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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Do you need to switch your pitch?

Lately I've found myself in a number of pitch sessions where I've quickly realized that the entrepreneur's pitch did not correspond to the framework I use to analyze a company. All investors have some type of mental model and set of proxies that they use to help them evaluate a company and how it fits into an overall market. This model will often drive the types of questions that a VC will ask. This is not rocket science - rather, just some common sense.  For example, if you are entering into an existing market with entrenched players, a VC will place a lot of importance on understanding the competitive landscape.

To really deliver a knock-out pitch, an entrepreneur should have an understanding of how the model works, and frame their presentation squarely within it. This allows them to anticipate the questions that the VCs are likely to ask before they ask them. Although these mental models can vary from individual to individual, there are some basic fundamentals that apply across the board. The first step is to understand whether you're a 1, 2, or 3 type of business...

VC Evaluation Framework

1. New Market or Space

When I was an undergraduate at Wharton, I had an entrepreneurship professor who definitively stated that "a successful entrepreneur is one who finds a new, unmet market need."  And after 15+ years of working in IT-related startups, I can now say that I disagree.  The IT market has gotten so efficient, with low barriers to entry, that the answer is almost never that you were the first person to think of the idea.  Rather, the odds are far more likely that if there is an "unmet market need" it might be unmet for a reason.  I can't tell you the number of companies I see entering into a market space that have not fully investigated why the previous companies in their space have failed.   (Take the swap market - I've seen many new Swap 2.0 entrants over the last two years, but few had really studied the rise and fall of the 1998-2003 players like WebSwap, Switchouse,, SwapVillage, Mr. Swap). 

Given that perspective, when I'm looking at a company that is attempting to define a brand new market or space, I will generally want to know: "Why you?  Why now?."  The answer is almost never that you were the first person to think of the idea, but rather the confluence of a number of trends that make this possible now where it just wasn't before. For example,  Aggregate Knowledge could not have existed until the computing and network power required for them to deliver relevant real-time recommendations became available. Likewise YouTube could not have existed before broadband penetration reached critical mass, storage costs significantly dropped, and flash became the online video standard.

If you're a Number One type of business, you should expect questions like these:

  • Why now? What technologies and/or trends have changed to make this possible?
  • Why was this not possible before? 
  • Why did prior companies fail here?
  • Why are you the right company to do this?
  • How big is this market going to be?
  • What existing companies are you disrupting?

At the end of the day, an investor needs to make a "gut bet" on a Number One business.  The absence of existing market data forces a VC to take the "market acceptance" risk.  While I definitely see a lot of Number One businesses (and make the bets occasionally, like we did with Jingle Network's 1-800-FREE411), the vast majority of the deals we see compete in an existing space or market. In this case VCs will generally look at two scenarios:

2. Existing Market with Successful Players

In an existing market with successful players, market acceptance risk has already been taken off the table. However investors will still need to understand what makes you significantly faster, better, cheaper than the existing companies. For example's structured market for buyers and sellers of used goods gave it a strong advantage over incumbents eBay and Amazon. The classic example of a Number 2 company is Google, which used its PageRank algorithm to deliver better search results than the existing search engines. Typical questions you'll get as a Number 2 business include:

  • What is your significant competitive advantage over existing solutions?
  • Is it meaningful enough to steal market share away from existing players?
  • Is this a feature or a company?
  • Why won't [insert market leader here] just do this?

If you are a Number Two type of company, your differentiation needs to be real and meaningful.  Don't expect your AJAX homepage to succeed because you have a good URL.  Also, you should never downplay the competition.  Rather, you should emphasize the competitive landscape -- and your differentiation from the entrenched players.  In the ideal world, your  differentiation will be extreme (ie, not just "our website is easier to use") and business model will allow you to succeed at the expense of your competitors (perhaps you can shrink a market?).

3. Existing Market with Struggling  Players

Perhaps the toughest of the three scenarios, an existing market with struggling players requires you to prove two things - that the market doesn't suck, but that your competitors do. For example despite multiple attempts by a host of venture-backed companies, to date there has been relatively low traction in the online tutoring market. Startups in this space will need to explain how they plan on creating a market where plenty of companies that came before them were unable to. This also requires convincing investors to overcome both market and competitive risk - no small feat. If you're a Number 3 type of company, you can expect to hear questions like these:

  • Why has no other company been able to succeed in this market?
  • What has changed in this market that makes this idea possible now?
  • Why have none of the existing players moved in this direction?

All pitches are not created equal. Understanding the framework that investors use to analyze their business will enable entrepreneurs to view their company with greater perspective, and ultimately articulate its value (to themselves and their investors) more effectively. It all starts with a simple question - are you a 1, 2 or 3?

Thanks to Mazen Araabi for helping with this post...


Mukund Mohan

What would you call the Starbucks play if if came up now?
1. Existing market (coffee) with small successful players (Peets), 2. Underserved and losers for competition (Cheap 50 cents coffee) or
3.New Market (purveyor of fine $4 coffee?

Chuck Sacco, PhindMe

Josh, in reference to your "Failing Cheaper" post, I wonder if #1's are the best candidates for the cheaper funding model, while #2's and #3's are better cast with the traditional model.

It seems to me that 2's and 3's can use market research and milestone planning to reduce risks since more can be known about an existing market. 1's need to focus more on experimentation to reduce risks given more unknowns and risks in new markets.


@Mukund Mohan

ERGO It all depends on what your definition of "Successful Players" is.

Starbucks redefined "success," by redefining "the coffee experience" (i.e., creating the concept here in America, in order to recreate the European experience).

Emre Sokullu

Very enlightening! Thanks!

Raj R

Josh- Great Post. However, I believe there is a variation in Step #2 which is: Existing Market- Unmet need by existing players. Is'nt that what Aggregate Knowledge is doing?


Jingle is not addressing a new market but is disrupting an exsting market (phone directory services). So I would have put it in your category 2. They are providing a cheaper solution (namely free) to the existing paid directory services.

Also, youtube founders would have probably failed your why you? test.

Paul Freet

There is a fine line between common sense and over simplification. If you only have five minutes to judge the worthiness of a new venture, then I guess you need an easy model like this. But that doesn't mean it always works.

I'd like second what Emre said. There are markets where a disruptive technology can allow a product or service at a price point that may open entirely new class of customers. Incumbents will ignore a new entrant if it is not going after their customer base. I encourage anyone interested in this subject to read the Innovator's Dilemma by Clayton Christensen.


very useful; thank you.
Am currently owner of a #3 business which is clearly failing and will be put out of its misery imminently. Unfortunately, not only does our mkt suck, our business model does as well. (No two ways about that - mea culpa etc etc.) Stripping out all the obvious disappointment etc, it is probably, in a perverse way, the best lesson to have learned, albeit one that I would certainly not have chosen.
As a 1st time entrepreneur, I am hoping these are battle scars and not terminal in themselves..
From my perspective, then, I'd like to think that for the 'why you' criteria, 'past experience in having failed' is just as much a valid answer as those 1st timers who have struck gold first time around.

hermes bags

Jingle is not addressing a new market but is disrupting an exsting market (phone directory services). So I would have put it in your category 2. They are providing a cheaper solution (namely free) to the existing paid directory services.

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