Managing a venture fund is hugely different from running a startup. Eric Paley told me that last year at this time his primary responsibility was at dental imaging firm Brontes Technologies, the MIT spin-off that he co-founded and where he had served as general manager after its sale to technology giant 3M (NYSE:[[ticker:MMM]]) in 2006. Nowadays, as managing partner and co-founder of new seed fund Founder Collective, his much broader focus includes meetings with a whopping 30 entrepreneurs a week, he said.
Early this month Paley’s firm had an official launch after closing a first fund of about $40 million to invest in seed-stage startups, even though reports about the firm surfaced in June after its initial SEC filings became public knowledge. The firm is made up of a group of successful entrepreneurs who have been backing each other’s startups for ages before coming together as Founder Collective. David Frankel, the firm’s other managing partner along with Paley, was a seed investor in Brontes as well as partner Chris Dixon’s startups SiteAdvisor and Hunch, for example. Their experience as entrepreneurs who have raised venture capital and reached successful exits, along with their compelling investment strategy, could help them succeed in the struggling venture industry.
Founder Collective, which has offices in Cambridge, MA, and New York (where Frankel is based), is taking a much different tack than many funds have taken over the past decade. Paley says that the vast majority of funds closed over the past 10 years have been more than $100 million, while most of the funds were less than that in the previous decade. But the big knock on the venture industry is that it’s done a poor job of returning capital and returns commensurate with their risk profile to their limited partner investors. And large funds often aim to invest big amounts of capital ($10 million or more) in their portfolio companies, even when companies don’t really need that much money, Paley says. Founder Collective’s first fund is a lean $40 million or so, and that money is intended to be invested in capital-efficient businesses that aren’t taking on more investment capital than is needed to achieve their goals. Indeed, we’re seeing this movement toward smallish investments in lean teams, at least in software/tech, all around the country.
Another big downside of a startup raising more venture capital than it requires to execute its plan is the dilution of ownership for the entrepreneurs who founded the company. “We really created the fund out of frustration that there wasn’t a really good answer for the capital-efficient business in the early days to achieve major milestones and increase the value of the company before giving so much of it away to investors,” Paley said.
There are no banker-turned-venture capitalists at Paley’s shop. Many of the partners maintain operational roles at startups they’ve co-founded. Dixon, a founder of Web security firm SiteAdvisor (acquired by McAfee), is full-time CEO of his firm Hunch that provides an online decision-making tool. Also, Micah Rosenbloom, who co-founded Brontes with Paley, is now the general manager of the Brontes business for 3M. (Here’s a full list of the the Founder team on the firm’s website.)
The investment philosophy at Founder is to back startups led by committed entrepreneurs. And though Paley said the firm has no stated limits on sectors or geographic areas in which it invests, the firm will most likely invest, as it has done so far, in
