Seemingly overnight, early-stage investor Josh Kopelman has become something of a business celebrity. The attention stems partly from the fact that his venture firm, First Round Capital, continues to actively back young companies despite the recession. Partly, it owes to the several successful exits First Round has already enjoyed since opening just five years ago.
Perhaps given Kopelman’s background as an entrepreneur — he cofounded Infonautics Corp. (IPO in 1996), Half.com (bought by eBay for $312 million in stock in 2000) and TurnTide (sold for $28 million to Symantec six months after its founding) — it’s no surprise that entrepreneurs uniformly speak highly of him, too.
I caught up with Kopelman yesterday, as he commuted from New York to Philadelphia, near First Round’s West Conshohocken headquarters. Among other things, we talked about how the market looks, six months into 2009; why he helped buy back StumbleUpon from eBay; and whether or not it makes sense for entrepreneurs with no VC experience — many of whom are now starting microcap venture vehicles like First Round’s earliest funds — to break into the business.
Your profile has risen pretty dramatically in the last couple of years. What’s been the good and bad of becoming better well-known?
Heh. I haven’t noticed it yet. The inbox is a little more full, but otherwise, nothing has really changed.
You haven’t become self-promoting Twitter fiend, I’ve noticed.
Thanks, though I do use Twitter and get value out of it. I’ve used it for everything from helping our portfolio companies to hire to keeping in touch with people to doing diligence. A couple of weeks ago, I was looking for data about Google’s advertisers based on their monthly spend. I tweeted about it and within hours several people had tweeted me back with useful information and links. I thought that was pretty great.
Why do you think there’s so much interest around First Round Capital and its focus on small rounds and outcomes? Is it just a sign of the times?
I don’t know about the interest level in First Round, but I have strong opinions about the math in venture capital. Ten years ago, 80 percent of venture funds were $100 million or less. Today, 80 percent of venture funds are $100 million or bigger. That [bloat] is creating real challenges in terms of returns in the industry and for entrepreneurs as their companies are forced into trajectories around a venture capital map.
I still can’t believe that in the five years since Google’s IPO, Kleiner has raised seven funds totaling at least $2.6 billion. That’s about a billion dollars more than it raised in its 33-year history prior to the IPO.
All I can say is that because something works at a certain scale doesn’t mean it works at a 10x scale or even a 3x scale. I believe small funds are important to producing returns.
Speaking of performance, First Round was the second most active Internet investor last year, and you told me then that the firm would probably make between 15 and 20 new investments in 2009, too. Are you on track to do that?
We were pretty active in Q1 and Q2. So far this year, we’ve closed on eight seed deals, three of which are still [in] stealth [mode], so I wouldn’t be surprised if we come in at the high range of that prediction.
Do you run the risk of overextending yourself? How many boards are you on right now?
I’m on about eight. But our model is a little different. We front-load our board seats. Our board tenure is about 18 months. So as a company goes on and raises B and C rounds, we tend to move from being proactive to reactive.
Those 18 months must be intensive, though. How do you find the time to sit on so many early-stage boards, fly cross-country twice a month, meet with new entrepreneurs and do the other networking you do?
My partners. There are four partners and three principals who help with everything from meeting with new entrepreneurs to the execution work with our existing portfolio companies. We’ve really tried to bring on board a strong team to help us scale. I don’t know many $125 million funds with seven investing professionals.
Historically, out of every dollar you invest, how much have you set aside for follow-on rounds?
Our initial investment is usually around $400,000, and we’ll invest from up to $2 million to $3.5 million in a company.
What of the risk that the M&A market will remain sluggish and the IPO window will remain mostly closed for a long time to come? How do you keep from becoming diluted by bigger VC firms as you wait for both to turn around?
Our model works in the current M&A market. You see companies being bought for $25 million to $150 million. For a large fund, that wouldn’t move the needle, but for us, small and profitable exits like we’ve had in the last two quarters [Powerset’s sale to Microsoft for roughly $100 million and Mi5 Networks’ sale to Symantec] do.
You also enjoyed a nice return when StumbleUpon, which raised just $1.5 million from investors, sold to eBay in 2007 for $75 million. Why join the syndicate that recently bought it back from eBay?
As an original investor and director, I’ve always been a big fan of the team and opportunity there, and that didn’t change, just because it might not have been a good strategic fit. Also, its revenue numbers have grown almost 10 times since the sale. So when an attractive opportunity came to jump back on the bus, I was happy to do it.
Has the company entertained any new offers yet?
I’m not telling.
That sounds like a yes.
[Laughs.] I’m not going to talk about it.
Okay, what are some of the unifying themes around your other new investments? What criteria are you focused on right now, in the second half of 2009?
We’re not so much sector as style driven. All our startups tend to be capital efficient; they have an average monthly burn of under a $100,000 a month. They all tend to be software based. We’ve spent a fair amount of time looking at the transition from software to applications in the cloud. And we’re looking at more enterprise than in the past. But as far as themes, we always like businesses that can shrink markets. The Internet is just ruthless at finding inefficiencies and letting new players take money away from their established competitors.
Last time we talked, you mentioned Jingle Networks’ 1-800 Free411 service as a market shrinker, eating away at what’s been an $8 billion industry. But now there’s not only Google 411 to compete with but Microsoft’s Bing 411.
Not to mention the iPhone, whose users have the Web at their fingertips. But Jingle is still the market leader. To some extent, the power is in the brand. Also, Jingle is now actually monetizing more non-directory assistance calls than directory assistance, and those are higher margin because you don’t have the cost of directory assistance behind them.
What kinds of calls do you mean?
They have more than than 200,000 audio advertisers. Anytime you call the show “The Biggest Loser” to vote, for example, you hear an ad served by Jingle.
A lot of people seem to have caught on to the microcap fund model. Has that meant more competition for the deals that interest you?
No, at the seed stage, rounds have grown from $500,000 to $1.5 million because companies need longer runways, so we’re very happy to cooperate with folks like Mike Maples and Baseline Ventures and other new groups that are doing seed-stage deals.
What of the fact that some of these funds are being run by enterpreneurs with no venture experience. You were an entrepreneur-in-residence at Comcast Capital before starting your fund. Your grandfather ran a venture capital firm. In your view, how critical or not is training at a venture fund?
There’s an incredible learning curve for any investor in the first year or two, because a lot of what you’re doing in pattern matching, and the more experience of patterns you build up, the better you become. The longer you do this, the better ability you have to judge someone’s ability to execute, as well as how to manage conflicts and personalities.
There are no absolutes, but overall, I think it’s a great trend. There’s been very little novelty or innovation in the venture industry, and I think introducing entrepreneurs’ perspectives into the mix is a good thing. I find that entrepreneurs who don’t know how things used to be done often invent new ways of doing things that are better, and I think the same could be true of VCs.
Where does your current fund [a $125 million fund raised in early 2008] stand? Are you gearing up to raise another anytime soon?
We’re somewhere between 15 to 18 percent invested, so we don’t expect to raise another fund for quite some time.
When you do head into the market again, you’ll raise a similar-size fund?
Yes, there’s always this temptation to compete with later-stage funds, but we really want to continue to partner with them and stay in our shallow end of the pool. We kind of like it there.
One last corny but sincere question: You’re praised widely by entrepreneurs who you’ve backed and who you’ve turned down. What do you think they’re reacting to?
I don’t think there’s anything special I’m doing. I think part of why entrepreneurs have bad experiences with VCs is that they never want to pass on a deal, because there’s no upside for them in doing that. Instead, they say, “Eliminate the risk and come back to us.” As an early-stage fund that funds PowerPoints all the time, we can never say, “You’re too early for us,” but we also wouldn’t want to.
When I was an entrepreneur, I realized there are three kinds of VCs. My favorites are those who are quick and write out checks. My second-favorite are those who are quick to say no. Then there’s a third category of VCs, who offer drawn-out maybes. I knew I never wanted to be that kind of investor. Even if entrepreneurs don’t like your answer, they need you to be straightforward.