The Ledger
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Frankel: Backing successful second-time founders hasn't worked out due to hubris
“I would say generally founders who've had enormous, enormous success and exits come to the next opportunity with some degree of hubris. I speak about this personally. I sold my first business And I thought I could conquer anything. And they look at any vertica…”
Paley: High seed valuations lower a startup's chances of ultimate success
“So I just think there's another problem outside of, it's a different form of risk, which is the likelihood of success, in my opinion, goes way down for those companies, which is super counterintuitive because you're like, well, but they have more money at a hi…”
Paley: VC obsession with ownership targets hurts founder alignment and returns
“We do not focus on ownership. We actually think that's a very problematic mindset. There's a whole bunch of downstream issues, including, first of all, our missions about alignment with the founder, and the whole ownership mentality. You can twist yourself in …”
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.”
Frankel: Moderately Successful Second-Time Founders Outperform Prior Massive Winners
“And I think overall we've done a little better on second time founders who didn't do that great up front. They didn't, they did okay, right? It's life changing. Like the first million dollars is so life changing. But they're really hungry. They've learned some…”
Frankel: Standard 10-Year Venture Capital Funds Now Take 18 Years to Mature
“You know, these ten-year funds are taking 18 years.”
Frankel: Seed VCs Should Sell 20% of Winners Early to Generate DPI
“Even in your top names, sometimes taking 20% off the table, if you can return 25% of the fund, particularly if it's a newish fund, so if it's a, you know, if it's a twenty-twenty-four fund and you can give back 25%, like, why wouldn't you do that? And you're s…”
Frankel: Billion-Dollar Early Rounds Are Momentum Plays, Not Seed Value Investing
“I think that that's the momentum business, and I think knowing how and when to get out quickly with some of those really, really matters, and that's not really my business. So my business is value, is getting involved early, and trying to find value opportunit…”
Frankel: Founder Collective broke rules to invest $100K at $100M valuation
“In that situation, I broke every rule under the sun, and we put in a hundred K check, right? I broke my rules. But we don't do that.”
Frankel: Founder Collective Only Invests When Seeing 10x Potential
“We look at a company and go, can we 10 X that? Can we 10 X? And if we can't, then we shouldn't invest.”
Frankel: Seed funds can return capital via multiple moderate exits, not just mega-unicorns
“Fund returners, you need four or five good fund, good companies. If we sell four companies at two hundred fifty million dollars each, right, we can return a fund. If we sell 10 companies at a hundred million each, like, nobody cares about that, we can return a…”
Frankel: Founder Collective passes on AI seed rounds at $100M valuations
“When I see those rounds at like 25 on a hundred, pretty much we're out. We're pretty much out. Again, team versus theme. So, you know, there are rare instances where we see someone who's just like, you cannot ignore, you wake up in the morning, you go, oh my g…”
Frankel: High market heat is the ideal moment to take secondary liquidity
“In fact, in an ideal situation when there's insane heat in something that we've gotten earlier, like that's a great moment to take secondary if you can.”
Frankel: Venture funds aren't taking enough risk if they aren't losing money
“But I think it's the most unfair feature of capitalism, Harry, is the most you can lose is all your money. The most you can make is three, you know, 3000 X, right, or unlimited. If you just look at that, it is such an unfair feature of capitalism, and my LPs m…”
Frankel: Founder Collective's 2018 Fund III has generated zero DPI
“Fund, our Fund Three is a 20 18 vintage. No DPI yet.”
Eric Paley: Overvalued unicorns face one of three realistic fates
“One of three things are going to happen to those companies, right? They're either going to take the extraordinary amount of cash they got, cut their burn rates down and figure out how to build real companies. And by the way, many of those will still never rais…”
Paley: Top Company Never Matched Its Founding Year's Hottest Theme
“Never, not the last 20 years, has the most valuable company born in any single year, right, valuable as of now, been this in the theme that was hot in that year. It has not happened.”
Paley: Investors won't recapitalize overvalued startups with low revenue
“If you're recapping a hundred million dollar revenue company at a billion dollar valuation, but it really should be recapped. People will do that work, but if you're recapping a three million dollar run rate revenue company with a billion dollar valuation, the…”
Paley: Struggling founders should return unspent capital to investors
“I actually think that if you want to maintain your integrity, you want to maintain your integrity, and you don't have product market fit, and you raise money at a crazy valuation, and you don't want to have this burden on your back for possibly years, and by t…”
Paley's study of 71 IPOs shows capital raised doesn't drive startup success
“We looked at 71 IPOs over the last five years, the 71 tech IPOs over the last five years. To study whether venture capital in the outlier cases could be argued to have really driven greater success. And it turned out there was effectively no correlation betwee…”
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.”
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 Will Never Lead Follow-On Rounds in Fund II
“In our second fund, we will never lead a follow-on.”
Frankel: Pro-rata investment rights are generally bad for entrepreneurs
“I think pro rata is generally not great for entrepreneurs. It's a call option against you.”
Frankel: Founder Collective Has Never Passed on a Startup Over Ownership Percentage
“I've never turned it down. Never.”
Frankel: Founder Collective seeks exits after capturing 80% of value
“Our knee joke tends to be when this has gotten across a certain point, like we're out of here and credit to Eric at a point for going like we've captured 80% of the value. We could capture another 20%.”
Frankel: Following On in Every Round Boosts Absolute Returns, Not Multiples
“If we follow, our view would be we'd had, we would have had to have followed on in everything, and I think that the absolute return would be better. I don't think that the multiple would necessarily be better on the fund.”
Frankel: Founder Abandonment and Lack of Focus Remain Rare Minority Cases
“I still see that the vast minority of the time. Like, I think it's easy to extrapolate and go, that's a trend, and I could be very Pollyannish about this, but for the most part, like, I see founders wanting to make it work.”
Frankel: Larger fund sizes make achieving high DPI much tougher
“And we're working for DPI, and the bigger we make the fund, the tougher it is on the DPI.”
Frankel: Co-Founding CTOs Are Often Redeployed After Scaling Past 50 People
“The CTO at some point up to 50 people, you're golden. And then at some point you go, actually we could bring in better, better technical skills. And if you've got a good co-founding CTO, that person becomes like a Swiss army knife and is deployed in different …”
Frankel: Founders Use Founder Collective as Insurance in Mega Seed Rounds
“I think we're being seen and I'm, I could be over extrapolating the last 20 deals that we've been involved in almost as an insurance policy. Where we're side by side, we're putting in 500 K or a million. There's been eight, nine million dollars going in, and T…”
Stebbings: I passed on Suno's seed round over 1% ownership target
“I turned down sooner when David Frankl at Founder Collective introduced me at The Seed. You know what the lesson was there? Really interesting. I hope Mikey's okay with me saying this. I'm sure he is. It was a 250 K check or a 200 K check. And so the ownership…”
Frankel: Founder Collective regrets selling any secondary shares in Trade Desk and Uber
“Well, Trade Desk, I regret every single share I sold. Uber, I regret every single share I sold.”
Frankel: VCs cannot justify board seats for $500K or smaller checks
“If I'm on your board, I can't write a hundred K check. I can't write a 500 K check anymore because you need my time and you need my interest.”
Frankel: Founder Collective does not worry about dilution
“We don't think about dilution much. We really don't. Our MO has been, we dilute alongside the founder. As a seed stage fund, we get involved at the beginning, and it's been a strategy, and we don't think about dilution.”
Frankel: Running Tide shut down with $10M left, burning $3M monthly
“Running Tide, we just closed down the business. This was a carbon sequestration business, ag, literally ag in the ocean. Unbelievable business. We've got ten million dollars, and he's burning three million dollars a month.”
Frankel: Trade Desk was a bigger outcome for Founder Collective than Uber
“Trade Desk was a bigger outcome for us. Coupang returned the fund, right? Like if, and multiple times.”
Frankel: Smalls reached $50M ARR but couldn't raise capital in December
“We try to raise money for this business, Smalls, right? Doing fifty million ARR. Try to raise money in December. Nobody would look at us.”
Frankel: I believed my early investment in Olo was a total loss
“I remember saying to my wife on Olo, this is done. We've lost a lot. This was pre-founder collective saying, we have lost our money. Like, Noah is never going to get there.”
Frankel: Liquidation preferences are a fundamental and fair venture capital mechanism
“Well, I would disagree with Nick, because I would say, prefs are fundamental. Saying, you should give your investor your, their money back, right, before you kind of, you know distribute the spoils to everybody. I think that's a fair tenet.”
Frankel: Founder Collective passed on Pinterest due to portfolio conflict
“The first thing that comes to mind is like Pinterest. The founders came to us and we had a conflict. We had a very strong associate in Zach Klein, who was the chairman of supply. We, we'd invested in supply. We couldn't make the investment.”
Frankel: Founder Collective funded The Trade Desk when nobody else would
“Eric invests in Trade Desk as a follow on because nobody else was going to give them money.”
Paley: Trade Desk Founder Limited Fundraising to Preserve Acquisition Optionality
“And I'll tell you another story, you know, with Trade Desk, one of the reasons we didn't raise a lot of money was, we were the last ones in, and people just thought it was played already in the programmatic advertising market. But one of the reasons we didn't …”
Paley: Founder Collective's 2010 investment SeatGeek will deliver an amazing liquidity event
“Like, SeatGeek was a 2010 investment. I think it's a great company. Dave led that for us. I think it's gonna ultimately have an amazing liquidity event”
Frankel passed on Remitly after Sequoia's Roelof Botha raised diligence concerns
“Beam at Mobile, Matt Oppenheim comes to mind. I loved what he was doing, and then I got into diligence, and I spoke to Rulof Buerta, who was in Zoom, and he helped talk me out of it, just talking about how difficult, you know, foreign kind of compensation was,…”