20VC First Round's Josh Kopelman on Why Price Is Both An Art and A Science, Why Ownership Must Be Built on First Check and The Negative Consequences of Attribution in Venture

In this insightful conversation on "20 Minutes VC," host Harry Stebbings interviews Josh Kopelman, founding partner of First Round Capital, a pioneering seed-stage venture fund. Kopelman reflects on the evolution of seed investing and First Round's role in backing successful startups like Uber and Square. He emphasizes the critical nature of the "pick," both for VCs selecting startups and founders choosing investors, and the importance of asking the right questions rather than having all the answers. Kopelman also discusses the challenges of building a community within a portfolio and the delicate process of generational transition in venture firms. His relationship with Nat Turner of Flatiron Health exemplifies the dynamic between investor and founder, highlighting the mutual growth and learning that can occur. Throughout, Kopelman shares valuable insights on decision-making, board dynamics, and the impact of AI in healthcare investment opportunities.

• Harry Stebbings hosts the 20 Minute VC podcast.
• Harry expresses gratitude for having Josh Kopelman on the show.
• Josh Kopelman is a founder and partner at First Round, a leading seed fund.
• First Round's portfolio includes companies like Uber, Warby Parker, and Square.
• Josh has been recognized by Forbes and Newsweek for his investing success.

"And I could not be more thrilled to welcome the incredible Josh Cropper into the show today."

This quote shows Harry's excitement about having Josh Kopelman on the podcast, highlighting Josh's accomplishments in the venture capital industry.

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"And speaking of being prepared, are you."

This quote transitions from the introduction to presenting the sponsors, emphasizing the importance of being prepared, whether in life insurance or business bookkeeping.

• Josh Kopelman founded First Round Capital to address a market gap in seed-stage investing.
• He observed a significant decrease in the cost to launch a startup over the years.
• Venture funds were growing, creating a mismatch in the market.
• First Round Capital started with a $7 million fund in 2004.

"And it seemed like a contrarian idea at the time, and obviously now it's grown into something."

This quote explains how Josh's idea for First Round was initially against the norm but has since become a recognized asset class in venture capital.

• Josh Kopelman reflects on his strengths and weaknesses as an operator.
• He realized that venture capital allowed him to focus on his strengths.
• This realization led him to see investing as his ideal career path.

"The ability to craft a job where you could play to your strengths and you didn't have to worry and spend the time on the areas where maybe you didn't have a marginal contribution to make."

This quote highlights Josh's strategic approach to career choice, focusing on areas where he can add the most value.

• Josh has experienced both boom and bust cycles in his career.
• These cycles have made him more cautious as an investor.
• He acknowledges the importance of taking risks in venture capital.

"I've had to consciously try to remember that we get paid to take risk, not avoid risk."

This quote reveals Josh's awareness of the balance between risk-taking and caution in venture investing.

• Josh discusses the importance of flexibility in pricing when investing in startups.
• He shares past experiences of losing opportunities due to sticking to a price, such as with Twitter and Dropbox.
• Josh believes in finding a balance between being price sensitive and taking calculated risks.

"Valuation is both art and science. The science is picking a price, and the art is knowing which 5% of the deals to invest in at any price."

This quote from Jim Breyer, shared by Josh, encapsulates the nuanced approach to valuation in venture capital.

• Josh contrasts his missed opportunity with Twitter to a successful investment in Square.
• He reflects on the learning experiences from both successes and missed opportunities.

"We offered Twitter a term sheet at a 5 million pre money valuation... Fred came in at 20 a few months later, and to make it even more painful, called me and said, you know what? We're doing around at 20. And I know I didn't take your term sheet of five, but if you want to put money in on this round, you can. And I didn't do it."

This quote illustrates the importance of flexibility and the potential consequences of strict adherence to predetermined valuations in early-stage investing.

• First Round Capital learned from a missed opportunity with Twitter and adjusted their approach with Square.
• They became the second-largest investor in Square's first round, despite the high valuation, indicating a willingness to adjust price considerations based on lessons learned.

"So when Jack was starting square and we met with him, he said, well, if you thought Twitter was expensive, this is going to be even more expensive. And his first round was at a 40 pre, and we learned our lesson."

This quote highlights the experience of missing out on Twitter and how it influenced First Round Capital's decision to invest in Square, despite the high initial valuation.

• First Round Capital's reserve allocation has evolved from a 50/50 split to a quarter for initial investments and three quarters for follow-on, and now back to nearly 50/50.
• This shift is due to later-stage valuations increasing more rapidly than seed-stage valuations.
• The current fund size is $180 million, and they still invest at the super early stage.

"Today, we're putting a little more upfront. We're kind of back to where we started. We're pretty close to 50 50, primarily because what we've seen is later stage valuations have increased far faster and far greater than seed stage valuations."

This quote explains the strategic shift in reserve allocation to balance initial investments and follow-on investments in response to changing market valuations.

• Josh Kopelman believes in the importance of building ownership with the first check.
• Accumulating ownership in later rounds can be expensive, and initial investments are seen as crucial for ownership, while later investments are more focused on cash returns.

"Our view is that it's pretty important to build it on first check. I think that it just gets so expensive to accumulate ownership in the later rounds..."

The quote emphasizes the strategy of establishing significant ownership early on, as later investments may not offer the same level of returns in terms of multiples or IRR.

• First Round Capital has a collaborative decision-making process, requiring a two-thirds majority without any partner having a veto.
• The process has evolved to focus on finding truth rather than winning a deal.
• Haley challenged the partnership to reframe their approach to be more about learning and less about advocating for a particular investment.

"The goal isn't to sort of win, but rather the goal is to find truth. And a successful outcome could be when I learn something from my partners and we don't invest in a company that I brought in and vice versa."

This quote reflects the internal culture shift from competition to collaboration, with the emphasis on learning and finding objective truth over pushing individual investment agendas.

• Josh Kopelman has evolved from being prescriptive to asking the right questions as a board member.
• He emphasizes the importance of enabling the management team to make better decisions by asking insightful questions rather than providing all the answers.
• Focusing on specific areas in board meetings can have a greater impact.

"The best board member isn't always the person that has all the right answers... But oftentimes, the best board member is the person who asks the right questions."

The quote conveys the shift in Josh's approach to board membership, highlighting the value of enabling the founder and management team through strategic questioning.

• Josh Kopelman admires Matt Harris for his diplomacy and rational approach in board meetings.
• He learned the importance of keeping emotions in check and allowing for rational, grounded discussions to make the right decisions.

"Matt was very good at framing the conversations in rational, grounded, well articulated arguments that enabled everybody to save face and enabled the people to optimize on making the right decisions."

The quote illustrates the influence of Matt Harris's diplomatic approach on Josh's own style as a board member and underscores the importance of rational discussion in board meetings.

• Josh advises new board members to listen more than participate in their first board meetings.
• Engaging with the company and its team outside of board meetings is crucial for effective board membership.
• It's important to understand how the entrepreneur thinks about problems before actively participating.

"The first and second board meeting you should go to should be listening far more than participating."

This quote provides practical advice for new board members, emphasizing the importance of observation and understanding before active engagement.

• Josh Kopelman focuses his engagement on companies in their first 18 to 24 months, which he sees as a magical time of formation and growth.
• He prefers to be proactive during this stage and reactive once a company has progressed to later funding rounds.
• Time allocation is based on life stage rather than company progress.

"So one of the things that I believe is that the first 18 to 24 months are a magical time in a company's life."

The quote highlights the strategic focus on the early stages of a company's development, where Josh believes he can have the maximum impact and leverage.

• Josh Kopelman emphasizes the significance of the selection process, or "the pick," in venture capital and entrepreneurship.
• A disproportionate amount of time is spent on execution rather than on the critical stage of idea selection.
• Successful pickers expand their set of ideas rather than reducing them quickly due to arbitrary deadlines.
• Continuous learning and the willingness to ask "dumb questions" are traits of the best pickers.
• The concept of "the pick" is so crucial that Josh believes startup mortality is often determined at this stage, not during execution.

"I might spend 50% of my time helping companies after we've invest. I might spend 40% of my time sourcing network building at pop a funnel. And maybe when you sort of look at the amount of time we spend in partner meetings and in diligence sort of doing the pick, it's 10% of our time, but it probably drives 80 plus percent of the return."

This quote highlights the skewed time investment in venture capital, where a small fraction of time spent on selecting investments drives the majority of returns.

"Most founders spend less than five to ten weeks picking an idea, but they're going to then spend five to ten years executing on that idea."

Josh points out the imbalance in time allocation for entrepreneurs, where the idea selection phase is rushed compared to the years spent on execution.

"The best pickers are people who are consistently focused on set expansion. They don't feel the time pressure of an arbitrary deadline, so they're consistently reevaluating and consistently collecting data."

Successful pickers are characterized by their ongoing effort to broaden their options and gather information without being constrained by self-imposed deadlines.

"I believe that a high degree of startup mortality is baked in at the pick and not on the execution."

Josh argues that the fate of many startups is sealed during the idea selection phase, suggesting that failure is often predetermined by poor choices at the outset.

• Founders often rush the process of selecting investors, which can have long-term consequences.
• It is essential for founders to understand what they want from an investor and to conduct thorough due diligence.
• Josh encourages founders to ask for references, especially from investments that did not succeed, to gauge an investor's behavior in challenging situations.
• Understanding the investment behaviors and policies of a venture fund is critical for founders.

"Right now, an investor is oftentimes more than just capital in both good ways and bad ways."

Investors bring more than money to the table; their influence can significantly impact the company's direction, for better or worse.

"It's amazing to me how few founders ask me for references when I am asking them for references."

Josh finds it surprising that founders do not commonly request references from potential investors, despite the investors asking for references from the founders.

"Try to understand the product you're picking because you're locked into it."

Founders should view their choice of investors as a long-term commitment and should thoroughly evaluate the "product" they are choosing, i.e., the investor and their fund.

• Josh describes his evolving relationship with Nat Turner, from mentorship to a mutual learning experience.
• The relationship has been rewarding and serves as an example of how roles can shift over time in professional connections.

"I've known Nat now for well over a decade... it's so rewarding that I'm learning from him now."

Josh reflects on his long-standing relationship with Nat Turner, highlighting the progression from mentor to a reciprocal learning dynamic.

• Josh prioritizes the selection of partners over companies for the long-term success of a venture firm.
• He acknowledges the benefits of starting with a trusted network but also recognizes the limitations and lack of diversity it imposed on the partnership.
• Josh suggests that he would consider going outside his network more if he were to do it again.

"I would rather be known as a better picker of partners than a picker of companies, because that's what enables a venture firm to scale, grow, and endure just beyond any one person."

Josh values the importance of selecting the right partners as a key to the enduring success of a venture firm.

"I think we're paying off some diversity debt now as a result."

Acknowledging the early focus on a closed network, Josh admits that the firm is now working to address the lack of diversity that resulted from this approach.

• Open and honest conversations about personal and fund goals are crucial for successful generational transitions.
• Viewing each new fund as a separate entity with its own cap table helps align economics with current partner contributions and prevents issues related to past partner entitlements.

"I've seen more great funds get killed and die, or just great brands get damaged because of failed generational transition."

Josh emphasizes the importance of managing generational transitions effectively to maintain the integrity and success of a venture fund.

"As long as people are transparent and as long as economics are aligned to value creation, it puts you in a good spot."

Transparency and economic alignment are key principles that Josh believes contribute to a successful generational transition within a venture firm.

• First Round Capital plays the venture game as a team, eschewing personal attribution for deals.
• The firm prioritizes matching founders with the partner best suited to help them, regardless of who initially brought the deal in.
• This team-based approach is believed to be more beneficial for the firm and its founders, as it avoids internal competition and optimizes for the collective success.

"We've chosen to play the venture game as a team."

Josh explains First Round Capital's philosophy of team-based collaboration over individual attribution.

"How do you give attribution for that? It also creates challenges around follow on investments."

The quote illustrates the complexity of assigning credit for deals and the potential conflicts that can arise from a focus on individual attribution.

• VC firms often have significant reserves for investment, and partners may focus on how to allocate these funds.
• The goal should be to invest in the right companies, not just to improve personal track records.
• Firms typically discuss performance internally, but individual partner performance is not tracked or shared with limited partners (LPs) during diligence processes.

"A partner is going to sit down and say, how do I get as big a portion of that $100 million from my companies? And I think that's the wrong thing they should be solving for. How do I get as much of that $100 million into the right companies?"

The quote emphasizes the importance of focusing on the collective success of the firm's investments rather than individual partner gains. It suggests that the strategy should be about finding the best opportunities for the firm's capital rather than personal accolades.

• "Thinking in Bets" is recommended for its insights into decision-making and understanding biases.
• The book discusses the concept of "resulting," which is the flawed practice of evaluating decisions based on outcomes rather than the decision-making process itself.
• It highlights the importance of acknowledging uncertainty in decisions and the need to quantify it.

"Thinking in bets by Annie Duke. Annie is a champion poker player, but the book talks about decision making. It talks about recognizing biases and overcoming them."

The quote provides a brief overview of the book's content, indicating its relevance to decision-making and bias recognition, which are crucial skills in venture capital and business.

• Josh Kopelman's motivation comes from a combination of deep-rooted insecurity and self-actualization through work.
• He values the opportunity to engage with innovative ideas, great founders, and his team.
• The job satisfaction comes from the dynamic nature of working in a startup environment and contributing to various projects and initiatives.

"I think I have the best job in the world. I get to hear incredibly mind blowing ideas. I get to meet really great founders, I have great partners and a great team to work with."

This quote reflects Josh Kopelman's passion for his work and the venture capital industry, highlighting the aspects that motivate him and bring fulfillment to his professional life.

• Lou Holtz's saying is frequently referenced for its wisdom on the disparity between what is said and what is done.
• Building a reputation is based more on actions and achievements than on words or promises.

"When all is said and done, more is said than done."

The quote is a reminder of the importance of action over rhetoric, a principle that Josh Kopelman adheres to in his professional philosophy.

• The challenge in scaling First Round was transitioning from a portfolio of independent companies to a community of interconnected ones.
• Creating genuine collaboration and support among founders was difficult but rewarding.
• Community building requires intentional effort from the beginning and must be part of the company's DNA.

"How to truly create cohorts and a peer group where founders are giving and taking and are paying it forward."

This quote outlines the challenge of fostering a true sense of community within a venture portfolio, which requires more than just superficial connections or events.

• Venture capital is humbling, with continuous learning required.
• Early certainty in decision-making is often regretted due to the complexity and spectrum of probabilities in reality.
• Acknowledging the nuances and having a calibrated confidence in perspectives is crucial.

"I'm wrong. A know venture is an amazingly humbling know."

The quote conveys the idea that certainty in venture capital can lead to mistakes, and it's important to remain open to learning and to acknowledge the inherent uncertainties of the industry.

• Spring Discovery is a company that combines AI with longevity research.
• The founder, Ben Caymans, impressed with his intellectual curiosity and honesty.
• AI in healthcare is seen as a disruptive opportunity, similar to the transformative period of the early internet.

"I think his idea is a big one. He's focusing on sort of combining modern day AI with longitivity."

The quote explains the rationale behind the investment in Spring Discovery, highlighting the potential impact of AI in the healthcare sector.

• AI is disrupting traditional healthcare and reducing the experience gap between veterans and newcomers.
• This disruption creates unique opportunities for innovative startups and founders.
• The transformative potential of AI in healthcare is compared to the early days of the internet and the rise of crypto.

"AI right now is such a disruptive platform that it really is reducing, not eliminating, but reducing, the gap between veteran and rookie."

The quote underscores the significant impact AI is having on the healthcare industry, leveling the playing field for new entrants and creating opportunities for innovation.