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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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 :-)

Happy Holidays!

In the past we have wrapped our annual holiday greeting in song and dance. This year we have enveloped our yuletide message of holiday joy in the creative passion of the entrepreneurs we have been lucky enough to meet over the past six years. 

 

 

 

We are honored to play a small part in the success of the brightest founders with the biggest ideas; to work together, to laugh together and to shower together...


Wishing all of the internet dreamers a very Happy Holiday Season!

 

 

First Round - Six Years, Our Third Fund, and Looking Ahead

Six years ago this month, First Round Capital was started. 

 It started with a simple thought – that while the world had changed tremendously over the last 30 years, the venture capital industry had not .  So we asked ourselves a simple question - what would a venture fund look like if the model was invented in 2005 rather than 1975?    And over the last six years, we’ve learned several things:

  • That a small fund size is good and brings alignment.  Alignment between investors and entrepreneurs.  Alignment between GPs and LPs.  Alignment with the market’s current exit realities.
  • That the advent of email, IM, skype and air travel has made the country (if not the world) flat.  And while there are massive benefits to scaling/growing companies in a handful of ecosystems, there are amazingly talented entrepreneurs founding companies all over the country (like Eric and Susan Koger who founded Modcloth in Pittsburgh, like Garrett Camp who co-founded StumbleUpon in Calgary, and like Jimmy Wales who founded Wikia in Florida).  
  • That with the right level of investment, nurturing and tools, you can transform a portfolio of companies into a community of entrepreneurs.
  • That the entrepreneur is the customer – that successful investors exist to serve entrepreneurs, and not vice versa.
  • That you can’t take yourselves too seriously

Over the years, First Round Capital has evolved.  We’ve become one of the most active seed-stage investors with the most visited VC website in the country.  However, we have not changed our investment style or strategy.  We still fund Powerpoints (though more Keynotes these days).   We still fund pre-launch, pre-revenue ideas.  And, despite our growth, we have not really increased our average initial investment size.  We still make investments as low as $50K.  Our average initial investment size is still under $500K -- and we have never made an initial investment larger than $1M.     This week we successfully closed our third fund – First Round Capital III.  And we decided to keep it at the same size as our prior fund.   While it might be small by market standards, we think our fund size is ideally suited for our strategy. 

Over the last several years, First Round Capital has also grown our geographic footprint.  Our investment team has grown from Howard and myself working in Philadelphia to an 8 person investment team working out of three cities.  Our San Francisco office, led by my partner Rob Hayes, continues to be our most active office – with over half of our portfolio based in California.    Rob is joined by Kent Goldman and with Christine’s  recent departure for Intel we are seeking to grow our west-coast presence by adding a  SF-based Associate.   (If you’re interested in the position, please reach out to Rob Hayes with why you think you might be a good fit).

Just last year we opened our New York City office.  We did so because we continued to meet more and more amazing entrepreneurs from New York.   Over the last three years around a third of our new investments have been based out of New York – and we currently have an amazing portfolio over 25 NY-based companies.  Our New York office is led by my partners Howard Morgan and Chris Fralic.  And today I’m excited to announce that Phin Barnes (who previously has worked out of our Philadelphia office) is swapping Amtrak for the L-train and is moving his family to New York.  And that that Charlie O’Donnell is being promoted from an EIR role to Principal

I continue to be based out of Philadelphia (along with my colleague, Scooter -- aka Brett Berson) but will continue the lifestyle of a redeye VC – dividing my time  between Philadelphia (where my home is), San Francisco (where my true inner-geek lives), and New York (where the Shake Shack is).    As we approach Thanksgiving, I realize that I have so much to be thankful for.  I have the best job in the world.  I get to work with an amazing group of people – and get to spend my time with an amazing group of entrepreneurs.   I work with people who are trying to change the world. 

And I can’t wait to see what the world looks like in another six years…

 

 

Community

Community-712702Over the last six years, we have tried to build First Round Capital as a community of entrepreneurs -- not a collection of companies.  We've always tried to find ways for our entrepreneurs to benefit from (and help) each other.  We've invested heavily in building this community.  We get all our CEO's together at our CEO Summits.  We hold portfolio-only conferences for our advertising, e-commerce and entertainment companies.  We have active mailing lists for our entrepreneurs to send questions, thoughts and suggestions to each other.   We even set up an Exchange Fund where qualified First Round Capital entrepreneurs can contribute a small piece of the stock they own in their company -- and share in the performance of all the other companies in the fund. 

And during that journey, we have assembled a diverse group of innovators all on a mission to build something massive.  Some have PHDs from the most prestigious universities in the world and others haven't gone to college.  Many have built successful businesses in the past and for some, this is their first time.  Some have a background in engineering or product management while others built world-class sales and business development teams.  One got suspended from high-school for hacking into the school's phone system, while another has commandeered The Cone of SilenceSome are incredibly young while others are…less young.  And we're lucky to have entrepreneurs from almost every corner of the world working at startups across the country.

Yet, until now this community of innovators was hidden on our website.  So I'm super-excited to unveil the new Community section on the First Round Capital site -- a place to see the faces, biographies and Tweets from the remarkable people that make up our community.

Not a bad day...

Friday'sLogo If day's could have a "like" button, I definitely would push it today.  An exit to Facebook. Two women First Round Capital founders on the cover of Entrepreneur Magazine. And an exit to Google just in time for cocktails.  Just another Friday at First Round Capital.

In the short-term gains category, congratulations to Justin and the HotPotato team.  While we've only been investors for a few months, it's been a real pleasure to see the HotPotato team in action -- and I'm sure they'll do amazing things at Facebook.

In the long-term gains category, I've now been working with Munjal Shah for almost six years.  Back in December of 2004, Munjal first sent me his plan for a photo-site code-named Chunky.com.  That company evolved into Ojos.  Which evolved into Riya.  Which evolved into Like.com.  Munjal is truly a heat-seeking missile -- he has an innate ability to collect a massive amount of data and determine the signal from the noise.  I've blogged about Munjal's journey before -- but it's not nearly as powerful as hearing Munjal talk about some of his lessons learned in this video.  This is our second exit to Google this summer -- and Google is getting an amazing team of folks.  Congratulations to Munjal, Burak, Gaurav, Vinnet and the entire Like.com team!

Finally, I'm super excited to see two of our female entrepreneurs gracing the cover of this month's Entrepreneur magazine.  Both Emily and Susan created their companies out of their personal passions and experiences.  Emily (the co-founder of Foodzie) was working as a brand manager at The Fresh Market and saw firsthand how hard it was for small producers to break into big retailers, even with their awesome stories and top-quality products. So she created a place in which producers could directly connect with customers.  And when Susan (the founder of ModCloth) was in high-school, she spent weekends thrift shopping for unique vintage finds. She found herself snatching up great pieces that weren't necessarily her size, but that she couldn't pass up.  So, at 17-years old, she decided to start an online shop.  Today Modcloth is one of the biggest online retailers of vintage-inspired clothing, with hundreds of employees...

I sure can't wait until next Friday!

New and Improved

NewImproved It's been almost five years since I went to Typepad and created this blog.  And while I've added content over the years -- the look of the blog hasn't changed.  Until today.  Today I launched a redesigned blog -- with a completely new design.  I've also taken off a bunch of the peripheral "widgets" -- which, hopefully, will make it faster to load and easier to read. 

The new look gives me added incentive to add some new content.  So stay tuned...

Thanks to Brett Berson for leading the effort, Philly's own Brian Hoff for the wonderful design -- and the folks at Typepad for helping me with the upgrade!

Founders and Heat Seeking Missiles


As a seed-stage investor, First Round Capital typically funds powerpoints.  Not only are the majority of our investments pre-revenue, but most of the time we are investing in pre-launch companies.  While these companies might have an alpha/beta version of their site, it's usually early enough that we can’t base our investment decision off of any market traction.  Instead, we typically make our investment decisions based on three key areas:  the size of the market, the strength of the team, and the product vision.   This is often made even more difficult by the fact that we know that many of the businesses we fund end up with (one or more) pivots -- since their business plan is always wrong. 

The Team

I've lately started to realize that our most successful companies are led by entrepreneurs who have a unique talent -- they are heat seeking missiles.  It doesn't matter where the missile is aimed pre-launch.  Successful entrepreneurs are constantly collecting data -- and constantly looking for bigger and better targets, adjusting course if necessary.  And when they find their target, they're able to lock-onto it -- regardless of how crowded the space becomes.  When Nat and Zach first came to us with the idea for Invite Media, it was focused on algorithms for ad targeting.  But once they got into the market the team saw a bigger opportunity -- the DSP space -- and they locked-onto that target with a successful outcome.  We funded VideoEgg back in 2005 with the goal of creating tools to manage online video -- but Matt and team quickly adjusted course and have now become a leading media network for brand advertisers.    When we first met Lance and Jia in 2006, they had a cool photo-hosting application called RockMySpace -- but they quickly found  the opportunity was much larger than photo-hosting, and RockYou has since became a leading provider of social networking and gaming applications.

Market

Markets really matter.  Because the bigger the market, the more targets there are for the missile to hit.  I've seen many companies fail to reach their potential because -- despite the skill of the founders -- they ultimately realize that there just aren't enough (or any) big targets for them to lock-onto.  It's really hard to start a company -- and there are so many risks that all startups share, regardless of market size.  Whether you're targeting a $10M addressable market or a $1B addressable market, you're still going to face Hiring Risk, Marketing Risk, Competitive Risk, Technology Risk, and  Financing Risk.   And while bigger markets might pose more challenges than smaller markets, the risks involved in targetting a $1B market are not 100x greater than those involved in $10M market.  Choosing the right market is critical, because the market you choose determines the targets that are available for the heat-seeking missile to hit.

Product

Sometimes entrepreneurs (like Aaron) will have such a strong sense of the market that their initial product plan is dead-on.  But most of the time we see the product iterate and morph over time.  As a result, product is often the hardest thing to evaluate pre-launch.   And some of our biggest mistakes have occurred when we passed on companies based on their pre-launch product.  So today we tend to focus on a company's product vision, rather than on the specific implementation of a pre-launch product.  We've also found that a pre-launch product plan is a great way for us to get additional input on the team.  Have they studied the competition?  Do they really understand how to leverage social networks, game mechanics, etc?  Do they have a data-driven philosophy or a gut-driven philosophy.  Why did they make the choices they made?

At the end of the day, I've really come to believe that you can't predict success based on where a missile is pointed pre-launch.  Instead you have to assess the quality of the targeting system (the team) and the density/size of targets (the market).   And hope that the missile you launch finds a true target -- rather than a decoy...

 

This work is licensed under a Creative Commons Attribution 3.0 Unported License.

Follow the leader?

You_are_invited Whenever First Round Capital holds a party, we sometimes get emails from a few of our guests asking if they can bring another person with them.  Maybe a VC friend of ours wants to bring another partner with him.  Maybe it’s an entrepreneur who wants to bring a new executive hire.  Maybe it’s someone who works at Facebook and wants to bring a co-worker.  Unless we’re dealing with a venue that has a limited space, we typically are fine with the extra guests.  It’s a great way to expand our network – and meet new, interesting people.  The few times we weren’t able to accommodate those requests typically were due to hard constraints (either budgetary or the size of the venue).  And when we don’t have room, we tell that to the person who asked – and they typically are very understanding. 

I just read my friend, Roger Ehrenberg’s, latest blog post on syndicating seed rounds – and totally agree with his main conclusion (that rounds tend to work best if there is a lead investor to represent the interests of the syndicate).  But the most meaningful part of Roger’s post, in my opinion, is when he writes about how a syndicate gets chosen.  Specifically, he writes: ‘One can have a reasoned discussion concerning capacity, etc., but fundamentally if an entrepreneur wants a particular investor in I am going to make room – period.’   I could not agree more.  I think that the entrepreneur should be the “decider” on the syndicate – not the lead investor.  The lead investor should help establish terms, provide feedback and input on potential co-investors, and bring other investors to the table if asked/needed – but the lead investor should not force a syndicate on the entrepreneur.  

If I’d react badly to a guest trying to force me to let another guest into my party for a few hours (ie, “the only way I’ll come is if you let this stranger in”), I can only imagine how badly I’d react if I was an entrepreneur that was forced  to spend the next 5+ years with someone I don’t want.  In my view the lead investor should offer feedback and offer introductions – but ultimately should follow the founder’s lead on syndicate composition.  If the founder wants certain angels to participate – done.  If the founder thinks that a certain fund could add value – done.   

Just like I think that financing rounds should be based on company math (as opposed to venture math), I think the syndication decision belongs with the founder (as opposed to the investor).  The founder should be free to choose the investors that increase the company’s odds of success.  And building a syndicate is the entrepreneur’s opportunity to figure out who the founder wants to spend time with, who the founder respects, and who the founder thinks can help the company the most.  

Oftentimes the first strategic discussion that a lead investor gets to collaborate with a founder on is the discussion around the syndicate.  And while I'd clearly expect a reasoned conversation to occur, I believe that an early stage investor is funding a company because they believe in the entrepreneur's ability to make strategic decisions and to optimize for success.  And ultimately, it should be the investor who follows the founder's lead when it comes to syndicate composition (and not the other way around).

Location in the Cloud

I just read the news about Google's upgrades to Google Latitude -- and boy is it a bold move with major implications.  If done right, I think it could ultimately be as transformative as when Facebook opened up the social graph. 

Before Facebook opened up their social graph, if a web site wanted to know your relationships/friends it had to ask you.  Each and every time.  Then came Facebook Connect.  What Facebook did with Facebook Connect is to build out (1) a utility/infrastructure that enables third-party sites to gain access to your social graph, and (2) a permissioning model that gives users control of what third-party sites can access your data.  While there are a number of privacy issues that Facebook is working out in public, I believe that they will be ultimately resolved -- and that Facebook's social graph will become integrated throughout the net.  

And today, Google announced a similar model for location data.  Previously, whenever an application or website wanted to know where you were it had to ask you for permission to obtain your location from your phone.  Each and every time.  With Google Latitude's new API they are changing the game.  Rather than have dozens of applications that each ask for your location, Google's Latitude application will keep track of your location -- and put it in the cloud.  And then users can authorize third-party applications/sites to access their data.  Three million users already use Google Latitude, making it one of the largest location-based services around. 

Assuming Google can work out the privacy implications (which are non-trivial), there could be hundreds of potential applications, like:

  • Imagine linking your ATM or Credit card with Google Latitude. If you want to make a large ATM withdrawal or charge more than $1,000 -- your bank can check with Google Latitude.  If your phone is more than 500 feet from the transaction point, they might be alerted to fraud.
  • What if you could link your online photos with Google Latitude.  Your photos could be automatically tagged with your location -- just by looking up where your phone was at the time.
  • When you visit a website (like OpenTable or Fandango) on your desktop computer, it can look up your phone's location via Google Latitude and deliver a personalized experience.
  • I could be automatically notified when out-of-town friends come to town -- or my meetings could be notified when I'm running late.
  • Companies can use Google Latitude for expense report creation -- or even to replace time cards.

How often does someone go more than 200 feet from their cell phone?  In my experience, not often.  In today's world, your cell phone is now a personal location beacon.  And by making it programatically accessible in the cloud, Google could enable an entirely new class of applications. 

Combine this new ability to obtain location from the cloud with the types of tools and data overlays that SimpleGeo (a First Round Capital portfolio company) offers -- and developers now have an amazingly robust set of tools to build upon.    I can't wait to see what they build...