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 »

Announcing hackPR – a New Way for Startups and the Press to Connect

At First Round Capital, we build and deliver dozens of products, services and events to our portfolio every year - and today I’m excited to announce our newest experiment hackPR entirely new way for press and startups to connect.

Through building, investing and supporting over 200 companies, we've seen the disconnect between reporters and startups countless times.  Reporters are constantly seeking interesting new people, companies and trends to cover – and I can’t tell you the number of times I’ve been contacted by a reporter/blogger asking me questions like “do you have any portfolio companies that have been sued for patent infringement” or “what are some crazy things that startup companies do to attract and retain good employees”.  And startups are always looking to connect with those same reporters.  These two parties often struggle to find each other and lack an efficient marketplace to connect.  

hackPR is our attempt at creating a marketplace between press and startups. By giving reporters the tools to connect directly with companies and entrepreneurs, we hope to provide the means for more in-depth journalism while helping startups gain additional PR opportunities.  Here's how we think it will work:

  1. A journalist will be able to send a request out to a range of startups based on size, sector or location with just a few clicks.  Their request could range from anything like "I'm doing a piece on collaborative consumption, what are the startups I should profile?" to "We're doing a piece on college recruiting in startups - have any great stories on how you won a candidate?"
  2. Based on profile data that startups will complete, the appropriate startups will be able to respond.
  3. If the journalist is interested, a match will be made – and the responses will be sent to the journalist
  4. The journalist will receive the contact information of the entrepreneur – and the reporter can make the decision to reach out or not.  (Since the startup will not get the reporters contact information, the reporter will not get spammed.)

This service will be available to any venture backed startup – not just the First Round portfolio.   Like most marketplaces, scale matters and we think everyone will be better off  if it's an open platform.

This is not a new idea – there are other similar services like Profnet (which charges companies to participate) or HARO (which is not limited to startups).  But after using both of those services, I think there is real value that can be delivered by creating a platform exclusively for venture backed startups and the press that covers them…

We plan on launching the first iteration of hackPR in December 2012 – but be sure to grab your place in line as access will be opened very slowly to build the highest quality marketplace. We'll be aggressively iterating on our product as we approach launch – so if you're a startup or journalist, be sure to tell us what you'd like to see.

I strongly encourage any interested reporters or entrepreneurs to sign up at today to gain early access and help us beta test.

The Dorm Room Fund

I was a dorm room entrepreneur. 

I co-founded my first company, Infonautics, back in 1991 while I was a Junior at Penn.  By the time I (barely) graduated, we had 20 employees.  It was through this personal experience at Penn that I first learned that college campuses are wonderful ecosystems for creating disruptive ideas.  And I'm not the only one that noticed and took advantage of this.  For other examples, look no further than today’s largest tech companies -- it’s not surprising that Facebook, Microsoft, Dell, Yahoo, Google all started in a dorm room. 

As I look at the environment facing today’s dorm room entrepreneurs, I notice a few things.  Never in history has it been cheaper or faster to start a company.  In my own startup career, the costs to get to “first product ship” went from $5 million in 1991 (Infonautics), to $2.5 million in 1999 ( and to $750,000 in 2004 (Turntide) – and that doesn’t even take into account the amazing strides and cost reduction platforms of open source software (mysql, memsql), flexible programming languages (python, ruby), cloud infrastructure (AWS, heroku) and new platforms (facebook, iOS6 and Android).   The result has been that products can come to market and create massive user engagement quicker than ever.  It took AOL 66 months to get to one million users.  eBay and Amazon did it in 24 months.  Foursquare in 13 months.  And Path in around 15 days! 

But just because it takes less capital to build a company now, doesn’t mean it doesn’t take any.  And, for a student population already taking out five figure loans to pay for school, finding and obtaining that additional capital is often extremely difficult. Friends and family are usually stretched thin, and in most cases, already do whatever they can to ease the burden on their college relatives.  At the same time, we’ve seen the growth of many wonderful incubators and accelerators – but those often require a student to drop out (or take a “leave of absence” from college).  And traditional venture capitalists are not optimized to write $25K checks to fund a student’s idea while they are still in school.  We’ve heard from several entrepreneurs claiming that it was “much harder to raise our first $25,000 then our next $2 million”.  Given this, I just wonder how many amazing companies we would be talking about today had they received that first small check.  Instead, I hear stories about how amazing students, under the giant burden of college debt, abandoned their startup dreams and chose to take full-time positions at established companies. 

Over the past few years we’ve invested in companies that are disrupting financial markets – from Upstart (which provides a revolutionary new way for college students to raise money to pursue their dreams) to Funders Club (which is pioneering an innovative way for startups to raise capital) to On Deck Capital (which uses technology and data exhaust to underwrite small business lending).  With these as inspiration, I spent some time thinking about how a new venture fund could bridge the disconnect between dorm room ideas and the capital to bring them to life.  In my opinion, a fund would:

  1. Be run by students – not suits  A student investment team would know the entire student and campus ecosystem – allowing them to find, screen and invest in the best ideas

  2. Be located on campus, so that it constantly has a feel for the vibe on campus

  3. Students are engineers, marketers, financers, writers, doctors, lawyers and researchers – and allow them to focus on investing in companies that disrupt big markets that they (students) have expertise in
  4. Finance students based on their needs.  Students are scrappy and often just need that first $10,000 - $20,000 in order to build their product and ship a minimum viable product – let’s call their current stage the dorm room stage

That’s why, today, I’m excited to announce the launch of the first Dorm Room Fund, with a pilot in Philadelphia.  This isn’t a business plan competition.  It is a student run investment fund and First Round Capital will be committing $500,000 in capital (or $15,000 on average per Company) to the fund – for them to invest in startups that are founded by a current student at (or recent graduate of) a Philadelphia-based university (such as the University of Pennsylvania, Drexel, etc).  While First Round Capital will be the initial investor in the fund – and I’ll be helping them by serving as an advisor and member of the Investment Committee while they get it off the ground – our goal is to make this an independent, student-run fund…and for them to raise additional outside capital in the future. 

We will be selecting the initial Investment Team of eight students – and our plan is that they will be responsible for selecting their replacements in the future.  If you are a Philadelphia –area student at Penn or Drexel, and if you are interested in applying to serve on the investment committee, please visit .  We’ll be holding an on-campus information session this Thursday (September 27th) and we'll email the details to every student who goes to the website and signs up

While this is clearly a "pilot", if it's successful we expect (and hope) that Philadelphia will be the first of many cities where we bring the Dorm Room Fund.  And our hope is that this Dorm Room Fund allows for more companies to be built while providing an unparalleled learning experience for the students on the investment team.  Choosing Philadelphia as our first city underscores my commitment to creating a stronger and more vibrant Philadelphia start-up community.  Over the years, we’ve seen amazing companies make it out of Philadelphia’s dorm rooms (Invite Media, Milo and Warby Parker, to name a few), when the capital finds them.  And we can’t wait to add many more to this list.

Welcome Perceptual Networks

Anyone who has been on the Internet for a while remembers HotOrNot -- it has been called "one of the most viral product launchs in Internet History."  And they were one of the first "freemium" companies that showed how you can monetize a free service.

When HotOrNot launched I was still at -- and we were launching a cool tool called the Price Patrol.  This was a browser plug-in that monitored your Internet browsing -- and anytime you went to a product page on a shopping site, it alerted you to a cheaper price at  The technology was built by a company called ClickTheButton, which was founded by Cheyenne Ehrlich.

Today, I'm super-excited to announce that we've invested in Perceptual Networks -- a company founded by Jim Young (a co-founder of HotOrNot) and Cheyenne Ehrlich (the founder of ClickTheButton).  Even more exciting (to me) is the fact that both Jim and Cheyenee moved to Philadelphia -- choosing to locate themselves (and their company) in Philly.

Both Jim and Cheyenne are in my "300 baud club" -- a group of people who have been actively using, playing, and creating online since the days of the 300 baud modem.  And I'm not the only one who is excited by them teaming up.  Indeed, we were joined in this investment round by a "who's who" of angel investors including founders of Youtube, Paypal, Bebo, Demand Media, Delicious, and many others.  

Perceptual Networks is hard at work developing a suite of products that make it easier for people to find "the best people to connect with" and hopes to launch soon.  I'm thrilled that we continue to find "the best people to invest in" -- and am excited to welcome Jim and Cheyenne to the First Round Capital family. 

More about Perceptual Networks can be found here and here.

Hello Philly!

Warning - long blog post ahead.  

For those of you who just want the punchline, First Round Capital is moving our headquarters from the suburbs of West Conshohocken to the City of Philadelphia  Here is why:

I’ve lived in the Philadelphia area for over 20 years – ever since I was a freshman at Penn.  I helped to found three startups in the Philly area.  I launched First Round Capital in the Philly area.   Yet, for most of my professional career I’ve been “bi-coastal”.   Recognizing that Silicon Valley is the center of the technology ecosystem, I’ve made countless trips out there.  I’m there so often that I know the flight attendants on the PHL-SFO flights by name.  It’s why this blog is called RedEyeVC – and why it has carried the subtitle “A view of the startup ecosystem from a coastally challenged VC”. 

As a result, I’ve often found myself making a mental distinction between my “professional community” and my “personal community”.  Philly is where I live and socialize – and it is where my wife and I have chosen to raise our family.  But while I live in Philadelphia, First Round Capital is a national firm.  And as a result, I feel like I have stronger professional ties to San Francisco and New York (where we also have offices).   When I’m in Philly, I spend far more time talking to NY or SF-based entrepreneurs on the phone (and videoconference)  than I do meeting entrepreneurs face-to-face in my office.  And the First Round Capital portfolio reflects that – with over 80% of our portfolio companies based in either California or New York.

Over the years I’ve been contacted by many Philadelphia-based organizations that have sought to improve Philly’s tech ecosystem.  And while I’ve tried to help, it was always in a limited fashion.  I joined the boards of Innovation Philadelphia and the Wharton Entrepreneurial Center.  I’ve spoken at dozens of local events and met with hundreds of local entrepreneurs.  But I never picked up the “Philadelphia Tech” torch myself --  I always played a more supporting role…providing advice from the sidelines.   And when people have asked me “how do we make Philly more like Silicon Valley” I’ve always thought that was like someone saying “how can I make Philadelphia Chinatown more like China”.

Yet over the last few years, I’ve seen several encouraging changes. 

  • First, I’ve seen capital get portable.  When I co-founded Infonautics back in the early 90’s there were several Silicon Valley venture capitalists who offered us term sheets on the condition that we move out west.  Yet today, capital is more geography agnostic.  With e-mail, instant messenger, skype, videoconferencing – and cloud-based reporting platforms that encourage transparency – distance doesn’t matter as much.  And like First Round Capital, more VCs are investing outside of their core geography. 
  • Second, we’ve seen the growth of more efficient ways of knowledge transfer.  As recently as 10 years ago if you wanted to start a technology company, the only dedicated publications that catered to you were magazines such as Upside and the Red Herring.  And most startup knowledge was passed on from person to person – you learned from in-person interactions with other entrepreneurs and investors.   This created real network effects for technology ecosystems (like Silicon Valley).  Today, however, there are so many online resources to help people shorten their learning curve and build their own networks.  From Techcrunch (and their awesome Crunchbase) to PandoDaily (where I am an investor) to AllThingsD, it has never been easier to keep up to date on the industry.  Tools such as Angellist, Gust and FundersClub connect entrepreneurs to capital.  There are dozens of blogs written by venture capitalists and founders.  Online communities such as Hacker News have emerged.  And social media has made everyone and everything much more accessible. 
  • Finally, it’s gotten much cheaper to start a company.  I (and hundreds of other people) have blogged about this before.  Five years ago if you wanted to build a mobile app you needed to plan on spending a year negotiating with AT&T and Verizon.  Today, anyone can build an app from their dorm room in a few days.   

And as a result of these changes, I’ve seen more and more interesting startups get created in more and more diverse places.  Cities such as Boulder.  Austin.  Portland.  Providence.  And, yes, Philadelphia.  From Invite Media, Monetate, Curalate, Relay Network, PackLateSolve Media and Warby Parker (which we were fortunate enough to invest in) to AdMob,, Milo, Venmo, DuckDuckGo and Lore (where we didn’t invest) we’ve begun to see more really exciting companies get their start in Philadelphia.   Every year I see more entrepreneurial activity at Philadelphia’s universities.  Indeed, just last week PandoDaily suggested that the University of Pennsylvania was like “the Stanford of the East”.  And we’ve also begun to see other positive signs in the ecosystem.  Grassroots organizations such as Philadelphia Startup Leaders (which I recently joined the board of) have emerged to provide some “connective glue” for the ecosystem.  Incubators like DreamIt and co-working spaces such as IndyHallVenturef0rth, Benjamin's Desk, SeedPhilly, and many others have begun to emerge.  Several of our portfolio companies have already expanded into Philly – such as Uber and PublicStuff (which is powering Philadelphia’s mobile 311 app).  We’ve seen the launch of Philly tech blogs like Technically Philly.  And Mayor Nutter is a regular speaker at startup events (like Philly Tech Week) and a real booster for tech entrepreneurship.

Change doesn’t occur overnight.  I’m a big proponent of the what Fred Wilson calls “the Darwinian Evolution of Startup Hubs” – and recognize that in order for an ecosystem to grow you need the alumni from successful companies.  And while it takes multiple generations of successful companies to create a true startup hub, I’m encouraged by the quantity and quality of the current generation of startups.  Monetate, for example, employs over 100 people in the Phialdelphia area (and is looking to hire another 25 people now).  Their team is incredible -- and has the technical chops of a Silicon Valley company.  It isn’t random luck that the company’s founder and CEO, David Brussin, was the CTO and co-founder of Turntide – an earlier Philadelphia success story that sold to Symantec.  The best way to create a more vibrant startup ecosystem in Philadelphia is to help the current class of startups succeed – so that Monetate’s employees will be our next batch of upcoming entrepreneurs.  This doesn’t just create value today – but it also has a compounding effect as today’s successful companies create the next generation of entrepreneurs through their alumni. 

That’s why I’m done sitting on the sidelines.  And so is First Round Capital.  And I am super-excited to announce that First Round Capital is moving our headquarters from the suburbs of West Conshohocken into the city of Philadelphia.   I’m trading my sterile suburban office park environment (and short commute) for proximity to Philadelphia’s entrepreneurs.   We’ll be opening a 10,000 square foot facility in University City – right next to Penn’s campus.  In addition to housing our Philadelphia team, the office will have space for startups – both for our portfolio companies (such as Uber’s Philly team, Curalate and Perceptual Networks) as well as other companies (like Technically Philly – who will be locating their offices there as well).  It will have space to host educational and networking events.  And it will have space for entrepreneurs to hang out and work. 

But for me this is more than just an office move.  It is my acknowledgement that I can do more to help local entrepreneurs get their business off the ground.   And while I don’t expect that I will slow down my travel schedule or that our new office location will immediately result in us funding dozens of Philadelphia area companies – I do want to play a more active role in helping the current generation of Philadelphia entrepreneurs make their mark.  I’m not trying to turn Philadelphia into Silicon Valley (or Chinatown into China) – but I do think we can enable more great companies to be built here in Philadelphia. 

And I can’t wait to get started.

Welcome Upstart

College-student-debt$1 trillion.  A number we normally associate with national debt can now also be used to describe student debt, the result of an exponential increase in college tuition.  At current, two out of every three college students take out an average of $23,000 in college loans; loans that need to be repaid to the tune of hundreds of dollars a month upon graduation.  Add this to post-graduation ‘real-world’ expenses (such as apartment rent) and this is forcing graduating students to find alternative ways to save money, as some choose to move back in with their parents, or earn money, by forgoing their real passions and accepting a job for purely monetary reasons.  All of these financial constraints limit choices and dissuade risk-taking.   

This is why I'm thrilled to share that our newest investment, Upstart, is looking to tackle this problem with an innovative new approach.   Upstart allows graduating students to raise capital in exchange for a modest share of their income over the following 10 years.  This means that students finally have the freedom to make the best choices for them, regardless of short-term income flow.  As the company writes:  

Upstart was founded to help people do what they were meant to do. Many talented college grads take jobs they’re not excited about, rather than following their true passions. Whether constrained by debt or just comforted by traditional career options, too many students take the perceived “safe path.” Upstart aims to provide a modest amount of risk capital - where repayment is tied to the student’s future success - paired with guidance and support from experienced backers, to help grads pursue less traditional and more inspiring careers.

Upstart is launching with five pilot universities in the fall that include Dartmouth College and University of Michigan.

The Upstart team is comprised of a number of ex-Googlers and is being lead by Dave Girouard, who formerly lead all of Google Apps – so if you're a user of Gmail and Google Docs, you're familiar with his work.  Dave joins a number of other First Round Companies that are also shaking up the funding and financing landscape like On Deck Capital, BillFloat, AxialMarketGiveForward, and FundersClub.

Please join me in welcoming Dave and Upstart into the First Round Capital portfolio and Community.






Welcome FundersClub

If we think back over the past decade, software has done a great job of making inefficient markets more accessible and efficient.  eBay made it easier for buyers and sellers to find and exchange products.  One of our portfolio companies, TaskRabbit, is creating a marketplace for labor that efficiently connects those who need tasks completed with those that can perform the work.  Kickstarter is enabling, and making it easier for, the world's most creative people to turn their dreams into reality.

But, software and the web have yet to make connecting private companies with seed-stage capital more efficient.  There are some burgeoning platforms, like AngelList and Gust, that are moving in this direction; but the transactions still happen offline,  and usually require large blocks of capital.  If someone is looking to invest $1,000 in a private company, it's still virtually impossible.

And as someone who spends over 30 hours a month on planes/trains, I know how hard it is for someone who doesn’t live in Silicon Valley full-time to stay connected and get access to the strongest startups. 

FundersclubFor these reasons, I’m really excited to announce First Round Capital’s investment in FundersClub.  FundersClub makes it easy for companies to raise capital from individuals without hassle.  Companies have just one shareholder (the FundersClub fund) – and don’t have to deal with the hassles of chasing down individual shareholders for signatures/approvals down the road.  And for investors, it eliminates many of the monetary limitations - it allows investors to invest as little as $1,000 - as well as the geographic limitations of a normal seed stage round.  (You still need to be an accredited investor, though).

FundersClub just launched last week with several companies from the current batch of Y Combinator companies – and if history is any benchmark, the startups listed on the platform will be heavily oversubscribed shortly after YC Demo Day on August 21st.  What FundersClub provides for everyone, is insider access.  If you aren't one of the 300 people to get an invitation to YC demo day, this is your chance to invest in these great companies.  The initial available companies include FundersClub itself, Virool, Sponsorfied, TracksBy, and Coinbase.

Please join me in welcoming Alexander Mittal, an accomplished founder named one of BusinessWeek’s Best Young Entrepreneurs, and Boris Silver, founder of Sport Interactiva, and their Company, FundersClub, to the First Round Capital Portfolio and Community.

Welcoming Mango Health

2921FEvery day 149 million Americans (almost half of the U.S. population) take at least one prescription medication – with many taking more than one - and that does not even include the number of supplements/vitamins taken.  At the same time, approximately three out of four adults in the U.S. report not adhering to physician prescribed treatment regimens in one or more ways and almost half of adults report forgetting to take prescribed medication.  This means worse healthcare overall and leads to anywhere from $100 to $300 billion in cost to the system – we think a sufficiently large and hard problem. 

This is why today I’m thrilled to announce our investment in Mango Health – an entirely new mobile solution for managing healthcare.  The team at Mango Health is trying to help consumers take control of their health with fun, elegant and easy to use mobile applications.  They’re attacking the problem of managing healthcare by focusing first on the drug adherence market with a simple and elegant mobile app that will incentivize users to take their medication on time, everyday, while also warning them about potential harmful interactions, thereby increasing their safety.

When we first met the team back in January, the first thing that impressed us about Jason Oberfest and Gerald Cheong was their passion for utilizingatheir social gaming background to make mobile healthcare more accessible and fun.  Before starting up, Jason served as a VP of Social Applications at ngmoco and SVP of Business Development at MySpace.  Gerald was the Lead Engineer at ngmoco, and has previous experience at VM Ware, Ariba and Microsoft Research.

Over the past year, we’ve continued to see incredible opportunities in healthcare that are fundamentally driven by both ubiquitous smartphone use, as well as a trend in consumers continued desire to be more active in their healthcare – and I can’t wait to share a few more investments in the coming weeks.  In addition, we’re starting to see the next generation of healthcare companies that can move at startup speed without the traditional multi-year build cycles that have been historically tied to anything in healthcare IT.

Please join me in welcoming Mango Health to the First Round Capital Portfolio and Community.



The More Things Change

The more things change, the more they stay the same.

Today I’m happy to announce that we have successfully closed on our new fund (First Round Capital IV) – but we’ve chosen to keep our fund the same size as our last fund. 

And we are thrilled that our investor base remains the same.  Every single one of our existing institutional Limited Partners has recommitted to our new fund – and we are honored and thankful for their continued support.

First Round Capital’s investment focus and strategy remains the same.  All we focus on is seed-stage.  We believe that the first 18-24 months of a company’s life are a special time – where the DNA of a company gets established.  And seed-stage is the only place we play.  It’s what we know.  It’s what we love. 

We will continue to invest in services, products and events (like last week’s Advertising Summit) – building a platform that (we hope) makes it easier for entrepreneurs to start successful companies.  Our investment team, platform team and finance team is also staying the same.   I love the fact that I get to work with amazing people – who share my passion and excitement about working with amazing entrepreneurs. 

And I’m super-excited to announce that Kent Goldman and Phin Barnes will become new Partners in our next fund. Both of them have done an incredible job for us and our founders.  They’ve helped us expand our footprint in New York and San Francisco, introducing First Round to many talented entrepreneurs and supporting our portfolio CEOs as board members and trusted advisors.  Each has played a meaningful role in our progress to date – and we are beyond thrilled to match their titles with the reality of their contributions.  We welcome them into the partnership…and look forward to seeing them sing and dance in next year’s holiday video!

[Be sure to check out Phin and Kent's blog posts here and here...]

Introducing our New Head of Talent at First Round Capital, Jack Leidlein

Today I'm thrilled to announce that Jack Leidlein has joined First Round Capital as our new Head of Talent. 

At First Round Capital we've spent the last 7 years working really Pic 2hard to build a new kind of venture capital firm dedicated to supporting the next generation of company builders at idea inception.  We do this through both a highly engaged partnership and a platform that helps connect our community to resources (and each other).  During this process of building our firm, we've been laser focused on making sure that First Round is an entrepreneur's First Call when they want to raise capital…and their first call when they're confronted with any challenge or opportunity.  And we've been fortunate enough to receive that First Call from over 300 amazing founders including entrepreneurs like Jason Goldberg at Fab, Dave Morin at Path, Nat Turner at Invite Media, Katia Beuchamp and Haley Barna at Birchbox, Travis Kalanick at Uber, Aaron Patzer at Mint and Garrett Camp at StumbleUpon.

While we hope to continue to receive calls from entrepreneurs looking to start a company, one of our goals over the next 7+ years is to be the first call from people looking to join a startup.  We fundamentally believe that category-killing businesses are built by amazing founders and world-class teams -- and if we're able to help our companies increase talent-density at the seed stage, amazing things are possible.  For example, if we're able to help a team of 5 engineers grow their team by just one or two -- that's transformative to their business and can potentially change the trajectory of the company.  So to that end, in addition to First Round Capital's existing suite of products, services and events that focus on business development, management, marketing and engineering - we're now also going to be aggressively focused on creating value in hiring during the first 18-24 months of company construction through education and mentorship as well as a fantastic network of talent.

To help us continue to develop and execute on our talent initiative, I couldn't be more excited to have Jack join First Round Capital.  As we've gotten to know Jack, I can't tell you the number of times we heard things like "he is always the person that provides the glue, and is exceptional at differentiating his startups' messaging and practices in order to compete for and hire the very best talent."  Jack has spent the vast majority of his career enabling early stage technology companies to attract and retain top talent.  He's a startup guy at heart that loves helping companies position themselves to be recruiting machines. Most recently Jack was responsible for scaling the teams at Scribd and Songbird.  Jack also built the first Data & User Insights group at ShareThis, a team comprised of exceptional scientists and engineers.

Please join me in welcoming Jack to the First Round Capital team.

Unintended Consequences

I am very happy that the Senate approved the JOBS Act yesterday --  I supported it's passage and believe that it will ease the path for companies to go public faster in a way that maintains meaningful investor protection.   I am fully aware, however, that like all legislation, we will find both positive and negative "unintended consequences" the emerge from this legislation.  I believe (and hope) that those consequences will be better than the existing situation.

We have already witnessed the unintended consequences of Sarbanes Oxley on the startup industry.  There has been a lot of discussion about the decrease in overall IPO volume, the increase in the length of time a company waits before going public, and an increase in companies choosing to exit via M&A instead of IPO.  According to a Wall Street Journal editorial, SarbOx has "...managed to kill the creation of new public companies in the U.S., cripple the venture capital business, and damage entrepreneurship."

One consequence of SarbOx that I haven't seen widely discussed, however, is the impact that the reduction in IPO's has had on the public market investor.  As companies choose to go public later in their lifecycle, they have materially shifted the "value creation" from public shareholders to private shareholders.   When Cisco went public in 1990 it was worth $220M -- so the private investors (founders, employees, investors) benefited from the value creation from zero to $220M.  Today, however, Cisco has grown to be worth $110B -- an increase of 491 times their IPO price.  And public investors were able to benefit from the value creation from $220M to $110B.  This is important.  The public shareholder (if they were smart enough to buy Cisco during their IPO and hold it) would have had the same opportunity as anyone else (including the company's founder) to receive 99% of the economic benefit of Cisco's growth!    

Take a look at 10 well known tech companies in the chart below -- which includes Apple, Amazon, eBay, Google, Microsoft and Yahoo.  The founders, employees and venture investors in these 10 companies benefited immensely from the creation of $32B of value at the time the companies went public.  However, the public markets (and public shareholders) were able to benefit from the increase in value from $32 billion to $1.3 trillion.  The public shareholder was able to participate in the creation of over One Trillion Dollars in market value creation -- and could enjoy the economic benefit of over 97% of the value creation from these companies.  And this is from just 10 companies!  If I wasn't so lazy, I could have included hundreds of companies in this analysis...but I'll leave that to others.

This is very different situation from today's crop of IPOs.  These companies have waited longer -- and are typically more mature at the time of their public offering.  And as a result, they are able to go public at much higher market capitalizations -- it is reported that Facebook will go public at a value of $100B.  In order for a public shareholder of Facebook to receive 97% of the economic value, Facebook would have to be worth over 3 trillion dollars.  But it's not just Facebook.  Twitter is reportedly trading at $8B in secondary market -- and LinkedIn and Zynga both went public with market capitalizations of $5+ Billion.  Groupon went public at a value of over $12B -- and most of the economic benefit from that value creation went to the company's founders, employees and investors...rather than their public shareholders.  

One result of the shift towards later, larger IPOs has been the increase in secondary transactions -- allowing early shareholders to get liquidity before an IPO.  Indeed, there were reportedly over $800M of secondary transactions in Groupon -- and billions of dollars worth of shares have traded in Twitter and Facebook.  

My point is not to debate whether today's companies are worth the prices they are getting -- I have no issue with a company selling stock to an educated, willing buyer at a high price.  Nor do I have any issue with secondary transactions.  Rather, I am just trying to point out that one major impact of the delay in IPO timing is that public investors miss the opportunity to benefit from what could potentially be the creatoin of trillions of dollars of market value.  

I recognize that for every Yahoo there is a Lycos -- and for every Amazon there is a  And that by delaying a company's IPO, you are also protecting public investors from losing money in these failures (and shifting it to private investors, founders and employees).  But I'm not sure that was an intended consequence of SarbOx -- as the intent was to prevent investors from fraud, not to prevent them from making bad investment decisions...

One of the intended consequence of the JOBS Act is to make it easier for startup companies to go public.   And I hope that one of the unintended consequences of the bill will be to let public market investors benefit from more of the value that these companies create.


Market Cap Growth vJPEG