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.

Read more or visit First Round Capital

Monthly Archives for 2010

View the older monthly archives »

Good Luck Charlie

20100927153632!good_luck_charlie_-_logoAfter two years at First Round Capital, today Charlie O’Donnell announced he was leaving to launch his own seed-stage venture fund, Brooklyn Bridge Ventures - the first venture capital fund based in Brooklyn.  I’m really very excited for Charlie and can’t wait to see the impact his firm makes on the Brooklyn tech community.  When Charlie initially joined First Round Capital, we had both agreed that it would be for a one-year term.  After witnessing Charlie’s hustle and energy firsthand, we extended his position for a second year.  During his time at First Round, Charlie made a real impact -- helping us expand our New York presence (we now have an office on Union Square with three investment professionals – Howard, Chris and Phin), sourcing seven deals (including GroupMe, which was acquired by Skype), and placing over a dozen people in our portfolio companies.  On a personal level, I think that almost every blog post I wrote during the last year was a direct result of Charlie’s frequent barbs like “Hey, did you lose the password to your Typepad account?  How come you’re not blogging more.”

Ever since Charlie joined First Round Capital he and I have talked about his goal of starting his own firm one day – and I’m excited to see him take the plunge.  All of us at First Round wish him the best of luck and look forward to working together with him in his new fund.  

 

We, We, We so excited for our annual holiday video

Over the last few years, one of my favorite holiday traditions has been putting together First Round Capital's annual holiday video.  In the past we have used song, dance and our impressive physiques to work our way into your hearts over the holiday season. This year has gone by fast and we have added a whole new cast of remarkable characters to our community.  We are really inspired by our talented portfolio and lucky to be able to roll our sleeves up and deliver the 2011 edition of the First Round Holiday Video.  

 

While it's not yet Friday…we hope it brings you a little holiday cheer.  (Although my kids are getting to the age where their Dad's performance in the video has shifted from "cool" towards "embarassing").  

 

 

 

Thanks to Phin Barnes for the lyrics, Brett Berson for masterminding the entire video, and our portfolio company CEO's for honoring the "participation" clause in our term sheets ;-)   

Saving Time vs. Killing Time

Killing-TimeOver the years, we've met with thousands of entrepreneurs who were starting consumer Internet businesses.  And as we listen to them describe their business, I find myself categorizing the opportunity.  One of categorizations I've found most helpful has been to determine whether the company is looking to help people "save time" or help people "kill time".  

Companies like Youtube and Zynga entertain people (and help them kill time)  -- while companies like Google, LinkedIn and Mint.com are great utilities and help people save time (but users rarely visit them for without intent or for for pure entertainment).  At First Round, we've funded both:

Why create such a distinction?  Well, I think it is helpful in looking at how the businesses will operate -- and what metrics you care about.  It's much easier to measure the impact of a Kill Time company than a Save Time company.  For example, in a kill time company you'd really want to see strong DAU (daily active user) counts and really long session lengths.  Yet short session length might be a good sign in a "save time" company.   If it took longer for Google to answer your question -- and you spent more time on their site searching -- I don't think that Google would view that as successful.   The fact that Mint.com allows you to manage your finances quickly and easily is a good thing.  

I think it's typically much harder (for me) to indentify which "kill time" companies will be successful at the seed stage.  The Kill Time companies are successful because they are able to entertain users -- and it's very tricky to identify good entertainment from a Powerpoint.   Save Time companies, on the other hand, are a little easier to evaluate pre-launch -- because these companies have a clear value proposition that can be measured in advance.  When we first heard of Uber, for example, we were able to understand the value propisition and user benefit immediately. 

Finally, the monetization strategies of Kill Time companies typically require much larger customer bases / audiences to be successful.  These companies frequently monetize through advertising or low-price virtual transactions -- both of which require significant volume to generate meaningful revenues.  

This is not intended to be a "perfect" framework -- and I can easily identify several exceptions -- yet I've found it helpful to keep in the back of my mind when I'm meeting with entrepreneurs.   (And there are rare times where companies can be in both categories.  Twitter is one such example.  There are use cases where Twitter can be the perfect way to kill time -- yet it has also become on of the most efficient ways for people to stay current on the news.) 

Fun Fact of The Week: Path to Revenues

Fact

Last week I posted some data from our portfolio about the pace of seed-stage financings.   And it sure looked like things are speeding up.

This week, I thought we'd take a look at the speed at which our companies generate revenue.   Specifically, we took a look at the 14 investments we made in our first fund (which was a 2005 vintage)...and wanted to know how many of them generated at least $250K in revenue in the 18 month period post-investment.  (I recognize that $250K and 18 months are arbitrary thresholds - but hey, we had to choose something).   And it turns out that just three of the fourteen companies in our 2005 fund (21% of the portfolio) generated revenues in excess of $250,000 during the 18 month period.  I was surprised to see how long it took those companies to generate revenue.  Especially because that fund has some really incredible companies in it.  It includes Bazaarvoice (who recently filed for an IPO ).  It includes SayMedia (formerly VideoEgg) who currently employs over 300 people in 10 different cities across the globe.  And it included Like.com (which was acquired by Google).

Then, we looked at the companies in our most recent fund (a 2010 vintage).  Specifically, we took a look at the 32 companies that have been in the fund for at least six months (since we didn't want to include the pre-launch companies we just funded).   And it turns out that 19 of the 32 companies in our most recent fund (around 60% of the portfolio) have already generated over $250K in revenues.

I was not expecting such a dramatic increase -- especially because while our fund size and investment team has increased over the years, our investment strategy has not.  Our average initial investment remains under $500,000.  We continue to invest in a company's first round of funding.  We still are focusing on capital-efficient internet startups.  So what's changed?

The numbers might influenced by the fact that we are bullish on online commerce -- and ecommerce companies typically have a shorter path to revenue.   It might be that the last six years have seen a dramatic growth in monetization platforms (whether it be advertising technologies, mobile platforms, virtual currencies, etc) that reduce the friction/cost/time to generate revenues.  It might be because the cost and technical complexity to start a company has decreased so much, companies today are able to get to market much faster (and possibly raise money much later) than they previously did.  It also could be that First Round has just gotten better at investment selection (though given the size of our woulda coulda shoulda list, I'm not too sure about that -- and I'm also not aware of any data that shows that a company's time to revenue generation corresponds to the size of a company's success).

Whatever the reason, I was surprised to see that companies today are 3 times more likely to get to $250K in revenue during an eighteen month period than they were six years ago. 

Disclaimer - these results are based on a small sample that only consisted of one fund's experiences.  This post is not intended to claim statistical significance -- just an observation of what we're seeing in our fund. 

Save The Internet

I rarely (or never) post about politics here.  However, today Congress holds hearings on a bill that would create the "first American Internet censorship system".  This bill is being rushed through Congress without any input from the technology industry -- yet it poses major risks to free speech online...  And could prevent the next Youtube, Facebook, or Tumblr from getting off the ground.

Please watch the video below, read more about the proposed law (Brad Burnham has a wonderful blog post about this today), and make your voice heard by visiting American Censorship Day today.  

UPDATE:  If you have five minutes and want to make your voice heard, click here and this cool Tumblr app will automatically put you in touch with your local congressman.  

 

Fun Fact of The Week: Time from Inbox to Investment

FactDuring the last few weeks there has been a lot of commentary about what’s going on in the seed funding markets.  Some say that web startups face a cash crunch.  Some disagreeSome think there is a “Series A Crunch”.   Others disagree.  

During this same time period I saw the movie Moneyball (liked it, thought the book was better) and my fund held our Annual LP meeting.  So I’m full of fresh stats about our portfolio of over 125 seed-stage companies.  I thought it might be interesting to take some of the data we’ve collected, and share it to help try to shed some light on what we’re seeing in the market.   So here is the first installment of a multi-part series:  Fun Fact of The Week

While there has been a lot of discussion about the number of seed deals vs the number of Series A deals, I haven’t seen anyone other than Chris Dixon talk about the impact of the accelerated pace of seed-stage funding rounds.   As the market for seed-stage investing has gotten more active, the average time to get a deal closed has gone down dramatically.  That means that the entrepreneur and investor spend much less time to get to know each other before making a major, long-term commitment.  This, as Chris Dixon put it, "is bad news for everyone."

From an investor perspective, the more time I can spend with an entrepreneur, the more I understand how they think, how they approach problems, what they are "working for", how they handle divergent views. It helps me get a better sense for their product vision. It gives me more time to do reference checks on the team. And it also lets me get educated on the market -- learning more about competitive products, etc.  And if I'm going to be paying a higher price due to increasing valuations, I am more comfortable doing so after being able to spend more time with the founders.  I know that there are situations when investors don't have the luxury of time -- and you have to make a quick decision. And of course I've made gut decisions that have worked out well.  But, I've found that there is much more variability in the investments where we've don't have enough time to get to know the founders well...

From an entrepreneur perspective, the more time they can spend with an investor, the better they understand their investor's goals and how they view the market.  They can make sure the investor shares their vision for the future.  They can call other CEOs to see how the investor behaves in the board room and how they behave in good times and bad.  They can get a better sense of the alignment of interests and personalities.  And they can try to get some insight into how helpful the investor will be in recruiting, strategy, future fundraising, and making introductions.   

So here's the data:

We took a look at the last four years of our initial investments (ie, not including follow-on investments).  We then identified the time it took for an company to go from "inbox" (when we first were introduced to the opportunity) to "investment" (when the deal closed).   The chart below shows the relative change in the median number of days it took us to go from inbox to investment for each year, baselined against 2008 (which was set at 100).   You'll note that the chart does NOT show the actual number of days we review each investment -- just the percentage decrease from the 2008 baseline.  You can see that the time we have to evaluate a prospective company has shrunk by 50 percent over the last four years.  While this data just represents our experience at First Round Capital, from what I hear from my colleagues at other seed-stage funds, they are experiencing the same thing...  

Inbox to investment

So the key question this raises is: Why is this occuring?  It could be because of the increase in available seed capital over the last four years.  It could be because of an increase in the number of great startups recently.  It could be because of the growth of incubators and their "Demo Days" (where companies often leverage their unveiling to force quick decisions and raise a round within a week or two).  It could be because of the growth in platforms (like Angelist and Gust) which seek to create a liquid seed funding marketplace.  It could be a combination of these factors.   What do you think?

Anticipation

As Philadelphia gets ready for Halloween and the first snowstorm of the year, it's a reminder that holiday season is right around the corner.   And the approaching holiday season can only mean one thing -- it's almost time for First Round Capital's annual holiday video.   Our team is hard at work producing this year's video (and definitely feeling the pressure)...but in the meantime, I thought I'd share some of our favorite moments from the making of last year's holiday video.  

 

Subscription Commerce and Kiwi Crate

I've previously shared some of my thoughts on ecommerce.   Specifically, that there is the potential for massive disruption in ecommerce due to the explosion in interesting technologies and opportunities such as mobile, social networks, user generated content, virtual goods, etc.

One of the areas that First Round Capital has spent a lot of time looking at is subscription commerce.  We've seen that consumers crave curation -- and are willing to pay for a monthly subscription to receive items (sight unseen) that are curated by trusted experts/brands.   Two companies in our portfolio, Birchbox and Foodzie, are pioneers of this model...delivering a "wow experience" on a monthly basis to tens of thousands of happy customers.  

Today I'm excited to announce that First Round Capital has invested in a new company: Kiwi Crate.  Kiwi Crate is a monthly service that delivers monthly craft projects that spark creativity and curiosity for kids aged 3-6.  As a parent myself, I love spending time doing hands-on activities with my kids -- but rarely have the time (or talent) to invent new projects and shop for the supplies.  As a Kiwi Crate subscriber you don't need to worry about that.  You'll receive a monthly package with several projects that you can do with your kids without preparation or hassle.  

If you have young kids and are interested in trying out Kiwi Crate, feel free to use promo code FLYKIWIS3 for 50% off the first 3 months of a monthly subscription or FLYKIWIG15 for $15 off any gift subscription.

As I look at the growth in subscription commerce, I'm reminded how far we've come since this Everyone Loves Raymond episode aired:

 

 

 

If Reed Hastings had worked at Techcrunch...

I find it funny that Reed Hasting's letter about splitting up Netflix's DVD-by mail and streaming services could have worked perfectly for AOL's decision to split up blogging and investing.  

Courtesy of "find and replace" here is the letter Arrington would have written...

 

I messed up. I owe everyone an explanation.

It is clear from the feedback over the past two months that many members felt we lacked respect and humility in the way we announced the separation of blogging and investing. That was certainly not our intent, and I offer my sincere apology. I’ll try to explain how this happened.

For the past five years, my greatest fear at Techcrunch has been that I wouldn't make the leap from success in blogging to success in investing. Most companies that are great at something – like AOL dialup or Borders bookstores – do not become great at new things people want (investing for me) because they are afraid to hurt their initial business. Eventually these companies realize their error of not focusing enough on the new thing, and then the company fights desperately and hopelessly to recover. Companies rarely die from moving too fast, and they frequently die from moving too slowly.

When Techcrunch is evolving rapidly, however, I needed to be extra-communicative. This is the key thing I got wrong.

In hindsight, I slid into arrogance based upon past success. We have done very well for a long time by steadily improving our blogging, without doing much CEO communication. But now I see that given the huge changes we have been recently making, I should have personally given a full justification to our readers of why we are separating blogging and investing.  It wouldn’t have changed the decision, but it would have been the right thing to do.

So here is what we are doing and why:

Many readers love our blog, as I do, because we aim to be the news source of record for tech startups.   We want to advertise the breadth of our incredible startup offerings so that as many people as possible know what exists, and it is a great option for those who want the huge and comprehensive selection of news coverage.  Blogs may not last forever, but we want it to last as long as possible.

I also love investing in startups because it is integrated into my bank account. The benefits of investing are really quite different from the benefits of blogging.  I feel we need to focus on rapid investment as technology and the market evolve, without having to maintain the impartiality of our blog.

So we realized that investing and blogging are becoming two quite different businesses, with very different cost structures, different benefits that need to be marketed differently, and we need to let each grow and operate independently. It’s hard for me to write this after over 10 years of blogging with pride, but we think it is necessary and best: In a few weeks, we will rename our blog to “Crunchster”.

We chose the name Crunchster because it refers to quick delivery. We will keep the name “Crunchfund” for investing.

Crunchster will be the same website and blog that everyone is used to. It is just a new name, and readers will go to crunchster.com to access their news.  One improvement we will make at launch is to add video games coverage.  Readers have been asking for video games for many years, and now that the blog has its own team, we are finally getting it done. Other improvements will follow.  Another advantage of separate websites is simplicity for our readers.  Each website will be focused on just one thing (blogging or investments) and will be even easier to use. A negative of the renaming and separation is that the Crunchster.com and Crunchfund.com websites will not be integrated. So if we highly rate or review a startup on Crunchster, it doesn’t show up in the Crunchfund portfolio, and vice-versa.

Erick Schonfeld, who has been working on our blog for years will be the Editor in Chief of Crunchster.  We will let you know in a few weeks when the Crunchster.com website is up and ready. It is merely a renamed version of the Techcrunch blog, but with the addition of video games. 

 For me the Techcrunch website has always been a source of joy. The new website is still that distinctive green, but now it will have a Crunchster logo. I know that logo will grow on me over time, but still, it is hard. I imagine it will be the same for many of you. We’ll also return to marketing our blog, with its amazing coverage, now with the Crunchster brand.

Some members will likely feel that we shouldn’t split the businesses, and that we shouldn’t rename our blog. Our view is with this split of the businesses, we will be better at investing, and we will be better at blogging. It is possible we are moving too fast – it is hard to say. But going forward, Crunchster will continue to run the best tech blogging service ever, throughout the United States. Crunchfund will offer the best investment fund for tech startups, hopefully on a global basis. The additional investments we have coming in the next few months is substantial, and we are always working to improve our portfolio further.

I want to acknowledge and thank our many readers that stuck with us, and to apologize again to those members, both current and former, who felt we treated them thoughtlessly.

Both the Crunchster and Crunchfund teams will work hard to regain your trust.  We know it will not be overnight. Actions speak louder than words. But words help people to understand actions.

Respectfully yours,

-Mike Arrington

 

 

Woulda Coulda Shoulda - Twitter

Investing in the earliest stage of startups is difficult.  At the stage we see companies, it is often with incomplete ideas, incomplete teams and incomplete business models.  While we try our best to predict the future, we are often wrong.  

Yesterday Business Insider published a story about "How Twitter Was Founded" that discussed the history of Odeo and Twitter.  First Round Capital was an investor in Odeo -- and I blogged about it almost six years ago when I wrote:

The reason I invested in Odeo in the first place was because I wanted to make a bet on Evan – and his recent actions have shown me how right I was.  I continue to be a huge “Evan fan” – and should he decide to raise outside capital again, I hope to be his first phone call.  

After Odeo, I kept in touch with Ev and Jack.  I was an early user and big fan of Twitter.  And we offered them a term sheet to fund Twitter in April of 2007 (I believe it was their first).  They turned it down because Ev wanted to keep self-funding the company.  A few months later, when they had term sheets for their Series A round, Ev asked us if we wanted to participate.  And I declined -- mainly because the pre-money valuation was 4x larger than the terms we offered them a few months prior and 2x larger than any other investment we had made.  Big mistake.  

We learned a lot from our mistake with Twitter.  While we still believe that valuation matters (and more on that in another blog post), we learned (1) how important a really strong team is , (2) that real market traction is worth a premium.   Thankfully we were able to apply those lessons when Jack founded Square and let us invest in his first round (at what the time everyone thought was a premium price -- but today seems like a bargain).

The venture business is humbling business.  Every firm has their "anti-portfolio" -- but few publish them.   We have our woulda coulda shoulda list - and Twitter is amongst the top companies (alongside Dropbox and Zynga).  

When Nicholas Carlson called me for his story about Odeo I chose not to participate -- and told him I would prefer not to have the story published.   Not because Ev made any mistake.  But because I did.  I passed on Twitter.  And if that story was going to be told publicly – I wanted to be the one to do it.

Ev has been nothing but straightforward, honest and direct with me.  I think he deserves all of his success.  I stand by everything I wrote in my blog post from 2006.  And if Ev does end up starting a new company, I still hope to get a call from him.  I promise I won't blow it this time :-)