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 »

Getting Unlost...

Lost I've recently begun watching the first two seasons of Lost on DVD -- and have found some striking similarities between the TV show and launching an Internet site.  The TV show tells the story of the survivors of Oceanic flight 815 -- and the bizarre island they land on.  Gradually, over a period of weeks, the survivors learn about their environment and discover some of the secrets of the island and the mysterious Dharma initiative.  This knowledge is not gathered easily -- their trial-and-error results in a lot of false conclusions and costly mistakes.

Most post-launch startups are also lost.  They don't fully understand the environment they are operating in -- or how to improve/impact it.  Things don't behave as the founders initially expected or logic might dictate.  With all of the data exhaust a website can generate, it's very hard to differentiate the signal from the noise (ie, determine which metrics matter and which don't).  Big functionality deployments can have no real impact on the numbers, yet sometimes small actions like pressing (or not pressing) a button at a specified time, have a major effect. 

Munjal Shah, the CEO of (Riya), has resumed blogging about his startup's journey.  And his current episode (Number 23) does a wonderful job of describing the lack of knowledge a company initially has about their site -- and the process they must go through to gain understanding.  It brings back many vivid memories from my days at  Trying to isolate cause and effect in an online environment is not as easy as it might sound.  It takes a lot of effort, testing and time to begin to understand the levers at your disposal -- and the impact each lever has on your key metrics.

Munjal and team have begun to build a core culture and competency around A/B testing (otherwise known as multivariate testing).    I'm impressed to see them get A/B religion so early in their development - it takes many companies much longer to
adopt this approach.  I think that this type of disciplined, statistical approach towards site improvement is a critical component in metric improvement.  Munjal's post is definitely worth the read...

"Catch And Release" Business Models

Istock_000002176016xsmall As the success of sites such as MySpace, Facebook, LinkedIn, Classmates, and Geni have demonstrated, viral marketing can be a very effective tool to help build social networks that appeal to a wide range of people for a number of different reasons.   Beyond the specific markets that they focus on, these sites have fundamental differences in how they acquire new users, generate revenue, and grow their business.

But what all of the most successful social networks have in common is that they’ve perfected what I like to call a "catch and keep" model. From the first time a user signs up for a MySpace, or a Facebook, they find themselves sucked into spending hours on the site, and feel compelled to both return on a regular basis, and drag their friends into their network. As recent data demonstrates, the top social networks are among the highest trafficked and stickiest sites on the web.

In sharp contrast, most social networks out there have what I call a "catch and release" model. They can generate buzz, get written up in the blogosphere, and even get 53,651 beta testers, but few of those initial users ever return to the site. There can be many reasons for this. The site may appeal to a group of people that just don’t need to communicate on a daily basis, for example old classmates, or distant relatives. They may have a cool feature set that presents data in some unique or surprising way, but is not enough to compel someone to come back on a daily basis.   [Note - this phenomenon doesn't only apply to social networks -- I've visited Zillow once, but have not found a reason to return...]

The catch and release model often occurs because it’s much easier to get someone to your site with the promise of value -- and much, much tougher to offer those users a compelling reason to return and invite their friends.

A good example of a catch and release business model is  When it was acquired in 2004, Classmates had a reported 38 million registered users (1.4 million of which were paid). Despite adding 1.5 million new registered users per month, by 2006 the total registered user count had only gone up to 40 million members. Given the amount of money Classmates spends on online advertising ($12.6 million in February 2007 alone) that’s some churn rate!

Classmates User Acquisition Model


 The effects of the catch and release business model show up in a company’s valuation. Classmates was acquired for $100 million by United Online in 2004. At the time the site had 38 million registered users, and was generating $72 million in annual revenue. This gives it a 1.4x revenue multiple, and a value of $2.63 per user.

Contrast that with one of the leading catch and keep social networks, Facebook. 
By limiting its initial scope to a select group of universities, Facebook ensured that its first few members were likely to know a lot of other people on the site, and have a lot in common with them (through both shared friends and interests.) Facebook successfully leveraged the connections that were being developed through that initial community to virally expand into other schools, growing rapidly until it had captured 85% of the college market only a year after launching.

Since then Facebook has opened up its network to anyone. The numbers behind their success speak for themselves: 6th most trafficked site in the US, 16 million unique monthly visitors, and 30 billion monthly impressions, all without a penny spent on advertising. Perhaps most impressive is how loyal those users are – 60% access their Facebook accounts every day, and 90% every month. The average user visits the site 24 times a month.
Facebook User Acquisition Model


Their catch and keep model is reflected in their valuation.  In 2006 it was confirmed that the company had received a $1 billion acquisition offer from Yahoo. At the time, Facebook had a reported 14 million registered users, and was generating an estimated $50 million in annual revenue. This gives it a 20x revenue multiple, and a value of $71.43 per user.

Which type of social network would you rather be?  It's clear that if you’re building a social network or are planning on starting one, it’s important to know whether you have a catch & release business model, or a catch & keep business model. I’m looking forward to seeing how the different social networks will evolve over time.

First Round Capital associate, Mazen Araabi, helped with this blog post.  Thanks Maz!

Google wants your voice...

Ursula_2 Is there really something for nothing?  Almost all free services (whether it be network television, online search, or free directory assistance) offer something for free to consumers because it is being subsidized by third-party advertisers.  That’s nothing new or surprising. 

As an investor in Jingle Network’s 1-800-FREE411 service, I’ve spent a lot of time thinking about Google’s free directory assistance offering – and wondering why they are offering it without any advertising.  Why would they take on that cost (including the toll free call + call completion + SMS cost) for nothing?  Is it just to gain market share, or is there another reason?  It was only after I read Tim O’Reilly’s recent blog post, that the answer hit me: Just like the witch Ursula in the Little Mermaid, Google wants your voice.

Take this quote from Mike McCue (CEO of TellMe) from February of 2007 (just two months before Microsoft bought TellMe):

“…our search index is better than Google's right now. The grammars that we have -- we do about 10 billion speech utterances a year. So what we are able to do is make the speech recognition system smarter and smarter. And that is something that Google can't get until they get that similar kind of traffic. How are they going to get that traffic? It's a chicken-and-egg problem.”

So is Google collecting our utterances?  It appears they are – check out Google’s 411 Privacy Policy:

“We also collect and store a copy of the voice commands you make to the service, so we can audit, evaluate, and improve the voice recognition capabilities of the service.”

Assuming each call has four utterances – and costs 3 cents each on average – then it would cost Google about $8M for 1 billion utterances (or $80M to match TellMe’s 10 billion utterances).  A bargain compared to buying Tellme for $800M.  I agree with Tim O’Reilly’s conclusion that Google’s launch of a directory assistance product was accelerated (and is driven) by their desire to compete with Microsoft.

But one thing Tim didn’t discuss is the privacy implications of Google’s actions.  Google is recording and storing voice prints of all users - and it's not a stretch to imagine that they are matching them up to caller-id numbers to build out user profiles.  And this is very valuable data to have.  Collect enough voice signatures and you can tell if a caller is a male or a female – and possibly even detect where they are from by their accent. 

And Google’s privacy policy lets them save your recordings for an undisclosed period of time.  Should Google own your voice?  What privacy issues does that raise?  All of the recent   controversy   about Google’s privacy policy doesn’t even contemplate them archiving your voice.  Given the high level of concern about Google’s retention of text search logs, I imagine it won't be long until privacy advocates focus on this as well.  [Insert shameless plug here -> If you don’t want your voice recordings saved, feel free to call 1-800-FREE411 -- they don’t store any voice recordings…]

I think it’s important for consumers to recognize what they are “paying” for a free service.  With 1-800-FREE411, you’re “paying” by listening to their advertisements.  With Google, you’re paying by giving them your voice.  At least Ursula clearly disclosed her bargain to Ariel.

American Idol

Americanidol Over the past year there have been several insightful posts on the similarities between Deal or No Deal and the venture business.  Lately I’ve found that there’s another popular show that good lessons can be drawn from – American Idol. (I admit it -- I watch American Idol.  Think what you want of me.)

As an entrepreneur, I watched the first few seasons of American Idol and found myself empathizing with the contestants; the person whose hopes and dreams were on the line.  Just like a technology startup, with so much competition the "beta" is very high. 

Now that I'm a VC, I find myself identifying much more with the judges sitting on the other side of the table.  They filter through thousands of hopeful applicants to find a handful of the most promising candidates.  And for every candidate they accept, they pass on hundreds of others.  Kind of like my job.  Last quarter we reviewed over 600 deals -- that means that my partners and I were passing on an average of 10 deals a day.  I've found that this is one of the toughest parts of making the transition from being an entrepreneur to a VC.  I know how hard it is to be an entrepreneur -- and I'd love to be able to be helpful/supportive/encouraging to all of them.  And it sure is not fun to say no to people 50 times a week.  And unlike most VC's, as a seed-stage firm we can't use the most common excuse: "It's too early for us, come back to us after you've proven XXX."   

So watching American Idol, I can’t help but wonder: which judge’s style would be most effective in the venture business?

Is it Simon’s brutal honesty and candor?  While he comes across as an unsympathetic ass, I have to admit that I usually agree with his assessment.  More often than not he’s right, and his feedback tends to elicit that ring of truth among viewers hearing something they know to be true but may never verbalize. On the other hand, although most contestants would be better off heeding his advice and not quitting their day jobs, his unvarnished assessments appear rude, leaving them upset and disillusioned.

Is it Paula’s unbridled enthusiasm and politeness? No matter how much a contestant sucks, Paula will always find something nice to say, even if it’s just about their outfit.  Although the candidate may come away feeling better, are they really getting the kind of advice to help them decide whether to dedicate a couple of years and potentially millions of dollars to their idea?  ("Your powerpoint looks hot" or "You made that demo your own" just don't seem to work)

Or is it Randy’s noncommittal, whats up dawg feedback? Often on the fence, Randy’s comments tend to be vague, lacking in any real substance. But his lack of an opinion can leave the contestant guessing as to what he really thought, which makes it difficult for both of them to make any real progress.

So which style is best for an investor? The answer is that I’m not quite sure yet.  My wife (frequently) describes me as "often wrong but never in doubt."  As such, my natural tendency with entrepreneurs has been to candidly share my thoughts and opinions.  However, when I'm looking at a plan that is a clear "Sanjaya", if I give an entrepreneur my straight-up opinion (like Simon) I often find that I've made an enemy for life.  When I give false encouragement like Paula, I'm misleading them as to my true level of interest.  And when I am non-committal like Randy, I drag the entrepreneur along.

My thoughts on this are definitely still a work in progress.  Fred Wilson has some good perspective on the subject.  What do you think?


I first saw Kodak's "Wind of Change" video at last year's WSJ D Conference.  Since they released it on the web, it's gone viral.  I think it's a brilliant piece of marketing.  (hat tip -

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...