

"The probability of one in a thousand of those ideas will be Facebook, but the volatility will be extraordinary."

This quote conveys that while naivety can lead to groundbreaking ideas, like Facebook, it is often accompanied by high levels of uncertainty and risk.

Investment Strategies and Screening Criteria

  • David Frankel and his team focus on balancing the number of investments with potential success rates.
  • They aim for a mix of more opportunities and a reasonable success rate, avoiding only high-risk or only safe bets.

"So you'll get more shots on goal, more of them will work out, but they won't be as wildly successful. And what I try to do, what we try to do is kind of screen for both."

This quote indicates that David Frankel's investment strategy is not to put all eggs in one basket but to have a diversified portfolio that includes both high-risk, high-reward opportunities and safer bets. This approach is intended to maximize the overall success rate while still allowing for significant wins.

Influential Figures and Reading Habits

  • David Frankel looks up to his partner, Eric Paley, for investment inspiration.
  • He regularly reads Dan Primack's newsletter for industry insights.
  • Twitter is a significant source of news for him, and he uses Tweetdeck to curate lists for efficient information gathering.

"I've got to think on the spot, but I would say my partner, Eric Paley, he's just such an extraordinarily thoughtful guy."

David Frankel admires his partner Eric Paley for his thoughtfulness in investing, suggesting that he values deep analysis and careful consideration in investment decisions.

"I tend to read Dan Premac every morning."

Reading Dan Primack's newsletter is part of David Frankel's routine, indicating the value he places on staying informed about industry trends and insights through reputable sources.

"I'm on Twitter a lot. I get most of my news from Twitter now."

David Frankel relies on Twitter for news, showing the platform's importance in his information-gathering process, and suggesting that social media can be a valuable tool for investors to stay updated.

Sector Interest and Investment Focus

  • David Frankel is driven by founders rather than specific sectors.
  • He is intrigued by founders tackling unconventional problems in traditional industries.
  • The consumerization of the enterprise is a theme he finds increasingly interesting.

"I'm much more driven by founders and I tend to be antisector, if anything."

This quote emphasizes David Frankel's approach to investing, which prioritizes the founders' vision and capabilities over the industry they operate in.

"I like founders doing strange things in overlooked areas and often those are dirty, greasy industrial areas where a few very smart technologists are rethinking..."

David Frankel is attracted to innovation in underappreciated sectors, suggesting a strategy of looking for disruptive potential where it's least expected.

East Coast vs. West Coast Investing

  • The West Coast is perceived as the center of the universe for investing.
  • Boston outputs remarkable talent, but local opportunities need to be emphasized.
  • New York attracts young, single graduates and may outperform Boston in some areas.
  • Sector strengths vary by location, with Boston being strong in tech pharma.

"The west coast kind of always feels like the center of the universe."

David Frankel acknowledges the West Coast's dominance in the investment landscape but also sees potential in other regions.

"Boston, the output of talent is just extraordinary."

The quote highlights Boston's strength in producing talent, which is crucial for the growth of local companies and the investment scene.

Personal Interests and Lifestyle

  • David Frankel enjoys life hacking through exercise and diet.
  • He is inspired by literature on healthy living and diplomacy.
  • He has completed five marathons, indicating a commitment to personal fitness goals.

"Kind of one of my favorites was Andrew Wiles eating well for healthy living."

David Frankel's interest in a book about healthy living reflects his personal commitment to maintaining a healthy lifestyle.

"I enjoyed the book about Mandela called playing the enemy just in terms of diplomacy, and turning enemies into collaborators and friends."

This quote reveals David Frankel's admiration for diplomatic skills and the transformation of relationships, which could also be relevant to his approach in business and investment.

Recent Investments and Decisions

  • David Frankel's recent favorite investment is Pullpack, a company disrupting the pharmacy industry.
  • He values the founders' deep understanding of the industry and their commercial acumen.
  • The humility of the Pullpack founding team was a factor in his investment decision.

"So probably one of my favorite portfolio companies is a company called Pullpack, and I just think it has an extraordinarily good opportunity to disrupt pharmacy as we know it."

This quote shows David Frankel's enthusiasm for Pullpack's potential to innovate in the pharmacy sector, highlighting the importance he places on a company's disruptive potential in his investment decisions.

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