Seed Capital From Angel Investors: Eric Paley, Managing Partner, Founder Collective (Part 4)

By guest author Irina Patterson

Irina: Do you think in terms of the valuation of the company?

Eric: We have a zone of valuation we think is appropriate for our thesis of investment as seed investors. If a company reaches a point at which it feels it has accomplished far more than what we call seed, then we are probably not appropriate investors for that company. It would be outside our valuation range. So, we have a fixed zone for what we think makes sense for our type of fund.

Irina: What about your percentage of ownership?

Eric: We think it is dangerous to dwell on percentage of  ownership. It is a very conventional way of thinking about venture capital. It is dangerous because it forces people to make investments that are not necessarily what makes sense for the company, meaning to put in more cash than is necessary, which is very unfriendly to the syndicate partners, or other actions that are not positive in terms of building great companies.

So, we are trying not to fixate on percentage ownership. We try to focus more on the right amount of capital for the level of risk we are taking on and for the stage we are investing in. We want to be investing in the stage where we should be properly rewarded for our risk.

Irina: And what about your equity share and returns? Do you have any rules for those numbers?

Eric: We don’t think about that, either, because we think there are also a lot of errors in those type of numbers. Our goal is to invest in companies that will become extremely important in their industry sectors. And by important we mean ultimately large companies in the sector that can make a real impact and, we hope, get there in some high-speed way.

We worry less about liquidity, timing, or specific multiples. If we are doing our job right and building great companies, then there are significant multiples and upside in those businesses. The question is, what can we do to help our companies become important companies?

And we think that if we can figure this out, we can do very well instead of being confined to some notion of when the exit needs to be, how much it needs to be, and those types of issues. If you are building important companies, there will be interested buyers or other forms of liquidity – IPOs, secondaries, and whatnot. The question is, can you build very important companies?

Irina: What stage of business development do you prefer to invest in?

Eric: We typically invest at a stage where there are a few founders who bring different skill sets to bear and have a well-thought-out plan and usually some early prototype or conceptual element to what they are building. They often have some initial user traction.

Some of our companies are as early as an entrepreneur, an idea, and a plan. It does vary in terms if when we feel we have conviction about the opportunity. Customer validation can make the opportunity evident even at a very early stage. Sometimes that’s all the conviction we need, and sometimes we need much more than that. Often our companies do have some customer feedback, but not always.

Irina: Do you think in terms of total available market (TAM) or total accessible market?

Eric: I do. But I think about it a bit differently than do most investors. I think you can look at enormous TAMs for exceptionally crowded spaces. And I find that in those spaces it is very hard to believe that someone is going to capture a large share of that market. Then you can look at smaller TAMs for very uncompetitive business areas, and in those areas it is actually believable that someone could capture meaningful market share.

When we built Brontes, we were in a market that was not at all saturated. It was smaller than many markets that are far more saturated, but it was very small. And it was believable that we could capture significant market share.

We are interested in large markets. But we try to size the company’s opportunity based on how important this company could be within a market that is at least a reasonable size. That is how we think about it.

This segment is part 4 in the series : Seed Capital From Angel Investors: Eric Paley, Managing Partner, Founder Collective
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