Seed Capital From Angel Investors: Eric Paley, Managing Partner, Founder Collective (Part 6)

By guest author Irina Patterson

Irina: Do you have any sector preference?

Eric: We are seed-stage, software-enabled capital-efficient investors. So, within that there are a lot of things we can do, but our setup tends to lend itself to a lot of Internet investing.

We can do other things, and we are doing other things. I think it really depends on the company.

If you look at our company OPOWER, it’s a clean energy company. It is capital efficient and software driven. We invested in the early stages of that company, which does behavioral science and direct marketing for energy conservation.

There is an Internet portion of that business, but it is not a pure Internet company. I think we are about to invest in a company that is doing some things in hardware, which definitely challenges the capital efficiency model but that we believe is still within our bounds.

So, I think we can be involved in a lot of different types of businesses, but it the fund strategy lends itself very well to the amazing and exciting things that are happening right now on the Internet.

Irina: What is your preferred investment type?

Eric: We like to keep things as absolutely plain vanilla as we possibly can. So, most of our investments are priced equity, preferred stock. We’d like to see follow-on investors keep terms as plain and as simple as we’ve made them and not get greedy on the margins of things.

The job is to make the company as valuable as possible and not to put in terms that marginally help investors on downside scenarios. We really try to keep things simple. We do do convertible notes with caps. My partner wrote a really good blog post on that topic.

Irina: Do you think of any preferred way of exit?

Eric: No. In fact, we spend very little time thinking about the exit until the business has created value and has some kind of catalyst for exiting the business, meaning specifically that a company wants to buy them or they are interested in going public for a variety of reasons.

What we are really focused on is how we can help them to become an important business, not on how quickly we can flip and exit the company.

Irina: What do you think is the single most important thing that angel-backed founders could do to increase their chances of success?

Eric: It’s a great question. The single most important thing they can do to drive their success is to understand their customers. I am a big believer in customer development. I think that deeply understanding your customers’ pain and needs is the most important.

It is rare that your customers are going tell you explicitly what the product should be. You will be hearing many different voices telling you many different things. And the great product people are the ones who could listen to customers and distill what it is they are trying to say and where their pain points are, and create a vision for something that really solves those problems.

You should have a strong, customer-centered focus in a good startup company. Most companies fail because they do not build products that customers really care about. They build things that people at the company think customers care about.

Startups have to iterate quickly. Get things in front of the customers. Get real feedback and distill it into something that really solves the problems that customers care about.

A lot of people assume this is obvious, but they don’t execute well and it is too late when they realize that they are were not doing what they needed to do. You hear from managers who inretrospect say, we really wanted to listen, but we built the wrong thing. You need to take control early and make sure that you are doing the right thing to make the company successful.

Irina: Very true. Now, what do you think is the most important thing that investors like you can do to increase their chances of great success?

Eric: I think this is going to sound like I’m minimizing the investor role because we really try to work hard for our companies. But I think the number one thing that investors can do in helping companies to be successful is do no harm. It’s like the Hippocratic oath that doctors take.

Investors should have a Hippocratic oath. I’ve seen so many VCs tinker and play with companies and have very strong opinions about things that are not very important, slow down companies, and distract CEOs with things that I call meta-issues, which are all the things that have to be dealt with but that are not that important and de-focus the management team.

This segment is part 6 in the series : Seed Capital From Angel Investors: Eric Paley, Managing Partner, Founder Collective
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