Nov 18, 2015 · 32m · 20vc
20 VC 089: Eric Paley @ Founder Collective on Outliers, Inspirational Founders and Pro Rata
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of The 20 Minute VC, host Harry Stebbings interviews Eric Paley, Managing Partner at Founder Collective, about his transition from founder to angel investor, the mechanics of seed-stage venture returns, and why Founder Collective intentionally avoids follow-on pro rata investments to remain aligned with entrepreneurs.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Harry holds 15.2% of the talking time here. How this is scored →
Harry as informed peer 2.4 Guest teaching 3.9 Guest disagreement 1.7 Harry pushing back 1.4
speaking balance: gold is Harry, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 15:25 Protesting the exclusion of outliers
Eric actively pushes back on Harry and David Hornick's question premise by protesting the idea that venture performance can be evaluated after stripping out top outliers.
Hardest push from Harry ▶ 15:50 Defending outlier importanceHarry refuses to let Eric dismiss the question framing, countering that outliers represent the core essence of the venture capital asset class.
Biggest teaching moment ▶ 11:00 Deconstructing pro-rata rightsEric systematically educates the host on how pro-rata rights create asymmetrical options that penalize founders and dilute seed fund returns.
Harry holds his own ▶ 14:50 Challenging small-check mathHarry uses industry knowledge and peer quotes to challenge whether sub-$500k seed checks can generate meaningful fund-level returns without mega-hits.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Harry as informed peer | Guest teaching | Guest disagreement | Harry pushing back | Why |
|---|---|---|---|---|---|---|
| Eric Paley's Career Origins and Founding Brontes Technologies | 1 | 3 | 0 | 0 | Harry opens with a standard personal background question about Eric's career path. Eric shares his journey from Abstract Edge to business school and founding Brontes Technologies in the dental CAD/CAM space without host challenge. | |
| From Brontes Acquisition to Launching Founder Collective | 1 | 3 | 0 | 0 | Harry prompts Eric to explain the transition from 3M to launching Founder Collective. Eric explains how early angel co-investing with David Frankel revealed 4x performance over top quartile VCs, leading to the firm's founding. | |
| Rethinking Pro Rata Rights and Seed-Stage Discipline | 2 | 6 | 4 | 0 | When asked about thesis performance, Eric reframes the conversation around pro-rata rights. He delivers an insightful breakdown showing why pro-rata rights act as a costly option for founders and dollar-average up cost bases for seed funds. | |
| Evaluating the 'Founder Friendly' VC Label | 5 | 5 | 3 | 5 | Harry presses Eric using David Hornick's question about whether small check sizes move the needle without outliers like Uber. Eric protests removing outliers from venture analysis, and Harry pushes back to defend the premise that venture is fundamentally an outliers business. | |
| Strategy Behind Avoiding Follow-On Capital Rounds | 4 | 5 | 3 | 3 | Harry asks if Founder Collective misses out financially by avoiding follow-on rounds in breakout companies like Uber. Eric explains the math behind capturing upside from early entry versus the danger of FOMO and dollar-averaging up. | |
| The Emotional Reality and Human Element of Venture Capital | 3 | 3 | 2 | 2 | Harry asks an off-schedule question about whether Eric looks back with pride at his portfolio, prompting Eric to emphasize humility and daily struggle. Harry then asks about navigating personal founder boundaries, which Eric addresses through human partnership. | |
| Quickfire Round: Books, Role Models, and Recent Deals | 1 | 2 | 0 | 0 | Harry runs through quickfire prompts on favorite books, respected seed funds, role models, and recent investments. Eric shares insights on probability from 'Fooled by Randomness' and details his investment in Cuvée in a friendly format. |
Statements from this episode (14)
Eric Paley says tech founders and investors are currently overconfident
“I think in really good times, you feel extremely, you know, probably People feel a little overconfident. Right now, it's probably one of those times”
Eric Paley calls dentistry the world's largest remaining cottage industry
“What later we learned or came to believe was the largest remaining cottage industry in the world, where every unit of production was a completely unique unit of production.”
David Frankel and Eric Paley's angel portfolio quadrupled top-quartile VC returns
“We saw that that body of that portfolio, that body of work was performing way better. I mean, four times as well as these top quartile PCs”
Founder Collective avoids pro rata rights due to founder misalignment
“We don't do a lot of Parada for a bunch of reasons, including we don't think In most cases, in many cases, Parada's aligned to the founder, because the problem with Parada is you're always a net buyer of the founder's company, and they're always a net seller.”
Exercising pro rata rights repeatedly dilutes seed fund returns
“The other thing you're doing when you're exercising parada over and over again is Is your dollar averaging down your returns, or otherwise you could say your dollar averaging up your cost basis?”
Eric Paley says most peer seed funds allocate capital like Series B
“A lot of seed funds today, a lot of our peer group, a lot of whom I respect very much they really look like series B funds in terms of where their average dollar goes in. They may be starting very early, but their average dollar is weighted towards series B.”
Founder Collective writes $200K to $2M seed checks depending on lead status
“We write checks at the seed stage between sorry, between 200,000 dollars and two million dollars. So it depends if we're leading or participating. We don't have a Is there an opportunity to lead, and who's the most qualified fund for this particular opportunit…”
Founder Collective's small Uber seed check would move the dial for anyone
“Yeah, so, ok, so we are, you know, as investors in Uber, and we didn't write a very big check, I think that current value alone of that small check would be very attractive to any venture fund of any size, even though our check that we started with was small, …”
Eric Paley claims Founder Collective is among the top funds globally
“I think our fund is performing you know, people like to say top quartile, top decibel I think we're, I mean, I think our fund's truly one of the very, you know, Count on your hands the number of funds performing as well right now. So I don't know if we're goin…”
Following on in every Uber round wouldn't double Founder Collective's returns
“If we had invested in every single round we still wouldn't, I don't think, come close to doubling what our current value is.”
Founder Collective has three unicorns in its first fund
“We have three, what people like to call unicorns in our first fund right now, and that's great.”
Breakout portfolio companies rarely need VC help, says Eric Paley
“Struggling through how hard it is to build companies in 90% of our portfolio. And then there's the 10% that just does amazingly well, and it's really fun to help those companies, and we do get involved, and we do contribute to those, too, but they don't really…”
Founder Collective's first fund has fully returned invested capital to LPs
“We've, you know, given back all the money our investors have given us, and then some in our first fund”
Kelsey Wirth built Invisalign into a billion-dollar company in five years
“I was very lucky to have Kelsey Wirth on my board who was the founder of Invisalign, and we had gone after this industry that I never imagined we'd go after that was certainly very quirky to the venture community, and Kelsey had built a billion dollar company …”