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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Shrink a Market 2.0

Microsoft EncartaImage via Wikipedia

It was almost three years ago that I first blogged about the benefits of "shrinking a market".    Ironically, the example I used in that blog post was how Encarta shrunk the encyclopedia market (and basically killed Britannica and World Book).  Well, we've now seen the encyclopedia market shrink again.  Today Microsoft announced that they will be closing Encarta -- an apparent victim of Wikipedia. 

The power of the Internet to remove friction, eliminate inefficiency, and drive innovation never ceases to amaze me!

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Yogi Berra wisdom for startups

Yogi.ypg My first company was called Infonautics.  I co-founded it in 1991 when I was an undergraduate at Penn.  This was back in the dark ages of online services -- when people used 1200 or 2400 baud modems.  Our initial product (called Homework Helper) was one of the first consumer "search engines" -- we created an online library of over 2,000 magazines, books and newspapers focused on kids -- and made it available online (via services like Prodigy).  We spent four years negotiating the rights to high quality content. Not surprisingly, publishers didn't even have digital versions.  We ended up sending a lot of stuff overseas to be scanned/keyed in.

And then the web browser was invented and consumers started going online in droves.  While we decided to leverage the Internet for distribution, we did not include web content in our index. 

The first time I saw WebCrawler, in 1994, I remember thinking, "Wow - indexing the web instead of licensing data directly...neat idea!  Too bad we didn't think of that.  We really missed that boat."

Then, we saw Yahoo.  And while we contemplated adding "web content" to our proprietary database, we concluded that it was too late -- and that the search game was "won" by Yahoo and WebCrawler.  And we would differentiate ourselves based on the quality of our proprietary content.

Then came Excite, Infoseek and Lycos  -- now it was really too late for us to move towards web search.  These guys were well funded and had all the momentum.  For sure they were going to own the space.

Then came Altavista and Magellan.  I thought Altavista had search nailed.  Game over for sure.

Then came Dogpile, Inktomi, HotBot

Then Ask Jeeves launched with the ability to actually give you an answer to your question.

Then (later Overture) launched with a really novel business model.

Then, finally, in 1998 (seven years after Infonautics was founded), came Google.  Boy, they must have been nuts to go up against such a strong array of well-funded competitors?

The two lessons I learned from this experience can be best summarized by Yogi Berra quotes:

If you come to a fork in the road, take it.
Infonautics was in the right place in the right time -- but made some wrong decisions.  (Or, as Yogi said "We made too many wrong mistakes").  We were so locked into our initial strategy and vision that we were unwilling to "pivot" in response to changes in the market.  We had all of the necessary ingredients (funding, search technology, data center, hardware, engineering team, and consumer interface) but were unwilling to change the recipe.  Some of the most successful companies have been "pivots".  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.

It ain't over till it's over. 
Boy, do I wish Yogi could have been on the Board of Directors of Infonautics.  We made a huge mistake by calling "game over" too early - we had already conceded the game during the first inning.  (In fact, some could say that we called "game over" while they were still singing the National Anthem).  When you are in the middle of the game, you don't have the benefit of being able to look at the scoreboard to tell you what inning it is in - but I've learned that successful entrepreneurs typically resist the natural tendency to assume it's later than it really is.  And while Infonautics was successful enough to go public in April of 1996, the company struggled until it's ultimate demise.

An interesting thought:  Is the "search game" over today?  Or are we simply in the seventh inning of the ballgame watching what appears to be a blowout by Google?  Ten years from now, will someone be blogging about how silly we were to surrender the search game to Google by saying "game over" in search?   Perhaps, in the words of Yogi Berra, "Nobody goes there anymore. It's too crowded."

Nantucket Conference

Logo I'm looking forward to attending my first Nantucket Conference in late April.  The agenda and attendees look very strong. Several topics are very relevant to the current environment. Bob Metcalfe will be giving his favorite talk on selling and I will be on a panel discussing the "Changing VC industry" with Brad Feld, Jo Tango, Paul Ciriello that is moderated by Dan Primack

As of Friday there were only 10 slots open. Act fast.

Nothing to Lose (or Risk Tolerance is a Competitive Weapon)

155890834X.01.LZZZZZZZ I've been thinking a lot about the market/economy lately, and what the economic downturn means for startups.  And I've come to the conclusion that while the economic crisis does present serious challenges to startups, it it might also offer a real opportunity to attack large entrenched players. 

Back in 2000, after I sold to eBay, I remained with eBay for a few years.  And while I was there I was a witness to their battle with (and ultimate defeat by/acquisition of) PayPal.  There are many reasons why PayPal won -- but I think it really came down to the differences in "risk tolerance" between a startup and a large public company.  Let me give two examples:

1.  PayPal had a different risk tolerance level for legal risk.
Around the time that PayPal launched, eBay launched its own payment product called Billpoint.  Paypal's product was widely seen as the better product -- it was easier to use, had less "friction" for sellers, and was well designed.  Billpoint was clunky and forced the seller (and buyer) to go through several additional steps.  The conventional wisdom was that PayPal had a better product team and that eBay was clueless.

From what I saw inside eBay, that wasn't really the story.  I believe that eBay understood everything that was needed to build a great payments product.  They were just unable to do so given the risks involved.  Specifically, I believe that PayPal had a better product than Billpoint because they were willing/able to take risks that Billpoint/eBay was not.  For example, when PayPal first launched, it was pretty clear that their product violated the operating rules for Visa, Mastercard and American Express -- and violated banking regulations is more than 40 different states

PayPal's bet was that they could ultimate resolve these issues after their product had won in the marketplace.  (And that if they didn't win in the marketplace, the legal risks didn't matter).  And they were right.   In late 2000, MasterCard threatened to terminate PayPal's ability to accept MasterCard cards for payment -- and PayPal ultimately worked the issue out.   In 2001, Visa said that PayPal was violating their operating rules -- and PayPal ultimately worked the issue out.  Over a dozen states investigated PayPal and several including Louisiana and New York concluded that PayPal was offering "illegal banking".  Ultimately, PayPal was able to work the issues out (and ended up applying for money services business licenses in more than 25 states).

It was clear to me (from inside eBay), that the Billpoint team knew exactly what they needed to do in order to offer a comparable product to PayPal.  They just were unwilling to accept the risks of doing so.  As a large public company, eBay could not afford to violate the laws of 40 states.  As a small private company, PayPal was willing to take the risk.

2.  PayPal had a different risk tolerance level for financial risk.
PayPal was one of the earliest success stories for online viral marketing.  Every time a user sent money to someone, the recipient had to become a PayPal user in order to access their money.  And to add fuel to the fire, PayPal launched a "refer-a-friend" bounty program, where they gave users $5 everytime they invited a new user -- and gave the new user $5 when they deposited money into their account.  PayPal was willing to invest millions of dollars to acquire new customers.  According to their financial filings with the SEC, PayPal spent over $15M in marketing fees in 2000 and lost over $169 Million that year. 

eBay, on the other hand,  was profitable in 2000 -- with Net Income of $48M.  Given the pressures that Wall Street analysts put on the company, there was just no way that eBay could invest anywhere near as much in the payments space as PayPal.  If eBay decided to spend half as much as PayPal did, eBay would have shifted from a $48M profit to a $37M loss -- a move which would have reduced eBay's market capitalization by billions.

Ironically, eBay was sitting on an enormous amount of cash at the time (over $1B) -- especially when compared to PayPal's $61 million cash reserve.  However, the realities of the public markets prevented eBay from spending/investing their cash to remain competitive with PayPal.  The fact that eBay was a publicly traded company forced them into a diferent risk profile when it came to financial investment.

In both of these cases, PayPal was able to pursue a strategy with a different risk profile because they had nothing to lose (except their venture capital investment dollars) and eBay (with their $20 Billion market capitalization) had everything to lose. 

So, as I look at the markets today, I think I see a similar situation developing.  There are a large number of public companies that have a lot to lose (and are forced to play defense to protect their sagging stock prices).  As they cut their spending (and lay people off), these companies are slashing investment in new projects and new products.  And that makes them vulnerable to scrappy startups with a different risk profile.  Granted, I don't think you're going to be able to burn through $150M (or even $15M) today to "go big" -- but I believe there are other ways to take an aggressive risk posture (as PayPal did with their willingness to accept legal "ambiguities").

Maybe the fact that startups don't have much to lose is a good thing - especially if you're competing with someone who has a lot to lose.

First Round Capital Office Hours in New York City and SXSW

OfficehoursAlthough the economy is hurting and the markets are in the dumps, we're still investing in new companies and are always eager to meet great new entrepreneurs and startups.  After holding successful office hours in Palo Alto and Vancouver, the First Round Capital team is excited to bring our "Office Hours" to New York City and SXSW (in Texas). 

As with all of our office hours meet-ups, this is your chance to meet with the First Round Capital team and chat about anything from starting a new business to joining an existing start-up, in an informal environment.  We’ll be available for a bunch of informal ~10 minute chats. No agenda. We’ll provide the napkins to write on and some drinks while you wait.

In New York, come meet myself, Chris Fralic, Howard Morgan and Phin Barnes in Manhattan on Friday, March 13th at Live Bait Restaurant and Bar from 2-4pm.  Details and signup form can be found here.

At SXSW, come meet Rob Hayes, Kent Goldman and Christine Herron on Monday March 16th at Rio Grande Mexican Restaurant in Austin from 11 am- 1pm.  Details and sigunup form can be found here.