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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Failing Cheaper

Failure Ask most successful entrepreneurs how they came up with the idea for their business, and you'd likely learn that what they initially set out to do is very different from the company that you're familiar with. PayPal started out as a service to beam money through Palm Pilots, while YouTube was originally a video dating site. The truth is that early stage ventures are all about experimentation and iteration. As soon as it's written, every business plan is wrong. Good entrepreneurs recognize this, and tend to build agile teams that can quickly respond to early market information in order to identify a real business model and minimize risk.

A necessary side effect of all this experimentation is that most startups will ultimately fail.  While the mythical "90% failure rate" has been disproven, I would venture to guess that for technology based startups the failure rate is still extremely high.  That's just the nature of the early stage venture world, and ideally it allows the entrepreneurs involved to apply their hard-earned lessons towards more productive ventures.  Or, as Jeremy Liew aptly put it: "Companies die, founders and employees learn from the experience and move on, and hopefully start more companies. I for one would love to see the second acts from the teams that are newly freed up."

Today, thanks to a well-documented shift in the online landscape (decreasing storage costs, open-source software, offshore development) it costs much less to start a software-based company than it ever did. Indeed, when I co-founded Infonautics (in 1991) we spent $5M to get our first product to market.  At (1999) we spent $2.5M to get our first product to market.  At TurnTide (2003) we spent $750K to get our first product to market.  And at Jingle Networks (2005) we spent $300K to get our first product to market.  And, in fact, of the 30+ investments First Round Capital has made over the last few years, our average initial investment size is $300K.

Recently we've been seeing a lot of attention paid to startup failures. Techcrunch has even established a “deadpool ” – reminiscent of the old Fucked Company website during the first web boom. This has led some people to speculate that the increased rate of failure is proof that the current funding model is flawed. I disagree.

Although the aggregate number of failures may seem higher (due to the increased number of companies being launched) the ratio of early stage failures to successes is probably still the same. What has changed is that you can now fail faster and cheaper than ever before. While I'd much rather invest in a company that succeeds, if a company is going to ultimately fail I'd rather it fail quickly. 

I believe that the goal of seed funding is to validate (or disprove) an entrepreneur’s hypothesis, and thereby “de-risk” the opportunity. Early stage companies should raise enough money to allow them to iterate - as long as their initial hypothesis is still valid and they are making demonstrable progress towards lowering risk. Today’s model of failure is far more capital efficient in allowing entrepreneurs and their investors to do this than the old model. Companies used to waste millions of dollars of VC money – and entrepreneurs used to waste years of their lives – working on a failed hypothesis.  Now, the cycle is much shorter.

At Infonautics back in 1991, we raised seed capital to conduct market research – we spent about $150K in surveys, focus groups and secondary research to validate our market.  Today, companies can actually launch a product for that amount, in a much shorter period of time.  What would you rather see, the results of real market feedback, or the results of market research?

The following graphs (courtesy of Benchmark's Peter Fenton via Venturebeat) illustrate what he describes as the "increasingly Darwinian environment for Internet companies":

Traditional Funding Model

In the traditional funding model a company's risk was decreased by hitting certain milestones, which brought about a corresponding jump in its valuation. Additional funding was needed at each milestone, resulting in a high overall level of financial investment by the investors, and time investment by the entrepreneurs.

New "Cheaper" Funding Model

In the new funding model a startup is able experiment/iterate over an extended period of time for very little capital. Only once some of the venture's risk has been eliminated through accelerating adoption does the company raise more money to further refine the model and expand. Overall the time and cost between the founding of the company and knowing whether both the entrepeneurs and investors should continue to pursue the opportunity is greatly decreased.

I expect that as a seed-stage investor, I will have a much higher number of failed investments than later-stage investors.  However, I also expect that I will invest less total capital in failed ventures.  Will I be proven right?  Only time will tell. For now though, I’d much rather back companies that are able to fail (or succeed!) cheaper.

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



From a college kid's point of view, this couldn't be more true. You have more college kids getting involved in entrepreneurship today and that's because the funds needed to create a business have dropped and the number of possibilities on the web are nearly endless. I know the big guys are investing big bucks into certain ideas, but I think you also have a lot of college kids throwing websites up against the wall and seeing what sticks. The only reason we can do that is because of what Josh said - the cost of entry is so low.


Great post. The corresponding outcome here seems to be steadily rising series A valuations. More done, less relative risk for investors - it makes sense, or is that the bubble? The cost to prove out business models and variability in cost of customer acquisition seems to be more unknown even though the technology is getting better and better.

Saul Klein

Josh - great post and totally agree with your thesis. we should be encouraging more experimentation with seed stage ideas and have the ability and guts to call time on businesses earlier


Great to see you referring to that post on venture beat. That post, and your two track post, are the two posts I forward to the companies I work with. If start up companies can internalize these two things, it can help them to set up rational short term and longer term objectives. See if the dogs eat the dogfood and, if they do, then spend money on expansion and monetization.

Toby DiPasquale

Don't you think its possible that at some point, maybe soon, the near-freeroll for startup companies will dry up? That all of the "cheap" ideas will have been tried and worked out and only the more expensive ones will be left to take on? Ones requiring more infrastructure and planning and people? The Internet makes tons of things possible that weren't before, but those things (like all things) are finite and once the cheap ideas are exhausted, the only moves left to make will be the ones requiring big money and long experimentation periods. Its cheap right now, sure, but how much longer can it remain so? And if it remained so for very long, would that not then redefine "cheap"?


Great post, best I've read in a while on the subject.

Nice to see some thoughts spread that I've been focusing on for a year or so now.

Dawn Douglass

I've always thought that having too much money can be worse than not having enough. That's why I'm not looking for capital from firms that want to invest millions of dollars. I'd rather have $200,000, thank you very much.

In 1999 I set up the bookkeeping for a software startup that got VC. They were spending money like there was no tomorrow, much of it a total waste. For example, they had NO sales at this point, but they hired an AP manager and clerk, an AR manager and clerk, an Accounting Manager, a controller, and a CFO!! They also spent tens of thousands of dollars on interior design (it was about $50k, as I recall) and then moved the offices six months later because they decided they didn't like the location.

That company FINALLY became profitable this past year, after they fired the CEO and brought in somebody who watches costs.

As for the "let's build a company and then try to figure out how to monetize it" mindset...that smacks to me like "let's all swallow this and see if it's digestable." Talk about risk. At some point (sooner rather than later), a sound monetization plan is going to again be upfront and necessary.


You are confusing features and products. You can launch a stand-alone feature for $100K or less see if it flies and then build a product around it if the feature gets some interest.

Mark Seremet

Josh, I completely agree with Toby's assessment of this. Yes, you can build a lot of software on the cheap but it's normally not defensible. If you can do it in 90 days so can someone else. That makes for low barriers to entry and difficult exits.

Please see my post on this from yesterday:


Josh -- whatever magic blogjuice you've been drinking lately, keep it up. This and your "Penny Gap" post are going in my hall of fame.

To those that say you can't build a "real" company inexpensively, I totally disagree.

The long term success of a company and the amount invested to get to an initial proof point look unrelated to me. If there is a correlation, it's inverse -- too much money leads to grand ambition that overrides what the market is trying to tell you.

Just because the initial investment is $300k or less doesn't mean the company never takes another penny, but it does mean, as Josh points out, that you get to an initial win/lose point quickly.

In today's fast paced world, this approach is just plain smart.

Mark Seremet

i'm not suggesting that you can't build a real company or site on little money. I'm also not advocating blowing millions to get somewhere. My point is that very serious applications that cannot easily be duplicated are often not inexpensive. They may require a broad range of talents that you cannot get on the cheap.

I'm also curious to see how products start struggling to get traction in this environment. As you load the pipeline with tons and tons of little features it's harder for something good to cut through...will that mean the $ have to flow to marketing?? Not sure on that maybe the beast corrects quickly.

Joshua Karp

At the seed stage, it’s not about what you can develop to create end-user value, it’s about what you need to create to obtain the next round of financing. It’s about using your “seed” stage to 1) build something, anything, tangible, with some value, 2) prove that you can leverage a current consumer action to do or pay for something else (your site), and 3) reduce enough risk to get additional investment.

I don’t believe that you can see success or failure (in most cases) after spending only 300K. Some great businesses take a little maturity, or a gentle shift in direction, or a tipping point, or feedback from a community, or an unbelievably short idea, development, release cycle (measured in days) in order to see success. Failing quick is obviously better than failing long, but I think it is important for entrepreneurs to fail smart as well.

Don Jones


I've started up my VentureDeal online venture capital database for $75K, all-in. I couldn't agree more with your analysis - the cost of trying has dropped dramatically - and I don't even use open source!


great distinction to draw between 'failing faster' and 'failing cheaper' - related, but not quite the same.



For what it's worth, before Paypal was going to send money between Palm PDAs, they were going to be in the business of linking field sales to the home office with IPSec, etc. for Palm.

Bryan Zmijewski

Nice post Josh.

Starting a business can now be done with less capital- the key is finding ways to hold on to your competitive advantage. Although you might be able to create a feature or product in 90 days, the technology is only one component that will fuel growth.

UI and community are two ingredients that are not as easy to replicate. If you can get these two parts right it becomes difficult for another company to replicate your success. A good example is YouTube.

Carolynn Duncan

We think an entrepreneur can cut the whole cycle down to $100 and 30 days-- at least, that's what we're experimenting with at The Hundred Dollar Business. :)

Steven Livingstone

I'd say thi sis also good for those of us creating these ideas. I love the idea of 1-4 people getting together in a cafe and launch 6 weeks later to validate the products in 8-12 weeks.

Of course it doesn't validate the longevity, but then neither does and expresso and i know many people who keep going back for more...

Blake Southwood

I'm happy to read your site.

This is my blog about my
startup journey.

I hope that reading your site
will help me get funding.

A Founder

Scott Clark

One of the things I read between the lines here is that the business model franchise is probably a poor step for an entrepreneur simply because it has no opportunity to fail or change directions.

You must comply with the business model and also commit to 10 years or more in the business.

There is a strong assumption that the "failing" is done already. But I find that many times it's not.

I'm doing research on whether the tribal model of entrepreneurship by "starting movements" is compatible with the franchise world. Thanks for the article.


For what it's worth, before Paypal was going to send money between Palm PDAs, they were going to be in the business of linking field sales to the home office with IPSec, etc. for Palm.

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I'm doing research on whether the tribal model of entrepreneurship by "starting movements" is compatible with the franchise world. Thanks for the article.

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Thanks for the post! Great model, very accurate - the key is just getting past that intersection between risk and reward.

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