Founder Collective, the seven-year-old, Cambridge, Ma.-based seed-stage venture fund, has closed its third fund with $75 million in capital from a small group of limited partners whose anchor investors are the the firm’s three partners: David Frankel, Micah Rosenbloom and Eric Paley.
“Unlike most funds, the partners are, in fact, the single-largest investor in [our new fund]. So when entrepreneurs take our money, it’s really our money,” says Rosenbloom, who earlier in his career co-founded a 3D imaging startup that sold to 3M.
Given Founder Collective’s success to date, we’re guessing that’s very much by choice. Consider that it backed the adtech company The Trade Desk, which managed to stage a billion dollar IPO in September. It was also an early investor in Cruise Automation, sold to GM earlier this year for a billion dollars; the 3D printing company MakerBot, acquired by Stratsys in 2013; the live streaming startup Periscope, bought by Twitter last year; the backend service Firebase, acquired by Google in 2014; and the private cloud service Blue Box, sold to IBM last year.
Did we mention the outfit — which closed its second fund with roughly the same amount — has stakes in privately held Uber, along with BuzzFeed, HotelTonight, ThredUp, FormLabs, Optimizely, PillPack and SeatGeek?
Earlier today, we chatted with the three partners about their new fund, and why they didn’t opt to invest a bigger fund this time around.
TC: Founder Collective is industry agnostic, with bets that range from Sudden Coffee, which makes instant coffee, to SeatGeek, an event ticketing marketplace. Are you geography agnostic, too, or do you tend to invest in primarily East Coast startups?
DF: Ninety percent of our investments are in four geographies: San Francisco, New York, Boston and Southern California. That said, we’ve invested in companies in South Africa, the U.K. and Israel. One of our best investments ever is a company called Coupang, South Korea’s answer to Amazon, which recently raised $1 billion at a $5 billion valuation.
TC: You’ve been at this for seven years now. What have you learned as investors that you might not have guessed would be true in your earlier lives as founders?
MR: That founder-investor alignment really matters, meaning fund size, follow-on strategy and just the chemistry match of founder and investor. Many founders don’t understand their investor’s strategy as well as they should, but it will inevitably impact their company. We try to be really explicit about [our positions on things] from the get-go.
TC: What mistakes have you made since forming Founder Collective? Where have you had to course correct?
MR: We’ve learned that party round syndicates with no clear lead are bad for entrepreneurs and for us as investors. When no investor owns the outcome and has responsibility for helping the company, often the founders get no investor support from anyone. We’ve found ourselves stepping into that vacuum, but the lack of investor advocacy underscores a long-term problem for the company.
TC: Presumably you could have raised a significantly bigger fund. Why not do that?
If you look at the last five years of IPOs, the companies that raised the least money outperformed the companies that raised the most on the public market. Our data showed there was no correlation between the amount of funding a startup received and its ultimate performance. Capital doesn’t come with insights. If you can’t turn $1 into $10, it’s hard to turn $1 million into $10 million. Overfunding hurts startups even in the best outcomes, and we don’t think it’s great for VCs, either.
TC: You write checks of between $200,000 to $2 million at the seed stage. How much do you aim to own of a company at the outset? A lot of micro VCs tended to care about this less years ago, when they were first starting out, but most say it matters quite a bit to them now.
EP: We typically write a single follow-on check in the Series A round and that’s it. We’re not life cycle investors and think that focusing on later rounds actually dollar-cost averages your returns down while misaligning investor interests with founders. We really don’t focus on ownership percentage. We think it’s the tail wagging the dog.
TC: You have a long list of venture partners, including Caterina Fake and Zach Klein. How do you work with them? They refer deals to you, then the three of you sort of make a decision?
DF: We think some of the best investors are busy running companies full time. We also think that often the best entrepreneurs tend to check in with aspirational founders before soliciting capital. That’s why we’ve always tried to work closely with founders who are really well-known and respected in their communities.
On a practical level, our founder partners invite one of us into a pitch meeting and actively engage in the decision-making process with us. We so highly value conviction internally, that if one of them is banging the table, chances are high that we’ll make the investment together.
TC: Is there anything you plan to do differently with this newest fund?
MR: We’ve opened an SF office, but everything else is the same as the past two funds.
TC: Have you seen seed-stage valuations change at all in the last 12 to 18 months and, if so, how?
DF: They’ve risen a bit, but looking at our data, we’re surprised by how little. We’re not sure if that reflects the macro environment, or just our aversion to deals with big sticker prices.
TC: What are you expecting to see in 2017? Are you concerned about a Trump presidency? Do you think it will impact what you do in either positive or negative ways?
EP: I’d say 2009 to 2010 was a pretty dark time, as well, and that’s when we had the good fortune to invest in Uber and The Trade Desk, so we’re big believers in the ingenuity of entrepreneurs no matter the macro conditions. In fact, tech might be one of the most important ways we can preserve and enhance our freedoms.