Redeye VC

Josh Kopelman

Managing Director of First Round Capital.

espite being coastally challenged (currently living in Philadelphia), Josh has been an active entrepreneur and investor in the Internet industry since its commercialization. In 1992, while he was a student at the Wharton School of the University of Pennsylvania, Josh co-founded Infonautics Corporation – an Internet information company. In 1996, Infonautics went public on the NASDAQ stock exchange.

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Monthly Archives for 2010

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I'm getting ready to head out to DEMOfall next week. I've had a long and wonderful experience with the DEMO conferences -- having founded or funded over 20 companies that have launched there.  It looks like Chris Shipley has identified a bunch of interesting companies this year as well - including First Round Capital portfolio company, (While the DEMO conference doesn't pre-announce the Demonstrator companies, the companies are free to announce their selection.  So far I've counted over 30 press releases from launching companies - check them out here).

If you're going to be at DEMOfall, drop me a note!

Companies launching at Demofall

Domino Rally Business Models

Domino_p1010008_cropped_45_4x5 As a kid, I used to play with a game called Domino Rally -- where you would spend hours setting up an intricate course of hundreds of dominos, with the hope that you can create a spectacular "chain reaction" at the end. However, if one domino was misplaced, the rally would be ruined...and you had to start all over again.

Today, as a VC, I've begun to see a trend toward what I call "Domino Rally" businesses. These are business models that require a number of disparate events to occur in order to be successful - and if any one event is missing, the entire business fails. 

"If we can negotiate a deal with the top 10 publishers on the Internet AND cost-effectively convince millions of users to install a co-branded plugin AND convince advertisers to buy a new form of advertising THEN we have a billion dollar business"

The problem with Domino Rally business models is that they tend to have a binary outcome -- everything either lines up perfectly or it doesn't work at all.  Even if each component has a high probability of a successful outcome (say a 75% chance of a positive outcome), the combined probability outcome for success is not high.  For example, "a 4-Domino" business plan's chance of success is .75 x .75 x .75 x .75 = 31%.
Moreover, most of these business plans require major up-front investment to get the company to the point where it is able to get visibility to the next domino.  (ie, it takes $1M to see if we can get the first domino to fall, and $2M to see if we can get the second, etc).

Rather than have a business model which requires all the moons to line up in your favor, I'd much rather see: (a) a business plan which has several different paths to success; or (b) a business plan where the outcomes of the each component has been tested or proven individually; or (c) a business plan which only requires one or two dominos to fall; or (d) if you still think your business needs multiple dominos, you can show how you can get there cost-effectively.

When we started our two major dominos were (1) can we get sellers to list inventory, and (2) can we get consumers to buy stuff. To offset the risks of the former, we went out and signed contracts with dozens of used book, CD and movie stores to list their inventory -- launching with over 1 million items available. To offset the risks of the latter, we launched with partnerships with all the major price-comparison shopping engines, providing us with quick access to millions of price-sensitive consumers.  While we didn't eliminate the risks, we were able to credibly convince our investors that we were able to position the dominoes in the right place.

Remember - If one domino is misplaced, your rally is ruined!

The M&A Lotto

Lottery In 2005, Google submitted a 10-K filing with the SEC which revealed that it had acquired nine companies and substantially all of the assets of another six companies. The combined purchase price for these 15 companies was equal to $130.535 million USD
2005 Google Acquisitions - 15

According to Wikipedia, Yahoo made 11 acquisitions in 2005 –and Yahoo’s 10K states that in addition to their investment in Alibaba, the purchase of the remaining outstanding shares of Yahoo! Europe and Yahoo! Korea, and the purchase of Verdisoft...Yahoo “acquired four other companies which were accounted for as business combinations. The total purchase for these four acquisitions was approximately $79 million…[and] the Company also completed immaterial asset acquisitions that did not qualify as business combinations.”
2005 Yahoo Acquisitions - 11

So why is it that every single startup that I see expects to sell to Google and Yahoo?

More people were drafted in the first round of the 2005 NBA draft than were acquired by Google and Yahoo. (Perhaps I should be scouting talent around North Carolina instead of Stanford?)

In fact, you have better odds of winning $5M in the NY Lottery than you do of selling your company to Google (or Yahoo) - in 2005, there were 19 prize claims of $5 Million or more in the NY Lottery. (Honest.  The information wasn’t readily available on their website – so I sent an email to them at questions [at] and they responded within an hour.)

Moral of the story – entrepreneurs should focus on building real, long-term value. An exit opportunity only exists if you build a company that has differentiated technology, a strong team, offers customers real value, demonstrates traction in the marketplace, and/or solves a real need for the acquirer. You can’t build a company to sell it – I’ve never seen it work. If you are playing the odds for a quick flip to Google or Yahoo, buy a lottery ticket.