July 15, 2024 • 51 mins
Eric Paley is a General Partner at Founder Collective, one of the great seed-stage venture capital brands - and one of the relatively few venture firms led by startup founders. As the name suggests, Founder Collective is a "founder stage" venture capital fund that focuses on providing the first professional round of capital to “entrepreneurs with compelling business concepts”. Eric himself also founded several companies before becoming a VC. Founder Collective's investments include: Coupang, Cruise, Kaggle, Pill Pak, The Trade Desk, Uber and Venmo.
In this episode we discuss the importance of Founder-led VC firms, and the evolution of seed VC firms - which barely existed when he started, and now number in the hundreds.We also discuss:
· * Why the unique name "Collective"
· * Fuzzy VC math
· * VC 'revisionist history"
· * What's next for Founder Collective
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Kent Lindstrom (00:06):
All right, welcome back. This is Something
Ventured podcast I am KentLindstrom, I am your host. My
guest today is Eric Paley. Howare you doing?
Eric Paley (00:12):
I'm doing great. Thanks for having me.
Kent Lindstrom (00:14):
So Eric Paley is the co founder of Founder
Collective, which is one of thefirst seed firms, which is a
concept that didn't alwaysexist. And when they, when they
started, there was a few ofthem. It later became popular to
be found, or what's now calledfounder friendly. But Founder
Collective was one of the earlyones to kind of seek alignment
(00:34):
with the founder, as opposed toreplacing the founder as quickly
as you can. big successes, afirm, right, Uber crews airtable
trade desk, a number of big, bighits. But before that, you were
a founder yourself, and foundedabstract edge and productize, a
couple of different companies. Imean, I guess I'll start out why
(00:56):
is it a collective that's apretty founder, collector is a
pretty specific word and evokesa pretty specific thing. Yeah,
Eric Paley (01:04):
you know, I think we're trying to, it's actually
hard to remember a world nowwhere seed basically didn't
exist. VCs were really financepeople there. So a lot of
finance people in VC. But mostVCs were finance people. And
they thought like financepeople. I mean, they really were
sort of wolves in sheep'sclothing. Still, again, there's
many folks who are like thattoday. But that was basically
(01:25):
most of the industry. And asentrepreneurs, we experienced a
lot of that in ways that werereally negative, and did not
want to be a fund anything likethat. And so we started off, you
know, with with two of us fulltime, and a collective eight
other I think it was eight atthe time, we called founder
(01:46):
partners, all of whom had alsobeen founders, and we're running
their companies day to day. Andthen what we realized over time
is if we did it, right, ourfounders who we invested in
could also be part of thatcollective, because they could
be adding a lot of value foreach other in the body of
knowledge that they create. Andwe found a whole bunch of ways
(02:07):
to execute on that, that I thinkhas really made it a broader and
broader collective over time.Yeah.
Kent Lindstrom (02:13):
So what is the different what? Well, let me ask
you this, what percentage,almost every VC is sort of like,
ends up paying themselves as afounder, right? Like from when I
worked at Google, and somebodyfounded that. So technically,
I'm a founder or, you know, Ifounded a venture capital firm,
but of people who really foundedcompanies and went through the
(02:35):
thing, the pain and the raisingmoney and all that. How common
is that invention? What do youthink the real percentages of
the of those types of people?Luckily,
Eric Paley (02:44):
it's gone up a lot. And we can talk about does it
really make a better investor? Ithink there's an interesting
conversation to be had there.What I think it makes better is,
that's who I'd want to workwith, because they understand it
as a founder, because theyunderstand what I've been going
through and when I don't agreewith them. And there's some kind
(03:05):
of disagreement about what todo. At least I know, it's not
hypothetical, right? It'ssomebody who's actually done
this before giving me feedbackthat's different from the way
I'm thinking about it. But thenumbers have definitely gone up.
One of the things that I findvery insincere is when founders
talk about fat founders, whenVCs talked about founding their
(03:25):
firms, as found as being afounder, it's so fundamentally
different, and there's only onepart of it that's similar, which
is fundraising. Right, and thatit is actually very hard to
fundraise the first time for aventure firm, or if you're
dramatically increasing the sizeof a fund, it can be very
challenging. In some ways, it'seven harder than being an
(03:45):
entrepreneur, fundraising for aventure backed startup, because
there's no way to really createFOMO you literally can, every LP
knows you can accommodate twodozen LPs. So until something's
happening, there's not a lot ofreason for anyone to act, where
it's for an entrepreneur, youknow, there's usually one lead.
So that's like, the one thingthat's harder after that, you
(04:07):
know, it is the least resultsdriven business you could ever
imagine. Whereas founders are onthe line for driving results
every single day. So you know,yeah, you create a culture and
you maybe and you create a youdo some marketing, and there are
things that look like starting acompany, but it really is,
diminishes how much harder itreally is to start a venture
(04:29):
backed startup, and howdifferent the experience is, and
it's sort of a neat way for VCsto be like, see, I'm like you,
yeah, you real founders,probably hearing that and being
like, oh, yeah, right. Okay. Andhere I am in the majors, trying
to hit hit really, you know, 100mile per hour fastball.
Kent Lindstrom (04:48):
Well, as I tell people, you shouldn't, you
really shouldn't start acompany. It's a really bad idea.
You know, when people come upwith this idea, you know, should
I start a company? My answer isalways like, No, we should not
start a company. If they say,Well, screw you, I'm gonna start
anyway, you're like, Okay, well,then you should start a company.
Yeah. I
Eric Paley (05:06):
joke about it's like the risk adjusted return on any
startup at the beginning iszero, right? Like, that's the
math, right? And the only reasonto do it is not because you
think you're gonna get richdoing it. But because you feel
so compelled to go do thatthing. And you're so willing to
take on the challenge of it,because you're just feeling that
(05:27):
level of drive about it. Right?Not because, you know, there's
gonna be a pot of gold at theend of that there almost
definitely is not going to beYeah,
Kent Lindstrom (05:35):
I mean, it's a crazy thing. We look out, you
know, 30 companies, I guess, inour first portfolio, and, you
know, every day there'ssomething hat like something,
man, you kind of feel it, likethat guy's, you know, CTO just
quit, and they run out of money,or Yeah, you know, that, Oh,
wow, that guy got a term. Sothis is great. And you, but
you're sitting there watching itlittle more like a TV show,
(05:56):
maybe. And you kind of have toremember that boy, when you're
in it. Oh, the news that yourCTO quit, or, you know, your,
you got six weeks and your staffneeds to know. And like, all
those things are humanexperiences going on. But
there's 30 of them. So you'rekind of it's something you don't
care, but you, they don't hityou, each one doesn't hit you as
(06:18):
hard as when you're in thething. And
Eric Paley (06:20):
you don't really own it. At the end of the day, it's
a portfolio and you're not thedecision maker, there are
situations where unfortunately,you have to be but very rare
situations. So you're anadvisor, right? And it's so much
easier, it doesn't mean as anadvisor, it doesn't mean or an
investor, it doesn't mean youdon't want to see the company be
wildly successful. But thepressure of actually owning the
decision that may make or breakthe business is so different,
(06:44):
right. And one of the things Ithink we forget a lot as VCs is,
will often be very flip, like,we'll see your resume and be
like, yeah, or that person, oroh, that person's giving a hard
time just fire him. Right. Andwithout actually understanding
how complicated that decisionis, how many trade offs there
are involved. Because it's easyto say, yeah, just fire that
(07:08):
person. But actually, if they'redifficult, but they're actually
getting a lot done for thecompany, it might take you six
months to find somebody who'sgonna play separate, or you
might hire somebody else toreplace him who's far worse, and
it takes you 18 months to getback where you were finding the
right person. So all of that isthe weight of owning the outcome
of every one of these decisions,rather than unfortunately, when
(07:28):
you're running a portfolio, itcan be very easy to be lazy in
understanding the magnitude ofeach choice.
Kent Lindstrom (07:37):
What do you think having been an
entrepreneur now that we'veestablished what that actually
means? What do you think ithelps you with as a venture
capitalist? I mean, is it that,you know, when you're sitting
across from somebody, you'relike, okay, this person, great
person doesn't have what ittakes to get through it? Or is
it that once you've invested,you can, you know, understand
(07:58):
what they're talking about in alittle more than maybe nothing
wrong with investment bankers,but maybe someone who worked in
investment banking their wholelife?
Eric Paley (08:04):
So So I think there's two things. One, there's
definitely the empathy part ofit that I think a lot of
founders need just to feelsupported. That this is hard,
and they're going through it.And you know how hard it is that
that counts for a lot, becausevery easy to sit in the cheap
seats and think it's easy to dohaving never done it before. Oh,
it's just all they have to do isthis. And if they do that, and
(08:24):
do that, the company will be asuccess. And I don't know why
the CEO is not doing that.Right. That's one category. But
the one I would really focus onthat I think people lose sight
of is VCs live at 30,000 feet,they do not see any of the
detail, right? They do notunderstand what happens on the
ground. And they tend to look atoutcomes and pattern match about
against them without actuallyunderstanding how any of those
(08:46):
companies got there. So youknow, we often say is to
founders, like, your VC wantsyou to be a billion dollar
business, and they want you tojump over every other part of
building the business as if noneof the other stuff ever
mattered, so that you'll becomea billion dollar business. But
you can't become a billiondollar business without being a
$10 million business. Yeah, theyactually have to do that stuff.
Right? You're not going to birthit as a billion dollar business.
(09:08):
But the standpoint they kind ofknow only wish you would but but
very little respect for what hasto happen to get there. Right.
And a lot of the VCs don't wantto it's like, and then and I
don't even want to hear it.Right. Like don't don't get me
involved. What am I VC said tome? You involved us too much in
the sausage making when he whenhe was on my board and resented
(09:29):
that comment. I was like, geez,you sold me that you were here
to help me. And I was totallytransparent with you about the
challenges I was facing. Notonly were you not particularly
helpful, but then you complainedthat I showed you what I had to
go through to get to this place.Yeah. Right. And but that's part
of that's part of the deal.Right? That is that is part of
(09:50):
why the person on the ground hasso much real work to do. And
it's very easy to minimize thatand think it doesn't matter.
Another example is I think italmost never happened. Is the
company's birth the platform.But VCs love that idea. They
want companies be platforms fromday one. Well, if you try to be
a platform from day one, youprobably will never get anything
(10:10):
working whatsoever. Right? It'svery easy for a VC to look at
things from 30,000 feet and belike, well, you know, this
company is wildly successful,their platform, this company's
wildly successful theirplatform, and not understand
that the beginning, none ofthose companies were platforms,
they built applications. Andthose applications gave them
license because they weresuccessful to become platforms.
Right. But from the VCstandpoint, they you know,
(10:32):
there's, there's somethingpowerful about beginning with
the end in mind. But if youdon't understand the steps to
get to the end, it is verydangerous. And that is that is
typically a big problem. VCspush entrepreneurs to skip over
validation. Because they justwant to get to the endpoint.
When you skip over validation.Usually, you screw up your
entire business. But that's likea slow motion train wreck that
(10:55):
the VC doesn't even appreciateor understand because they want
the company birth as a billiondollar company, right?
Kent Lindstrom (11:01):
And so how does how does an entrepreneur tell
the story? Because everybodyknows all this now, like in
retrospect, but of course, it'sthe classic Warren Buffett thing
already. He tells you how to getrich, you just have to actually
do it, you know, not panic whenanyone else does. How do you
tell the story where, you know,Uber comes along, and it was
like, well, is just a black carservice? Small, right? I mean, I
(11:22):
think the Pez dispenser eBaything might be a little
apocryphal. But hey, I've got aPez dispenser company. Small,
right. Yeah. But of course, inhindsight, you understand that
that's the Well, that's thepassionate group that starts the
thing that ends up being theplatform. But here we are today,
with just our little black carcompany, like how do you? How
(11:44):
should an entrepreneur tell thatstory to a VC? I
Eric Paley (11:47):
think one of the biggest challenges in our
industry is VCs say they investin markets ahead of everything
else. But I think VCs areterrible at understanding
markets, and really bad atmarket sizing. So even when Uber
was already a huge business,there were people writing about
how it could never be a reallybig business. Right? Like still
(12:08):
like and, and there are numerouspeople I talked to Uber about
VCs that I spoke to her about inthe early days. And they'd say,
I don't get it. Like how hard isit to create a mobile app for
one of the 10,000 50,000 liverycompanies in the US? Like,
they'll all do that, like whatis what is special about this.
And, you know, we believe therewas the potential for network
(12:29):
effect. And mean, we're going tobe right about that we wrong
about a lot of things. Butlargely the way we do it more
than anything else is we followthe entrepreneur. So we're
interested in entrepreneur who'sway out ahead of us in
understanding not not justenvisioning, but but testing and
learning in the market aboutwhat's going to happen. So
interestingly, everyone thinksthat Travis Kalanick, pitched me
(12:52):
on Uber and, and I did have lotsof interesting interactions with
Travis. But but it was RyanGraves, who pitched me on Uber,
was running the company at thetime. And he had multiple cars
already on the road, and hisobservations about what was
happening and what he thoughtwas going to happen in the
market with this approach andwhat was different about it, and
(13:13):
significant, he led us to anunderstanding, that didn't mean
we were going to be right, butallowed us to appreciate his
vision and the work he wasdoing. Maybe Travis and
Garrett's vision, but thecollective vision and the work
they were doing to validate itthat made it seem more and more
real. And both thing we get veryobsessed with is the people who
(13:35):
do that work well, we think aregoing to keep doing that work
well. And they'll find their wayto success. And the people who
just want to talk about thevision, but don't really want to
engage the hard parts and reallytalk about the work. They're
going to do that forever. Andwhen the company is not working,
they're just gonna keep wavingtheir hands with stories of
vision, right? So there'ssomething about the people who
(13:55):
really love to test it in thereal world, and learn from the
real world and adapt. Like, youcould say, Ryan at the time.
Tell me a couple examples ofassumptions you guys had that
haven't played out the way youthought they would. And he would
give you great examples of how,you know, in the few months,
they've been doing this, theylearn things that that
immediately got them to changewhat they were doing. And that's
(14:18):
the type of dynamic thinkingthat we're really looking for.
So, you know, ultimately, yes,we believe the market can be
big, but it was much more aboutbelieving in the person that was
leading the charge to find findthe way
Kent Lindstrom (14:31):
Yeah, well, it's funny, the social network thing,
too. And that happened. I mean,aside from everybody saying,
nobody's ever going to put theirphoto online. And that was a
common thing that people weresaying at the time. It was kind
of like well, you know, themarket was 4 million people
right? Go to college UnitedStates. So maybe the the 3
million person market, which youknow, I don't know how many 10s
(14:51):
of axes that's off by but, and Ithink the funny one of the
things I felt about when Uberand Lyft as well emerged The
first time I was like, Oh, crap,this is something I was got in
like, I guess it was a lift andthe woman driving. What's the
deal here? It's just like, Oh,I'm driving this thing. And I'm
paying for my tuition at, likeSan Francisco State with it. And
(15:15):
then you go, Oh, okay, what nowwhat's happening here, and this
is what happened, I guess witheBay. People are like, Hey, I'm
making a living on this thing.Airbnb, when you've got other
entrepreneurs, you know, she'shas her own little business
driving a car to pay for school,then you go, if that it, if
she's doing this to change herlife to go to school, you can
(15:38):
find another billion peoplesomewhere like I don't know
where, but, but it's the tinystory. It's just that one story
like that one person doing onething? And you're like, Yeah,
but that makes sense. As opposedto well, I'm gonna tell you
theoretically, how we're goingto change your enterprise by
this and that, and it'stheoretical. I don't know
something about that story. Inthe moment, you're like, Oh,
(15:58):
absolutely. Those
Eric Paley (15:59):
those anecdotes that you look at and say, well,
there's got to be a lot of this.And I'll even give you an
earlier one with Uber becauseUber X obviously came later. The
original, which became known asUber Black, but was just Uber
cab at the time, was liverydrivers. And a typical delivery
driver, we get pre scheduled forthe day for their car and was
very expensive, right? For theride. And like Boston coach was
(16:24):
like, you know, this, this biglivery agency. And they might
have three drives the entireday, and tons of downtime
between them, because it justwas so fragmented, and they had
to make a living off them, whichis why it was so expensive. So
very early on, and one of thethings Ryan was able to help us
understand is there was so muchinvisible inventory, or at these
people that hours a day in whichat a lower price, they'd be
(16:48):
happy to grab a ride on demand,right? And because they knew
they didn't have to go to theirnext ride for three hours.
Right, but they happen to be inthe area. And you looked at that
invisible inventory. And yeah, Iwasn't sitting there going,
Okay, what's the math of sizingit just looking at? You're like,
there are a lot of those people.And there are a lot of people
who would happily take a ridefrom someone like that a
(17:09):
professional driver at like,half the cost of what it would
have cost if I pre booked thatdriver. And so from minute one,
they were attacking angle themarket that you could start
engaging those types ofanecdotes, and extrapolate and
go Yeah, like, there's somethingpretty interesting there. Yeah.
Yeah. Tell me about followingthe entrepreneur. People always
(17:29):
ask us, Well, what's your youknow, what things do you invest
in? Like, they want to hearcybersecurity and like a list of
things? And our answer isgenerally like, well, we're very
focused, we're focused onsoftware, we invest at the seed
stage, which is the earlieststage, but we let the
entrepreneur tell us the future,because wouldn't the best
entrepreneurs figure this out? Idon't. So I guess what I'm
(17:53):
getting at is, we've seen theemergence of a lot of thesis
focused funds, where the VC hasthe idea first, right, we're
like, well, the future is, Idon't know, the financial system
is applied to mobility or, orsome idea that the VC starts
with, which seems to me the kindof the wrong way to do this, if
you're, because then ourentrepreneur is going to come
(18:15):
sell you that your story thatyou want to hear, and they're
not going to be natural fit forit. But it's been an interesting
phenomenon, because 20 yearsago, nobody could not Kleiner,
not Sequoia, not anybody hadthat idea, like, Oh, we're just
gonna focus on this. You know,our idea first,
I don't know if that's true. 20years ago, VCs had a lot of self
confidence 20 years ago thatthey knew if you pitched to Vc,
(18:37):
and they didn't invest in you,and people still use this term,
right? This very glib term Ipassed. Yeah, get it in that
term, is this notion that like,I know what a good company is,
and a bad company is and if Iinvested, it's a good company,
and if I didn't invest, it's abad company. And that's just not
true, right? Like, that's likebeing a baseball hitter, and
saying, I know what a goodpitches and a bad pitch is. And
(19:00):
if I hit it out of the park, itwas a good pitch, you know, and
if I, if I didn't swing it, itwas a bad pitch. But sometimes
you don't swing at a strike inyour, because it's not the part
of the zone that you hit wellin. Right. And I think the
reality is, there are so manycompanies, we've been very
lucky, we've had an incredibleportfolio, could not ask for
more. But there have been somany companies we missed,
(19:22):
because it wasn't the rightopportunity for us to appreciate
the entrepreneur at that stage.Right. Right. And that's tough
to believe, but we are, youknow, we are not a binary system
of we're right or wrong. And soI go back to VCs were quite
arrogant in those days. Butlet's dig in from there to this
idea of the idea. The VC comingup with the idea. I think
(19:45):
there's nothing more cheap inthe venture industry or in
entrepreneurship than ideas.Right? I think it really comes
down to execution and the craftof the execution. Craft of
execution goes well beyond anidea. It's million ideas. It's
it's every little angle offiguring out how do you make
whatever it is you're deliveringspecial for your customer. And
(20:08):
that's not like a singular idea,that whole thing is a myth.
Right? That there's some nowyou, you need to start with some
kind of idea. Usually you startwith the best entrepreneur
things start with a problem theywant to solve, and then they are
very adaptable to what would bea great solution for that
problem. But something's got tomotivate you to spend it. We
talked about this before tospend all your time pursuing
something when the risk adjustedvalue of it is zero, right. And
(20:31):
so you got to get motivated,that idea might be the thing
that motivates you. But I thinkthat's taken on a life of its
own. And VCs want to seem reallysmart. And the way they like to
feel smart is they like to beanalysts of markets. And they
want to believe they're in theprognostication business, that
they are the ones who canevaluate ideas, and predict the
(20:52):
future. And I don't actuallythink successful VCs do that, or
maybe very few do, and we'rejust not good at it. But there
are some people who are reallygood at that. I don't buy that.
Right, I don't think that is Iactually think that's one of the
reasons why a lot of peoplebecome very bad VCs is because
they think that they know whatthe future is going to bring.
(21:13):
And that's their job is to like,go predict the future. And then
they find people to bet on wholike align to their prediction
of the future. But those aren'tthe right people to invest in.
Right. And so we get away fromthis idea myth, we even
recognize that many of thethings that have become great
companies may not obviously seemlike great ideas when you first
(21:35):
engage them. But we're lookingfor the entrepreneur to help us
understand the work they'redoing and the craft and why they
believe and what the craft isteaching them about the space or
if you want to call it the ideathey're going after. And then we
start really engaging thatthought process to figure out,
are they all over it? Are theymany steps ahead of us? Are they
(21:58):
engaging the really hard partsof it? And you can you believe
that they might be? Right,right? And what we say is that
helps us pursue what we call theweird and wonderful, right?
Because I think thesis driveninvesting forces everyone into
clusters of hype, right, and wedid this analysis, where we
looked at 20 years of what thehighest hype thing was in the
(22:21):
year, the theme that was themost hyped in that year. And
then what was the most valuablecompany created that year, and
in 20 years of the last 20years, never has the most
valuable company fit the hypedthesis of that moment. If you
look at it a little moreclosely, what you see is there's
like a four to seven year lag ofwhen the companies are created
(22:42):
that end up four to seven yearslater, the theme emerges. Right?
So Uber gets created in 2010.And by 2014, everyone's talking
about the sharing economy,right? And Airbnb predates that.
And yet, if you look up Googleterms, the sharing economy
didn't exist as a term until Ican look at it 2014 15. And even
(23:03):
right now, it's not to say thatAI is not really important
software tooling, we believe init. But the company that
inspired this moment of AI is isopen AI, and that was founded, I
think in 2017. Right? So that'sa seven year lag from when the
company was founded. Now, thatdoesn't mean there's not great
opportunities in AI. But I wouldgo as far as saying that the
(23:26):
company that becomes mostvaluable 10 years from now from
2024, likely will not be an AIfirst company, it will probably
utilize AI tools. But in the waywe think about AI, right, the
company, the theme that yourUber was born was so Lomo,
right? Social, local, mobile,yeah. Oh, two of those things
(23:49):
were true in Uber. Yeah. But thecompany that was most sexy at
that time in the theme wasFoursquare. Yeah. What happened
to Foursquare? It still exists.But like, that's not a nobody
thinks that is one of the greatemerging companies at the time.
Uber hit on some of thosethings, but nobody thought of as
a so SoLoMo company in thatperiod of time. Right, right. So
(24:12):
anyway, this is how we thinkabout it. I think it's if you
ask, Why does VC look so lemminglike this is one of the core
drivers is there's no point inpursuing a theme that no
entrepreneurs are working on.And there's no reason for
entrepreneurs to work onsomething everyone say no
reason. But most entrepreneurswant to work on things that
people want to fund. So you getthe cycle of clustering
constantly.
Kent Lindstrom (24:32):
Yeah, that's such a great example Foursquare,
which I sense is the phase wherenow where people are like, okay,
there's a new technology, andthey squeezed their little brain
and they go, what would you dowith it and you come with
checkins that's what you do withit. You check into places and
you become mayor. And then youget somebody like, Travis are we
gonna have however, the storyends up going? Who says no, no,
that's not what you do with amobile phone that can locate you
(24:54):
and take your credit card. Whatyou do is you get a ride, but
it's not he didn't start I don'tthink they started thinking from
the technology side, theystarted thinking from the
Damnit, I can't get a Kevinparricide.
Eric Paley (25:05):
Exactly, they invert. And they say, there's
this problem that's reallyannoying San Francisco, Boston,
outside of New York City, maybeWashington few places, getting a
taxi was very, very difficult.There's this problem. It's
really annoying. I wonder if wecan do it better? And then like,
what are the tools availablethat might help us do a better?
Oh, here's some tools. But it'snot what are the tools that
(25:27):
exists today that are exciting?What can we do with them? I'm
not saying never start a companythat way. But I think it is a
much less natural way. And it'salso where so much mean to start
up, thinking and
Kent Lindstrom (25:41):
well, and all the people didn't understand
that sort of sharing economy,things that didn't have the
same, you know, hey, we're goingto share parking spaces, or
we're going to share valets, orwe're going to share maids and
things like that. And it just,you didn't understand what like
the problem they were solving.And it was just me to an Uber
for this Uber for that. What Iwant to ask you as you started,
(26:03):
when you started, there were afew seed firms. And it wasn't a
thing, right? We're in a worldnow, where there's hundreds of
seed firms, they've got everykind of brand, and then I'm
focused on AI and focused onthis. But there were only a few
at the time. Right, like whenyou started it.
Eric Paley (26:18):
I mean, I think a first round, I think of OA TV,
maples, which began floodgate,Jeff Clavia, A, but there were a
half dozen, sort of nationallyrecognized seed firms, there are
a whole bunch of other venturefunds that were seed funds,
because they couldn't raise moremoney. Yeah, right. Well, I can
(26:38):
only raise $30 million. So I'mgonna do seed investing. But it
wasn't world class, people. AndI'm sure I'm leaving a few out
that really were world class,but those are the ones at the
time. And when we were startingit, I admit a bit a bit of
ignorance. We didn't think therewere any, because like, you
know, it's like, we came up withthis thought of what we should
do. And then we startedresearching, we're like, oh,
(27:00):
there are some folks out therewho are seeing the same thing
that we're doing. But it was sofew and far between that I
didn't even know they existeduntil we started pursuing this.
Kent Lindstrom (27:11):
So I have my kind of my half joke. Question
for people who are in thisgolden age of, you know, when
there's just a few seed firms?Why weren't you in everything?
Like why weren't you in everyyou know, your you were in more
hits than 99% of VCs? You know,five of them. But why weren't
you in every single one, youknow, Pinterest and Airbnb and
knocked and and all of them ifyou had the whole field or most
(27:33):
of the field to yourself. Yeah,
Eric Paley (27:35):
I think there's some myth that the entire thing is
just a competitive game. I thinka lot of VCs feel that way.
Partially because the definitionI say this mockingly but the
definition of a good deal. Wedon't like to use word deal. But
a good deal is that VCs think, agood deal is a deal that
somebody I respect wants to do.Yeah, right. That's how deal is
(27:57):
defined. So if I was looking atsomething, and I wasn't that
excited, but then I heardsomebody else is looking at it
that I think highly of now it'sa good deal. Right? Like, not
independently, I judged it to beso or I'll tell myself I did. I
hope I'm using myself as anexample. I hope this is not how
we do business. But I think theindustry is really like that,
right? And so everyone startsbelieving that the whole game is
(28:22):
just this competitive game. Andif it was less competitive, you
could be in everything. And Ithink the reality is quite
different than that. Right? Ithink the game is, if it's a
game is really getting to knowentrepreneurs, you rightfully
should be making a realcommitment to supporting them,
(28:44):
not because like they threwthrough a quick idea your way
and you're like, that's a coolidea. Here's some money. But
you're you're actually spendingthe time to understand them and
get to know them. And there's noquestion an index fund of 2010.
And venture if you had goodjudgment, could have been a very
strong fund. Yeah. But, youknow, our goal was much more to
(29:07):
get to know these founders, pickthe ones we really felt we could
get behind because we understoodthem well enough, and then
really get behind them. Right,right. And I think the index
funds side of it just speaks tosomething that's incredibly
passive. And we you know, we'realways super active in every
situation. But we never want itto be that purely passive
(29:29):
investor. And we also never wantit to be that that's a cool
idea. We'll throw money into itbecause we were really trying to
get to know people. And I, youknow, even though there probably
were, I couldn't tell you from2009 to 2013, maybe 100 Really
great companies built orwhatever that number is, there
were 1000s of companies to meetwith. Right and every meeting is
(29:51):
an opportunity cost everyinvestments in opportunity cost.
So you're trying to constantlyfigure out like where am I
investing my time in getting toknow People that I can I can
really get behind and believein. Yeah, so I think it looks a
little differently, then thefield was just wide open. It
wasn't competitive, you just doevery good deal. Because the
other thing I'd say is, ourhistory demonstrates that most
(30:14):
of the very best things weinvested in, they didn't look
like the good deal. In themoment we invested in them, they
were only defined by the gooddeal as the good deal because we
liked it not because I mean,many of the things were passed
on by a million people andpeople don't know, like Uber was
passed on by many, manyinvestors. So it wasn't like you
(30:36):
could just clean up all the goodstuff. But again, I think a lot
of angels or VCs who are writingsmaller checks, think of it that
way, because they really definethe good thing is the thing that
Sequoia is doing, and can theysneak, you know, some dollars
into it? Right? So I think it'sthe wrong mindset. And I think
people have a funny, you know,like when people say I won the
deal and venture, I see why LPSwant to know who can win the
(30:58):
deal on some level. But I don'treally think that's how you make
great investments.
All right, welcome back. This is Something
Ventured podcast I am KentLindstrom, I am your host. My
guest today is Eric Paley. Howare you doing?
Eric Paley (00:12):
I'm doing great. Thanks for having me.
Kent Lindstrom (00:14):
So Eric Paley is the co founder of Founder
Collective, which is one of thefirst seed firms, which is a
concept that didn't alwaysexist. And when they, when they
started, there was a few ofthem. It later became popular to
be found, or what's now calledfounder friendly. But Founder
Collective was one of the earlyones to kind of seek alignment
(00:34):
with the founder, as opposed toreplacing the founder as quickly
as you can. big successes, afirm, right, Uber crews airtable
trade desk, a number of big, bighits. But before that, you were
a founder yourself, and foundedabstract edge and productize, a
couple of different companies. Imean, I guess I'll start out why
(00:56):
is it a collective that's apretty founder, collector is a
pretty specific word and evokesa pretty specific thing. Yeah,
Eric Paley (01:04):
you know, I think we're trying to, it's actually
hard to remember a world nowwhere seed basically didn't
exist. VCs were really financepeople there. So a lot of
finance people in VC. But mostVCs were finance people. And
they thought like financepeople. I mean, they really were
sort of wolves in sheep'sclothing. Still, again, there's
many folks who are like thattoday. But that was basically
(01:25):
most of the industry. And asentrepreneurs, we experienced a
lot of that in ways that werereally negative, and did not
want to be a fund anything likethat. And so we started off, you
know, with with two of us fulltime, and a collective eight
other I think it was eight atthe time, we called founder
(01:46):
partners, all of whom had alsobeen founders, and we're running
their companies day to day. Andthen what we realized over time
is if we did it, right, ourfounders who we invested in
could also be part of thatcollective, because they could
be adding a lot of value foreach other in the body of
knowledge that they create. Andwe found a whole bunch of ways
(02:07):
to execute on that, that I thinkhas really made it a broader and
broader collective over time.Yeah.
Kent Lindstrom (02:13):
So what is the different what? Well, let me ask
you this, what percentage,almost every VC is sort of like,
ends up paying themselves as afounder, right? Like from when I
worked at Google, and somebodyfounded that. So technically,
I'm a founder or, you know, Ifounded a venture capital firm,
but of people who really foundedcompanies and went through the
(02:35):
thing, the pain and the raisingmoney and all that. How common
is that invention? What do youthink the real percentages of
the of those types of people?Luckily,
Eric Paley (02:44):
it's gone up a lot. And we can talk about does it
really make a better investor? Ithink there's an interesting
conversation to be had there.What I think it makes better is,
that's who I'd want to workwith, because they understand it
as a founder, because theyunderstand what I've been going
through and when I don't agreewith them. And there's some kind
(03:05):
of disagreement about what todo. At least I know, it's not
hypothetical, right? It'ssomebody who's actually done
this before giving me feedbackthat's different from the way
I'm thinking about it. But thenumbers have definitely gone up.
One of the things that I findvery insincere is when founders
talk about fat founders, whenVCs talked about founding their
(03:25):
firms, as found as being afounder, it's so fundamentally
different, and there's only onepart of it that's similar, which
is fundraising. Right, and thatit is actually very hard to
fundraise the first time for aventure firm, or if you're
dramatically increasing the sizeof a fund, it can be very
challenging. In some ways, it'seven harder than being an
(03:45):
entrepreneur, fundraising for aventure backed startup, because
there's no way to really createFOMO you literally can, every LP
knows you can accommodate twodozen LPs. So until something's
happening, there's not a lot ofreason for anyone to act, where
it's for an entrepreneur, youknow, there's usually one lead.
So that's like, the one thingthat's harder after that, you
(04:07):
know, it is the least resultsdriven business you could ever
imagine. Whereas founders are onthe line for driving results
every single day. So you know,yeah, you create a culture and
you maybe and you create a youdo some marketing, and there are
things that look like starting acompany, but it really is,
diminishes how much harder itreally is to start a venture
(04:29):
backed startup, and howdifferent the experience is, and
it's sort of a neat way for VCsto be like, see, I'm like you,
yeah, you real founders,probably hearing that and being
like, oh, yeah, right. Okay. Andhere I am in the majors, trying
to hit hit really, you know, 100mile per hour fastball.
Kent Lindstrom (04:48):
Well, as I tell people, you shouldn't, you
really shouldn't start acompany. It's a really bad idea.
You know, when people come upwith this idea, you know, should
I start a company? My answer isalways like, No, we should not
start a company. If they say,Well, screw you, I'm gonna start
anyway, you're like, Okay, well,then you should start a company.
Yeah. I
Eric Paley (05:06):
joke about it's like the risk adjusted return on any
startup at the beginning iszero, right? Like, that's the
math, right? And the only reasonto do it is not because you
think you're gonna get richdoing it. But because you feel
so compelled to go do thatthing. And you're so willing to
take on the challenge of it,because you're just feeling that
(05:27):
level of drive about it. Right?Not because, you know, there's
gonna be a pot of gold at theend of that there almost
definitely is not going to beYeah,
Kent Lindstrom (05:35):
I mean, it's a crazy thing. We look out, you
know, 30 companies, I guess, inour first portfolio, and, you
know, every day there'ssomething hat like something,
man, you kind of feel it, likethat guy's, you know, CTO just
quit, and they run out of money,or Yeah, you know, that, Oh,
wow, that guy got a term. Sothis is great. And you, but
you're sitting there watching itlittle more like a TV show,
(05:56):
maybe. And you kind of have toremember that boy, when you're
in it. Oh, the news that yourCTO quit, or, you know, your,
you got six weeks and your staffneeds to know. And like, all
those things are humanexperiences going on. But
there's 30 of them. So you'rekind of it's something you don't
care, but you, they don't hityou, each one doesn't hit you as
(06:18):
hard as when you're in thething. And
Eric Paley (06:20):
you don't really own it. At the end of the day, it's
a portfolio and you're not thedecision maker, there are
situations where unfortunately,you have to be but very rare
situations. So you're anadvisor, right? And it's so much
easier, it doesn't mean as anadvisor, it doesn't mean or an
investor, it doesn't mean youdon't want to see the company be
wildly successful. But thepressure of actually owning the
decision that may make or breakthe business is so different,
(06:44):
right. And one of the things Ithink we forget a lot as VCs is,
will often be very flip, like,we'll see your resume and be
like, yeah, or that person, oroh, that person's giving a hard
time just fire him. Right. Andwithout actually understanding
how complicated that decisionis, how many trade offs there
are involved. Because it's easyto say, yeah, just fire that
(07:08):
person. But actually, if they'redifficult, but they're actually
getting a lot done for thecompany, it might take you six
months to find somebody who'sgonna play separate, or you
might hire somebody else toreplace him who's far worse, and
it takes you 18 months to getback where you were finding the
right person. So all of that isthe weight of owning the outcome
of every one of these decisions,rather than unfortunately, when
(07:28):
you're running a portfolio, itcan be very easy to be lazy in
understanding the magnitude ofeach choice.
Kent Lindstrom (07:37):
What do you think having been an
entrepreneur now that we'veestablished what that actually
means? What do you think ithelps you with as a venture
capitalist? I mean, is it that,you know, when you're sitting
across from somebody, you'relike, okay, this person, great
person doesn't have what ittakes to get through it? Or is
it that once you've invested,you can, you know, understand
(07:58):
what they're talking about in alittle more than maybe nothing
wrong with investment bankers,but maybe someone who worked in
investment banking their wholelife?
Eric Paley (08:04):
So So I think there's two things. One, there's
definitely the empathy part ofit that I think a lot of
founders need just to feelsupported. That this is hard,
and they're going through it.And you know how hard it is that
that counts for a lot, becausevery easy to sit in the cheap
seats and think it's easy to dohaving never done it before. Oh,
it's just all they have to do isthis. And if they do that, and
(08:24):
do that, the company will be asuccess. And I don't know why
the CEO is not doing that.Right. That's one category. But
the one I would really focus onthat I think people lose sight
of is VCs live at 30,000 feet,they do not see any of the
detail, right? They do notunderstand what happens on the
ground. And they tend to look atoutcomes and pattern match about
against them without actuallyunderstanding how any of those
(08:46):
companies got there. So youknow, we often say is to
founders, like, your VC wantsyou to be a billion dollar
business, and they want you tojump over every other part of
building the business as if noneof the other stuff ever
mattered, so that you'll becomea billion dollar business. But
you can't become a billiondollar business without being a
$10 million business. Yeah, theyactually have to do that stuff.
Right? You're not going to birthit as a billion dollar business.
(09:08):
But the standpoint they kind ofknow only wish you would but but
very little respect for what hasto happen to get there. Right.
And a lot of the VCs don't wantto it's like, and then and I
don't even want to hear it.Right. Like don't don't get me
involved. What am I VC said tome? You involved us too much in
the sausage making when he whenhe was on my board and resented
(09:29):
that comment. I was like, geez,you sold me that you were here
to help me. And I was totallytransparent with you about the
challenges I was facing. Notonly were you not particularly
helpful, but then you complainedthat I showed you what I had to
go through to get to this place.Yeah. Right. And but that's part
of that's part of the deal.Right? That is that is part of
(09:50):
why the person on the ground hasso much real work to do. And
it's very easy to minimize thatand think it doesn't matter.
Another example is I think italmost never happened. Is the
company's birth the platform.But VCs love that idea. They
want companies be platforms fromday one. Well, if you try to be
a platform from day one, youprobably will never get anything
(10:10):
working whatsoever. Right? It'svery easy for a VC to look at
things from 30,000 feet and belike, well, you know, this
company is wildly successful,their platform, this company's
wildly successful theirplatform, and not understand
that the beginning, none ofthose companies were platforms,
they built applications. Andthose applications gave them
license because they weresuccessful to become platforms.
Right. But from the VCstandpoint, they you know,
(10:32):
there's, there's somethingpowerful about beginning with
the end in mind. But if youdon't understand the steps to
get to the end, it is verydangerous. And that is that is
typically a big problem. VCspush entrepreneurs to skip over
validation. Because they justwant to get to the endpoint.
When you skip over validation.Usually, you screw up your
entire business. But that's likea slow motion train wreck that
(10:55):
the VC doesn't even appreciateor understand because they want
the company birth as a billiondollar company, right?
Kent Lindstrom (11:01):
And so how does how does an entrepreneur tell
the story? Because everybodyknows all this now, like in
retrospect, but of course, it'sthe classic Warren Buffett thing
already. He tells you how to getrich, you just have to actually
do it, you know, not panic whenanyone else does. How do you
tell the story where, you know,Uber comes along, and it was
like, well, is just a black carservice? Small, right? I mean, I
(11:22):
think the Pez dispenser eBaything might be a little
apocryphal. But hey, I've got aPez dispenser company. Small,
right. Yeah. But of course, inhindsight, you understand that
that's the Well, that's thepassionate group that starts the
thing that ends up being theplatform. But here we are today,
with just our little black carcompany, like how do you? How
(11:44):
should an entrepreneur tell thatstory to a VC? I
Eric Paley (11:47):
think one of the biggest challenges in our
industry is VCs say they investin markets ahead of everything
else. But I think VCs areterrible at understanding
markets, and really bad atmarket sizing. So even when Uber
was already a huge business,there were people writing about
how it could never be a reallybig business. Right? Like still
(12:08):
like and, and there are numerouspeople I talked to Uber about
VCs that I spoke to her about inthe early days. And they'd say,
I don't get it. Like how hard isit to create a mobile app for
one of the 10,000 50,000 liverycompanies in the US? Like,
they'll all do that, like whatis what is special about this.
And, you know, we believe therewas the potential for network
(12:29):
effect. And mean, we're going tobe right about that we wrong
about a lot of things. Butlargely the way we do it more
than anything else is we followthe entrepreneur. So we're
interested in entrepreneur who'sway out ahead of us in
understanding not not justenvisioning, but but testing and
learning in the market aboutwhat's going to happen. So
interestingly, everyone thinksthat Travis Kalanick, pitched me
(12:52):
on Uber and, and I did have lotsof interesting interactions with
Travis. But but it was RyanGraves, who pitched me on Uber,
was running the company at thetime. And he had multiple cars
already on the road, and hisobservations about what was
happening and what he thoughtwas going to happen in the
market with this approach andwhat was different about it, and
(13:13):
significant, he led us to anunderstanding, that didn't mean
we were going to be right, butallowed us to appreciate his
vision and the work he wasdoing. Maybe Travis and
Garrett's vision, but thecollective vision and the work
they were doing to validate itthat made it seem more and more
real. And both thing we get veryobsessed with is the people who
(13:35):
do that work well, we think aregoing to keep doing that work
well. And they'll find their wayto success. And the people who
just want to talk about thevision, but don't really want to
engage the hard parts and reallytalk about the work. They're
going to do that forever. Andwhen the company is not working,
they're just gonna keep wavingtheir hands with stories of
vision, right? So there'ssomething about the people who
(13:55):
really love to test it in thereal world, and learn from the
real world and adapt. Like, youcould say, Ryan at the time.
Tell me a couple examples ofassumptions you guys had that
haven't played out the way youthought they would. And he would
give you great examples of how,you know, in the few months,
they've been doing this, theylearn things that that
immediately got them to changewhat they were doing. And that's
(14:18):
the type of dynamic thinkingthat we're really looking for.
So, you know, ultimately, yes,we believe the market can be
big, but it was much more aboutbelieving in the person that was
leading the charge to find findthe way
Kent Lindstrom (14:31):
Yeah, well, it's funny, the social network thing,
too. And that happened. I mean,aside from everybody saying,
nobody's ever going to put theirphoto online. And that was a
common thing that people weresaying at the time. It was kind
of like well, you know, themarket was 4 million people
right? Go to college UnitedStates. So maybe the the 3
million person market, which youknow, I don't know how many 10s
(14:51):
of axes that's off by but, and Ithink the funny one of the
things I felt about when Uberand Lyft as well emerged The
first time I was like, Oh, crap,this is something I was got in
like, I guess it was a lift andthe woman driving. What's the
deal here? It's just like, Oh,I'm driving this thing. And I'm
paying for my tuition at, likeSan Francisco State with it. And
(15:15):
then you go, Oh, okay, what nowwhat's happening here, and this
is what happened, I guess witheBay. People are like, Hey, I'm
making a living on this thing.Airbnb, when you've got other
entrepreneurs, you know, she'shas her own little business
driving a car to pay for school,then you go, if that it, if
she's doing this to change herlife to go to school, you can
(15:38):
find another billion peoplesomewhere like I don't know
where, but, but it's the tinystory. It's just that one story
like that one person doing onething? And you're like, Yeah,
but that makes sense. As opposedto well, I'm gonna tell you
theoretically, how we're goingto change your enterprise by
this and that, and it'stheoretical. I don't know
something about that story. Inthe moment, you're like, Oh,
(15:58):
absolutely. Those
Eric Paley (15:59):
those anecdotes that you look at and say, well,
there's got to be a lot of this.And I'll even give you an
earlier one with Uber becauseUber X obviously came later. The
original, which became known asUber Black, but was just Uber
cab at the time, was liverydrivers. And a typical delivery
driver, we get pre scheduled forthe day for their car and was
very expensive, right? For theride. And like Boston coach was
(16:24):
like, you know, this, this biglivery agency. And they might
have three drives the entireday, and tons of downtime
between them, because it justwas so fragmented, and they had
to make a living off them, whichis why it was so expensive. So
very early on, and one of thethings Ryan was able to help us
understand is there was so muchinvisible inventory, or at these
people that hours a day in whichat a lower price, they'd be
(16:48):
happy to grab a ride on demand,right? And because they knew
they didn't have to go to theirnext ride for three hours.
Right, but they happen to be inthe area. And you looked at that
invisible inventory. And yeah, Iwasn't sitting there going,
Okay, what's the math of sizingit just looking at? You're like,
there are a lot of those people.And there are a lot of people
who would happily take a ridefrom someone like that a
(17:09):
professional driver at like,half the cost of what it would
have cost if I pre booked thatdriver. And so from minute one,
they were attacking angle themarket that you could start
engaging those types ofanecdotes, and extrapolate and
go Yeah, like, there's somethingpretty interesting there. Yeah.
Yeah. Tell me about followingthe entrepreneur. People always
(17:29):
ask us, Well, what's your youknow, what things do you invest
in? Like, they want to hearcybersecurity and like a list of
things? And our answer isgenerally like, well, we're very
focused, we're focused onsoftware, we invest at the seed
stage, which is the earlieststage, but we let the
entrepreneur tell us the future,because wouldn't the best
entrepreneurs figure this out? Idon't. So I guess what I'm
(17:53):
getting at is, we've seen theemergence of a lot of thesis
focused funds, where the VC hasthe idea first, right, we're
like, well, the future is, Idon't know, the financial system
is applied to mobility or, orsome idea that the VC starts
with, which seems to me the kindof the wrong way to do this, if
you're, because then ourentrepreneur is going to come
(18:15):
sell you that your story thatyou want to hear, and they're
not going to be natural fit forit. But it's been an interesting
phenomenon, because 20 yearsago, nobody could not Kleiner,
not Sequoia, not anybody hadthat idea, like, Oh, we're just
gonna focus on this. You know,our idea first,
I don't know if that's true. 20years ago, VCs had a lot of self
confidence 20 years ago thatthey knew if you pitched to Vc,
(18:37):
and they didn't invest in you,and people still use this term,
right? This very glib term Ipassed. Yeah, get it in that
term, is this notion that like,I know what a good company is,
and a bad company is and if Iinvested, it's a good company,
and if I didn't invest, it's abad company. And that's just not
true, right? Like, that's likebeing a baseball hitter, and
saying, I know what a goodpitches and a bad pitch is. And
(19:00):
if I hit it out of the park, itwas a good pitch, you know, and
if I, if I didn't swing it, itwas a bad pitch. But sometimes
you don't swing at a strike inyour, because it's not the part
of the zone that you hit wellin. Right. And I think the
reality is, there are so manycompanies, we've been very
lucky, we've had an incredibleportfolio, could not ask for
more. But there have been somany companies we missed,
(19:22):
because it wasn't the rightopportunity for us to appreciate
the entrepreneur at that stage.Right. Right. And that's tough
to believe, but we are, youknow, we are not a binary system
of we're right or wrong. And soI go back to VCs were quite
arrogant in those days. Butlet's dig in from there to this
idea of the idea. The VC comingup with the idea. I think
(19:45):
there's nothing more cheap inthe venture industry or in
entrepreneurship than ideas.Right? I think it really comes
down to execution and the craftof the execution. Craft of
execution goes well beyond anidea. It's million ideas. It's
it's every little angle offiguring out how do you make
whatever it is you're deliveringspecial for your customer. And
(20:08):
that's not like a singular idea,that whole thing is a myth.
Right? That there's some nowyou, you need to start with some
kind of idea. Usually you startwith the best entrepreneur
things start with a problem theywant to solve, and then they are
very adaptable to what would bea great solution for that
problem. But something's got tomotivate you to spend it. We
talked about this before tospend all your time pursuing
something when the risk adjustedvalue of it is zero, right. And
(20:31):
so you got to get motivated,that idea might be the thing
that motivates you. But I thinkthat's taken on a life of its
own. And VCs want to seem reallysmart. And the way they like to
feel smart is they like to beanalysts of markets. And they
want to believe they're in theprognostication business, that
they are the ones who canevaluate ideas, and predict the
(20:52):
future. And I don't actuallythink successful VCs do that, or
maybe very few do, and we'rejust not good at it. But there
are some people who are reallygood at that. I don't buy that.
Right, I don't think that is Iactually think that's one of the
reasons why a lot of peoplebecome very bad VCs is because
they think that they know whatthe future is going to bring.
(21:13):
And that's their job is to like,go predict the future. And then
they find people to bet on wholike align to their prediction
of the future. But those aren'tthe right people to invest in.
Right. And so we get away fromthis idea myth, we even
recognize that many of thethings that have become great
companies may not obviously seemlike great ideas when you first
(21:35):
engage them. But we're lookingfor the entrepreneur to help us
understand the work they'redoing and the craft and why they
believe and what the craft isteaching them about the space or
if you want to call it the ideathey're going after. And then we
start really engaging thatthought process to figure out,
are they all over it? Are theymany steps ahead of us? Are they
(21:58):
engaging the really hard partsof it? And you can you believe
that they might be? Right,right? And what we say is that
helps us pursue what we call theweird and wonderful, right?
Because I think thesis driveninvesting forces everyone into
clusters of hype, right, and wedid this analysis, where we
looked at 20 years of what thehighest hype thing was in the
(22:21):
year, the theme that was themost hyped in that year. And
then what was the most valuablecompany created that year, and
in 20 years of the last 20years, never has the most
valuable company fit the hypedthesis of that moment. If you
look at it a little moreclosely, what you see is there's
like a four to seven year lag ofwhen the companies are created
(22:42):
that end up four to seven yearslater, the theme emerges. Right?
So Uber gets created in 2010.And by 2014, everyone's talking
about the sharing economy,right? And Airbnb predates that.
And yet, if you look up Googleterms, the sharing economy
didn't exist as a term until Ican look at it 2014 15. And even
(23:03):
right now, it's not to say thatAI is not really important
software tooling, we believe init. But the company that
inspired this moment of AI is isopen AI, and that was founded, I
think in 2017. Right? So that'sa seven year lag from when the
company was founded. Now, thatdoesn't mean there's not great
opportunities in AI. But I wouldgo as far as saying that the
(23:26):
company that becomes mostvaluable 10 years from now from
2024, likely will not be an AIfirst company, it will probably
utilize AI tools. But in the waywe think about AI, right, the
company, the theme that yourUber was born was so Lomo,
right? Social, local, mobile,yeah. Oh, two of those things
(23:49):
were true in Uber. Yeah. But thecompany that was most sexy at
that time in the theme wasFoursquare. Yeah. What happened
to Foursquare? It still exists.But like, that's not a nobody
thinks that is one of the greatemerging companies at the time.
Uber hit on some of thosethings, but nobody thought of as
a so SoLoMo company in thatperiod of time. Right, right. So
(24:12):
anyway, this is how we thinkabout it. I think it's if you
ask, Why does VC look so lemminglike this is one of the core
drivers is there's no point inpursuing a theme that no
entrepreneurs are working on.And there's no reason for
entrepreneurs to work onsomething everyone say no
reason. But most entrepreneurswant to work on things that
people want to fund. So you getthe cycle of clustering
constantly.
Kent Lindstrom (24:32):
Yeah, that's such a great example Foursquare,
which I sense is the phase wherenow where people are like, okay,
there's a new technology, andthey squeezed their little brain
and they go, what would you dowith it and you come with
checkins that's what you do withit. You check into places and
you become mayor. And then youget somebody like, Travis are we
gonna have however, the storyends up going? Who says no, no,
that's not what you do with amobile phone that can locate you
(24:54):
and take your credit card. Whatyou do is you get a ride, but
it's not he didn't start I don'tthink they started thinking from
the technology side, theystarted thinking from the
Damnit, I can't get a Kevinparricide.
Eric Paley (25:05):
Exactly, they invert. And they say, there's
this problem that's reallyannoying San Francisco, Boston,
outside of New York City, maybeWashington few places, getting a
taxi was very, very difficult.There's this problem. It's
really annoying. I wonder if wecan do it better? And then like,
what are the tools availablethat might help us do a better?
Oh, here's some tools. But it'snot what are the tools that
(25:27):
exists today that are exciting?What can we do with them? I'm
not saying never start a companythat way. But I think it is a
much less natural way. And it'salso where so much mean to start
up, thinking and
Kent Lindstrom (25:41):
well, and all the people didn't understand
that sort of sharing economy,things that didn't have the
same, you know, hey, we're goingto share parking spaces, or
we're going to share valets, orwe're going to share maids and
things like that. And it just,you didn't understand what like
the problem they were solving.And it was just me to an Uber
for this Uber for that. What Iwant to ask you as you started,
(26:03):
when you started, there were afew seed firms. And it wasn't a
thing, right? We're in a worldnow, where there's hundreds of
seed firms, they've got everykind of brand, and then I'm
focused on AI and focused onthis. But there were only a few
at the time. Right, like whenyou started it.
Eric Paley (26:18):
I mean, I think a first round, I think of OA TV,
maples, which began floodgate,Jeff Clavia, A, but there were a
half dozen, sort of nationallyrecognized seed firms, there are
a whole bunch of other venturefunds that were seed funds,
because they couldn't raise moremoney. Yeah, right. Well, I can
(26:38):
only raise $30 million. So I'mgonna do seed investing. But it
wasn't world class, people. AndI'm sure I'm leaving a few out
that really were world class,but those are the ones at the
time. And when we were startingit, I admit a bit a bit of
ignorance. We didn't think therewere any, because like, you
know, it's like, we came up withthis thought of what we should
do. And then we startedresearching, we're like, oh,
(27:00):
there are some folks out therewho are seeing the same thing
that we're doing. But it was sofew and far between that I
didn't even know they existeduntil we started pursuing this.
Kent Lindstrom (27:11):
So I have my kind of my half joke. Question
for people who are in thisgolden age of, you know, when
there's just a few seed firms?Why weren't you in everything?
Like why weren't you in everyyou know, your you were in more
hits than 99% of VCs? You know,five of them. But why weren't
you in every single one, youknow, Pinterest and Airbnb and
knocked and and all of them ifyou had the whole field or most
(27:33):
of the field to yourself. Yeah,
Eric Paley (27:35):
I think there's some myth that the entire thing is
just a competitive game. I thinka lot of VCs feel that way.
Partially because the definitionI say this mockingly but the
definition of a good deal. Wedon't like to use word deal. But
a good deal is that VCs think, agood deal is a deal that
somebody I respect wants to do.Yeah, right. That's how deal is
(27:57):
defined. So if I was looking atsomething, and I wasn't that
excited, but then I heardsomebody else is looking at it
that I think highly of now it'sa good deal. Right? Like, not
independently, I judged it to beso or I'll tell myself I did. I
hope I'm using myself as anexample. I hope this is not how
we do business. But I think theindustry is really like that,
right? And so everyone startsbelieving that the whole game is
(28:22):
just this competitive game. Andif it was less competitive, you
could be in everything. And Ithink the reality is quite
different than that. Right? Ithink the game is, if it's a
game is really getting to knowentrepreneurs, you rightfully
should be making a realcommitment to supporting them,
(28:44):
not because like they threwthrough a quick idea your way
and you're like, that's a coolidea. Here's some money. But
you're you're actually spendingthe time to understand them and
get to know them. And there's noquestion an index fund of 2010.
And venture if you had goodjudgment, could have been a very
strong fund. Yeah. But, youknow, our goal was much more to
(29:07):
get to know these founders, pickthe ones we really felt we could
get behind because we understoodthem well enough, and then
really get behind them. Right,right. And I think the index
funds side of it just speaks tosomething that's incredibly
passive. And we you know, we'realways super active in every
situation. But we never want itto be that purely passive
(29:29):
investor. And we also never wantit to be that that's a cool
idea. We'll throw money into itbecause we were really trying to
get to know people. And I, youknow, even though there probably
were, I couldn't tell you from2009 to 2013, maybe 100 Really
great companies built orwhatever that number is, there
were 1000s of companies to meetwith. Right and every meeting is
(29:51):
an opportunity cost everyinvestments in opportunity cost.
So you're trying to constantlyfigure out like where am I
investing my time in getting toknow People that I can I can
really get behind and believein. Yeah, so I think it looks a
little differently, then thefield was just wide open. It
wasn't competitive, you just doevery good deal. Because the
other thing I'd say is, ourhistory demonstrates that most
(30:14):
of the very best things weinvested in, they didn't look
like the good deal. In themoment we invested in them, they
were only defined by the gooddeal as the good deal because we
liked it not because I mean,many of the things were passed
on by a million people andpeople don't know, like Uber was
passed on by many, manyinvestors. So it wasn't like you
(30:36):
could just clean up all the goodstuff. But again, I think a lot
of angels or VCs who are writingsmaller checks, think of it that
way, because they really definethe good thing is the thing that
Sequoia is doing, and can theysneak, you know, some dollars
into it? Right? So I think it'sthe wrong mindset. And I think
people have a funny, you know,like when people say I won the
deal and venture, I see why LPSwant to know who can win the
(30:58):
deal on some level. But I don'treally think that's how you make
great investments.
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