In this episode of the 20 Minute VC, host Harry Stebbings interviews Eric Paley, Managing Partner at Founder Collective, delving into his journey from CEO and co-founder of Brontes Technologies to angel investing and eventually co-founding the seed-stage venture fund. They discuss the firm's investment strategy, including their typical check size range of $200,000 to $2 million and their philosophy of not engaging in follow-on rounds to maintain founder alignment. Eric shares insights on the human aspect of VC, the importance of founder-friendly practices, and how his experiences as an entrepreneur influence his approach to venture capital. Key takeaways include the significance of building strong relationships with founders, the potential for high returns even with small initial investments, and the belief that a fund's success is not solely dependent on outliers but on a well-crafted portfolio strategy.
"Eric was the CEO and co-founder at Brontes Technology before its acquisition by 3M for $95 million. He then began angel investing and it was not long before Eric and David realized the potential for a founder first seed fund and founder collective was born."
This quote explains Eric Paley's journey from entrepreneur to angel investor and then to the creation of Founder Collective with David Frankel, emphasizing the transition from running a company to investing in startups.
"I was a founder of two different companies. I think growing up I was always quite interested in entrepreneurship. I didn't know exactly how to go about it. My first job out of undergraduate was in consulting and I didn't actually enjoy it very much."
This quote introduces Eric Paley's initial foray into entrepreneurship and his dissatisfaction with consulting, leading him to establish his own company.
"I think there are a lot of people quite critical of business school, but for me it was awesome. I learned a ton. I met extremely excellent people."
This quote highlights the positive impact business school had on Eric Paley, providing him with knowledge and connections that would later be instrumental in his career.
"And that company is called abstract edge and it still exists, still run by my brother and my cousin, and they've been at it for quite some time now and done great work with lots of neat clients."
This quote mentions the continued success of Abstract Edge, the web development company Paley co-founded, which has thrived under the management of his brother and cousin.
"So Bronze was acquired by three M, which is one of the largest companies in dentistry in 2006, and three M is the most innovative company in the space."
This quote describes the acquisition of Brontes Technologies by 3M, emphasizing the strategic fit between the two companies and the innovative nature of 3M within the dentistry sector.
And by the time 2008 2009 rolls around and we start talking about creating founder Collective, we actually had a 13 company portfolio that was doing extremely well.
This quote indicates the timeline and the successful track record that led to the creation of Founder Collective.
It wasn't just one deal or being very lucky. It was a number of companies performing very well, companies like Mediaradar and Opower and trial pay, and it was exciting to think about.
The quote highlights that their success was not due to a single fortunate investment but rather a consistent performance across multiple companies.
I think there's actually a pretty big returns benefit to investing at the seed stage.
This quote emphasizes the belief that seed-stage investments can yield significant returns.
And instead of investing at aggregate post money valuations of 8 million or 10 million or 15 million, over time, you're investing at aggregate post money valuations of 30 million, 50 million, 100 million.
Eric Paley explains the downside of overusing Parata rights, which can lead investors to contribute at higher valuations, potentially reducing returns.
But if the whole sort of ethos of we're also founder friendly is something that keeps VCs focusing on the importance of being founder friendly and understanding that what the founder is doing is so much harder than what the VC is doing, I think that's a pretty good thing overall.
This quote reflects Eric Paley's approval of the industry's shift towards a more founder-friendly approach, as it recognizes the challenges founders face.
We write checks at the seed stage between $200,000 and $2 million.
This quote specifies the range of investment amounts Founder Collective provides at the seed stage.
Even though our check that we started with was small, the current value of it would move the dial on any venture fund in the world.
This quote illustrates the potential for even a small initial investment to become highly valuable over time, as evidenced by their investment in Uber.
We are in many ways in an outliers business, and most venture funds are driven by outliers.
Eric Paley acknowledges that the nature of venture capital relies on exceptional successes, which are central to the industry's investment logic.
"We've sustained IRR that is beyond my own, meaningfully beyond my own expectations of what's possible." This quote reflects the speaker's surprise at the fund's performance, which has surpassed their own expectations for returns.
"But even if you remove our best outlier, the performance is really surprisingly good." The speaker emphasizes that the fund's performance is robust, even when excluding their most successful investment.
"But we do also lead investments and write bigger checks, which we've done in terrific companies like Betray Desk and SeatGeek and integral ad science and Pillpack and Bookbub." The speaker is highlighting their strategy of not just writing small checks but also leading investments with larger amounts in successful companies.
"David stated that you don't do follow on rounds, generally speaking, because he said it aligns you with your founders, and then you don't alter judgment calls down the line because you're both on the same side." The quote explains the rationale behind not engaging in follow-on rounds, which is to maintain alignment with the founders and avoid conflicts in decision-making.
"But if you really know, I won't do the math because I can't share all those numbers. But if you sit and you simulate that math, what you find is we capture a tremendous amount of that upside." The speaker suggests that their investment strategy still allows them to capture a large portion of a company's growth, even without participating in every funding round.
"So it's been a great experience. Right. I work with two of my best friends and we're having a lot of fun, and we're working with great founders, and it feels like it's working." The speaker reflects positively on the experience of working within the fund, highlighting the enjoyable and successful collaboration with colleagues and founders.
"And yet we take those losses every bit as hard, maybe even harder, than we enjoy the multiples of gains in terms of how it affects our day to day." This quote reveals the emotional impact of losses within the venture capital industry and the seriousness with which they are taken.
"There is a very human side of this business that is completely real." The speaker acknowledges the personal and human elements inherent in the venture capital industry, particularly when investing in early-stage companies.
"We value these relationships, we value the founders, even the ones who end up having to leave their companies." This quote emphasizes the importance of maintaining strong relationships with founders, regardless of the outcome of their ventures.
"It really is easy to be fooled by randomness and get convinced you're doing things really well that are just random distributions."
This quote highlights the central idea that success in entrepreneurship and venture capitalism can sometimes be a result of chance rather than pure skill, underlining the theme of understanding probability.
"I think very highly of first round and lear ventures and floodgate, and here in Boston, I think very highly of Nextview."
This quote identifies specific seed funds that are held in high regard, contributing to the theme of respected entities in the venture capital space.
"Kelsey had built a billion dollar company in five years in that industry, enabling mass customization, but on the output side, and we were on the input side and she really played a great mentoring role with me."
This quote underscores the significance of having a founder role model who has achieved success and is willing to provide mentorship, which is a key aspect of the theme of founder role models and mentoring.
"So I think we measure, and it's not just me. I think it's true of Dave and Micah, too. We measure ourselves based on the ways we're contributing to those companies and the relationships we build with those founders."
This quote explains the philosophy of measuring success in venture capital, which is not solely based on financial returns but also on the quality of relationships and support provided to founders, aligning with the theme of measuring success as a VC.
"Cuvet is trying to reinvent distribution in the wine industry, packaging and distribution using technology."
This quote reveals the rationale behind a recent investment decision, focusing on innovation in an established industry, which relates to the theme of recent investment decisions.