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Seed Capital From Angel Investors: Eric Paley, Managing Partner, Founder Collective (Part 1)

Posted on Saturday, Aug 21st 2010

By guest author Irina Patterson

This is the eighteenth interview in our series on financing for entrepreneurs. I am talking to Eric Paley, managing partner of Founders Collective, a $50 million fund dedicated to investing in seed-stage deals. The fund has offices in New York City and Cambridge, Massachusetts.

Irina: Hi, Eric. Let’s start with your background.

Eric: I am a two-time entrepreneur. My most recent company was founded when I was in business school and was called Brontes Technologies. It developed 3-D intra-oral imaging technology for use in dentistry.

I founded it with a business school classmate, and a research scientist and a faculty in mechanical engineering at MIT. We spun this technology out of MIT and built an interesting product that was initially funded by David Frankel, who also was our classmate. Now he is our partner at Founders Collective.

In many ways, David was the catalyst for the fund. He was also in the first round of SiteAdvisor, which was Chris Dixon’s most recent company. Chris was another classmate of ours. So, you see, some of the makings of the fund are in David’s super angel investing in our own companies and his sizable, meaningful commitments that were a part of the creation of those companies.

Brontes was a very interesting product that we believed had the opportunity to truly change the value chain of the dental industry from cottage production to mass-customized production. We sold it to 3M in 2006. We had five bidders for the company. Pretty much everyone in that industry who was a viable buyer participated in the process, and in the end 3M was our first choice and we became a 3M company.

I stuck around for two and a half years at 3M because I took a lot of personal pride in the business and I wanted to see it succeed. Just about everyone stuck around, including my cofounder, Micah Rosenbloom, who became general manager when I left and is also my partner at Founder Collective.

We were at that time actively investing as angels with David Frankel and Chris Dixon. Together, the four of us made eleven investments that at the time did very well, including companies such as OPOWER in Washington, DC, TrialPay in California, MagazineRadar in New York City and Link Medicine in Boston.

We became very proud of the track record that we developed. As we analyzed it, we felt that we did well not because we were smarter than anyone else. We knew that there were some really smart people in the venture business. We thought it was because there were some unusual opportunities in the venture industry that have opened up for folks who were making investments of our size and who had good experience as founders. As founders ourselves, we were very attractive to other founders.

We thought that there was a really good opportunity for a microcap VC or a seed-stage venture fund thesis. Largely, this thesis is that at earlier stages companies can create a lot of value on generally pretty small dollars.

Fund sizes for traditional mainstream venture funds are not suited structurally to do this type of investment in terms of being well aligned with an entrepreneur and investing an amount of money that is not totally irrelevant to a fund.

The mainstream fund sizes force an outcome of putting in more money than the entrepreneur needs, and I think it is generally bad for an entrepreneur. It doesn’t generate the right discipline, and then of course the founders are entirely diluted. Alternatively, the large fund puts in an irrelevant amount of money for the fund really to invest for the next round after this round. This type of buying an option can have negative implications for the entrepreneur as well.

So, we felt that there is was opportunity for the small funds that were focused on seed-round investing. There are actually a number of small funds out there. But we felt that we were well positioned to be working with founders as founders and be seed-stage investors who were investing the right amount of capital for that stage and were dedicated to it. We were not trying to buy options for future investments.

And that was the genesis of Founder Collective. This idea of trying to make the most aligned fund for founders is what we call peer-to-peer capital.

This segment is part 1 in the series : Seed Capital From Angel Investors: Eric Paley, Managing Partner, Founder Collective
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