Founder Collective, Seed-Stage Fund, Betting on Surging NYC Tech Startup Scene

4/7/11

New York is famous in the business world for its large companies in a variety of industries. For the partners at the seed-stage venture fund Founder Collective, however, the focus is on the small tech startups in the city and beyond that have the potential to rapidly grow in value.

In fact, managing partners David Frankel and Eric Paley, among other partners of the fund, formed Founder Collective in 2009 as a continuation of their success in backing each others’ startups and other young companies for several years. And while the firm’s $50 million fund might seem small to the bigwigs on Wall Street, we’re living in a world where tech upstarts are launching products and gaining real customers on budgets of less than $1 million.

Founder Collective, with offices in Cambridge, MA, and New York City, has made more than 50 investments in tech startups around the country, and its partners have made bets on 20 or so firms in New York, according to Paley and Frankel. Though Frankel and Paley have been involved in firms outside of tech, their fund focuses on software and Web startups that make efficient use of capital and for which relatively small investments can carry the companies to major jumps in value. (So, obviously, this excludes capital-intensive businesses like drug developers.)

While Frankel and Paley both keep homes in the Boston area, they have partners in New York, like Hunch co-founder and CEO Chris Dixon, who spend most of their time in operational roles at startups. (Hunch, a New York City-based startup, says that it personalizes the Internet by helping people find recommendations on all sorts of topics.) Frankel and Paley, who are the only partners who are full-time dedicated to Founder Collective, each serve on multiple boards of directors in New York, giving them a close view of what is happening on the ground in the city’s startup scene.

“There’s been, and I think Chris (Dixon) has been very involved in this, a renaissance in New York,” Frankel says. “There’s been a tremendous focus on the startup scene.”

In fact, Frankel is an adviser to General Assembly, a recently opened workspace and educational facility for entrepreneurs in the Flatiron district of Manhattan. General Assembly is one of a series of initiatives in the city to bolster the startup scene in recent years, including the opening of Polaris Venture Partners’ Dogpatch Labs to house and support tech entrepreneurs as well as the introduction of the TechStars startup accelerator program here.

Founder Collective and its partners are go-to sources of funding and advice for young startups in New York and elsewhere. For instance, the fund was part of a relatively small syndicate to participate in a seed round of funding last year for New York City-based ADstruc, a graduate of the TechStars program, which provides an online marketplace for outdoor advertising spaces such as billboards and the sides of buses. (Paley says that “adtech” startups in NYC like ADstruc and AdSafe Media, where he is a board member, benefit to their close proximity to major media buyers in the city.)

It’s no secret that startups are turning more often to seed-stage funds like Founder Collective and angel backers for initial financing than to traditional venture firms, compared with years past. In many cases, the seed-stage funds and angels offer startups the guidance of people who have been there and done it before at their own companies. Indeed, Founder Collective’s Frankel, Paley, and several other partners have past experience starting and selling firms.

In the 1990s Frankel, then in his early 20s, co-founded an Internet service provider in Africa called Internet Solutions and deferred his enrollment at Harvard Business School. He sold the company, which grew fast and profitably, to Dimension Data in 1997. With the successful sale of IS under his belt, Frankel started business school at age 30 at Harvard, where he met fellow members of HBS’s class of 2003, Dixon, Paley, and another current Founder Collective partner, Micah Rosenbloom.

Paley says that Frankel provided a key $500,000 seed investment for a 3D digital dental imaging company called Brontes Technologies that he and Rosenbloom started out of Harvard with technology from MIT. The startup went on to raise money from venture backers such as Bain Capital Ventures, Charles River Ventures, and IDG Ventures Boston (now Flybridge) and was sold in 2006 to 3M for $95 million. Frankel also made an initial seed investment in Dixon’s first company, SiteAdvisor, a Boston-based Web security software provider that was sold to McAfee (NYSE:MFE) in 2006 for a reported sum of $70 million.

“That first check [from Frankel] put us in business,” Paley says. “I don’t think we ever would have gotten Brontes off the ground without David.”

To be clear, the sales of Internet Solutions, Brontes, and SiteAdvisor were completed way before Frankel and Paley started Founder Collective. Yet Founder Collective has exited from its own investments in Brooklyn, NY-based Hot Potato (bought by Facebook last summer), Mountain View, CA-based About.me (sold to AOL in December), and Palo Alto, CA-based Milo.com (acquired by eBay in December).

While financial details of those three recent buyouts weren’t released at the times of those deals, it bodes well for Founder Collective that it already has three exits in less than two years of full operation. And the bottom line here is that the firm is a force in the growing startup scene in New York City.

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