20VC The Roblox Memo First Round's Chris Fralic on The 17 Year Journey to Build a $41BN Market Cap Company, Why It Is Way Harder To Increase Ownership Across Rounds Today & What Happens Post SPACMania



In the latest episode of "20 VC: The Memo," host Harry Stebbings dissects First Round Capital's early investment in Roblox with board partner Chris Fralic. Fralic recounts his initial hesitation due to a seemingly high $10 million valuation and the game's rough, early state. Despite passing on the initial investment, Fralic's ongoing relationship with Roblox CEO David Bazooki and observations of his son's engagement with the game led to a later investment. Fralic praises Bazooki's unwavering vision and highlights key moments, like Roblox's inclusion on the Xbox platform, which shifted focus to quality and helped catalyze growth. The discussion also touches on the broader investment landscape, including the challenges and strategies around secondary sales, reserve management, and the impact of an oversaturated capital market on venture capital firms like First Round.

Summary Notes

Introduction to the Show

  • 20 vc is Harry Stebbings' favorite show.
  • The memo is the show of the month.
  • The show unpacks the investing rationale behind specific breakout companies.
  • The focus of this episode is on Roblox and First Round Capital's early investment.
  • Chris Fralic, a board partner at First Round Capital, joins the show.

This is 20 vc and my favorite. Show of the month, the memo.

The quotes introduce the podcast and the special segment being discussed, highlighting the show's format of exploring investment decisions.

Chris Fralic's Background

  • Chris Fralic is a board partner at First Round Capital.
  • He led deals for Roblox, Ring, Hotel Tonight, Rec Room, and other companies.
  • Prior to venture capital, he worked in business development at Delicious and eBay.

At first round, Chris has led deals in the likes of Roblox, Ring, Hotel Tonight, Rec room and many more incredible companies.

The quote provides an overview of Chris Fralic's professional background and his role in leading significant investment deals.

Alternative Investment Platforms

  • Alt allows investing in sports cards similar to stocks.
  • Alt offers increased transparency and liquidity in alternative assets.
  • Revolut Business is a financial super app for business finances and management.
  • Pilot provides financial services for startups, including bookkeeping and tax services.

Well, with Alt, you can. Alt is increasing the transparency and liquidity of alternative assets, allowing you to invest from as little as $7 to a million dollars on their exchange.

The quote explains the function of Alt as a platform for investing in alternative assets, likening it to stock investment in terms of accessibility.

Chris Fralic's Investment in Roblox

  • Chris was introduced to Roblox in fall 2007.
  • He played the game with his son and met CEO David Bazooki in November 2007.
  • First Round Capital initially decided not to invest due to a high valuation.
  • Chris maintained a relationship with Dave, which led to a small investment six months later.

The first thing I did, given that it was a game, was I asked my son to take a look at it with me.

This quote illustrates Chris Fralic's hands-on approach to evaluating Roblox by involving his son, who was a potential user of the product.

Relationship Building in Venture Capital

  • Chris emphasizes the importance of maintaining relationships even after passing on an investment.
  • He highlights the difference in time to build relationships then versus now due to the abundance of capital.
  • Chris's relationship with Roblox's CEO allowed First Round Capital to invest later.

You can keep a relationship through a no.

The quote underscores the strategy of sustaining relationships in venture capital despite initial investment decisions, which can lead to future opportunities.

Pricing Challenges in Investments

  • Chris discusses the difficulty in deciding when to pay a higher price for an investment.
  • He reflects on missed opportunities like Twitter due to valuation concerns.
  • First Round Capital learned to not get hung up on price for potential breakout companies.
  • Chris cites the example of investing in Square and Roblox at higher valuations due to their potential.

Yeah, I think we might have been fortunate back in those days to have made a really poor investment decision, missed one of our biggest of all time with Twitter when we were all early users.

The quote reflects on a past investment decision where price was a deterrent, leading to a missed opportunity, and how that experience shaped future investment strategies.

Slow Bake vs. Fast Bake

  • Chris Fralic introduces the concept of slow bake versus fast bake in the context of investments.
  • He notes that it's not always clear which companies will be winners right away.
  • The "slow bake" refers to companies that take longer to show their full potential.

What did you mean by the slow bake versus the fast bake in context with FRC here?

The quote prompts a discussion on the differing timelines companies may have in realizing their success and how investors approach these variations.## Venture Capital Fund Successes

  • Historical fund performance can be surprising upon reflection, with significant companies like Uber, Square, and Roblox emerging from funds that initially seemed uncertain.
  • Uber and Square gained notoriety and high valuations quickly, while Roblox grew consistently but remained under the radar for many years.
  • Some companies require a longer time to develop and reach their potential, a process described as a "slow bake."

"And it turns out that fund had Uber and Square and Roblox in it, and we didn't know it at the time."

This quote underscores the unpredictability of venture capital success and the retrospective realization of having invested in transformative companies.

Reserves Management in Venture Capital

  • The approach to reserves management has evolved, with an emphasis on increasing ownership positions early due to the difficulty of buying up in later rounds.
  • First Round's initial investment in Roblox was relatively small, but they later increased their stake significantly.
  • The current trend is to secure a larger ownership share upfront through larger initial investments, as subsequent opportunities to increase stakes have become rarer.

"I think what's shifted over time at first round and in other funds is recognizing you may not have that opportunity to buy up down the road, so you better get your ownership position up front."

This quote explains the strategic shift in venture capital towards securing significant ownership early on, as later opportunities to increase stakes are less likely due to market competition.

The Challenge of Doubling Down in Capital Proliferative Markets

  • The "spray and pray" approach to investing is less viable in current markets where multistage players preempt rounds quickly, making it difficult to increase stakes post-initial investment.
  • Roblox's unique position as an under-the-radar company allowed for ownership increases that are not typically possible in the current investment climate.

"I think it's way harder for everything you mentioned, and there's so much more capital that's around so many more firms."

This quote highlights the increased competition and capital in the market, making it challenging to follow a strategy of doubling down on winners after the initial investment.

Advising Founders of Slow Bake Companies

  • Founders of companies with a slower growth trajectory, like Roblox, need to maintain conviction in their vision and product, even in the face of challenges.
  • Dave Bazooki, founder of Roblox, exemplified unwavering commitment to his vision despite slow growth and lack of investor attention.
  • Persistence and belief in the company's potential are critical for founders during difficult periods of raising funds and facing operational challenges.

"Dave never wavered once. And even to the point when there were acquisition offers for the company. And he knew, he always knew that it could be bigger and better on its own, and he never wavered."

The quote illustrates the importance of steadfast belief in a company's potential and vision as a key factor in overcoming obstacles and achieving long-term success.

Overcoming Significant Bumps in the Road

  • Every company faces significant challenges, such as financial misses, unsuccessful hires, and difficult fundraising periods.
  • Roblox experienced these issues, particularly during its efforts to go public, but continued to progress due to the founder's conviction.

"There were periods of big misses on the financial side. There were key hires that weren't working out as hoped needed to be replaced. And in particular, we went out for a fundraise and couldn't get anybody interested."

This quote reveals the tough periods Roblox faced, highlighting the reality that even successful companies encounter significant setbacks along their journey.

Hype Versus Substance in Startups

  • The current startup and tech environment often values hype, influenced by social media, tech news, and prominent investors.
  • Roblox serves as an example of a company with substantial substance and minimal hype, eventually gaining recognition for its business achievements.
  • The hype versus substance ratio is a concept used to evaluate the balance between a company's perceived value and its actual business progress.

"Roblox is a fairly great example of a company that had almost no hype, an incredible amount of substance."

The quote emphasizes the contrast between Roblox's low public profile and its substantial business growth, challenging the common emphasis on hype in the startup world.

Preventing Past Successes or Failures from Influencing Future Decisions

  • Past experiences with successful companies like Roblox can positively inform future investment decisions, but there is a risk of becoming jaded or overly optimistic.
  • Personal experience in e-commerce led to skepticism about Etsy, showing how familiarity can lead to missed opportunities.
  • Positive experiences with similar companies, such as Rec Room, can provide useful insights for recognizing potential in new ventures.

"I could see early on it had a lot of similarities to Roblox. They have played that out in even a faster level and had some hype along with a lot of substance."

The quote demonstrates how past success with Roblox informed the recognition of potential in Rec Room, exemplifying the benefits of applying lessons learned from previous investments.

The Rise of Preemptive Rounds

  • Preemptive rounds have become increasingly common, prompting considerations for founders on whether to accept early funding offers.
  • The general advice has shifted towards accepting serious funding offers when available, as it can be advantageous to secure capital when interest is high.

"Generally, the advice is to take the money when it's offered."

This quote reflects the current strategic thinking in venture capital, suggesting that founders should capitalize on funding opportunities when they arise due to the competitive nature of the market.## Engagement with Capital

  • Companies can be overly distracted by the abundance of funds and capital available.
  • Engaging with capital offered at an attractive price is generally a good idea.
  • It is important to take time to assess the legitimacy and desirability of capital offers.

"But in general, if the market is offering you capital at an attractive price, it's generally a good idea to engage with it."

This quote emphasizes the prudence of considering capital investment when it is available at favorable terms, suggesting that such opportunities can be beneficial if they align with a company's goals.

Proliferation of Capital

  • Bill Gurley highlighted the challenge of the proliferation of capital in today's market.
  • The oversupply of capital can both help and hurt firms like First Round Capital (FRC).
  • FRC has seen the landscape change from a few seed-stage funds to hundreds, resulting in increased competition.

"Bill Gurley said on the show that his biggest challenge is the bunting proliferation of capital that we have today and the oversupply of capital."

This quote reflects the concern that the current abundance of capital in the market can complicate investment strategies and create challenges for venture capital firms.

Public Markets and Direct Listings

  • The availability of follow-on capital for companies has increased.
  • The public markets are more open now compared to previous years.
  • Direct listings, as opposed to traditional IPOs, can be beneficial for companies that do not need immediate cash.
  • The shift in public market dynamics has altered the investment landscape significantly.

"Roblox is one great example that Bill Gurley is extremely excited to see that they went out in a direct listing versus an IPO process."

This quote highlights a successful example of a company utilizing a direct listing, which is seen as a positive development in the context of the changing public markets.

SPACs and Public Companies

  • There has been a significant reduction in the number of public companies over the past decades.
  • The increase in public companies through SPACs may be happening unnaturally fast.
  • There is a concern that the quality of companies going public may diminish due to the pressure from SPACs with deadlines to merge.

"It just feels like a race that won't end well, or the quality will, by definition, be diminishing over time."

This quote expresses the worry that the rush of companies going public via SPACs might lead to a decline in the overall quality of public companies.

Secondary Sales and Liquidity

  • Secondary sales are becoming an important aspect of liquidity for early-stage funds.
  • Different funds and partners within those funds have varying strategies for secondary sales.
  • Taking some capital off the table during a company's growth can lead to great returns without compromising significant future gains.

"With 2020 hindsight, you could look at what you might have done for the best outcome."

This quote acknowledges the difficulty in making decisions about secondary sales and reflects on the benefit of hindsight when evaluating past investment choices.

Wealth and Risk in Venture Capital

  • Wealthier partners in a fund may be more willing to take risks due to reduced fear of downside protection.
  • Success can lead to a greater focus on potential upside rather than immediate cash returns.

"That makes intuitive sense to me that there's a tendency to let more ride to play it for the upside."

This quote suggests that successful venture capitalists may be inclined to pursue larger gains by allowing investments to grow rather than cashing out early.

CEO Evolution

  • Dave Bazuki's transformation as a CEO is seen as profound and significant.
  • He has developed personally and professionally, leading to a world-class team.
  • The decision to become a public company CEO marked a significant shift in his leadership.

"It's the most profound leveling up I've ever seen firsthand."

The quote describes the remarkable growth and development of Dave Bazuki as a CEO, implying that his journey is noteworthy and could be the subject of future analysis.

Board Membership Style

  • A board member should be supportive and engaged, acting as a partner to the CEO.
  • Chris Fralic brings his experience as an operator and investor to his role on the board.
  • Board members should be authentic and focus on listening more than speaking.

"I like to be as engaged and partnered and supporting the CEO as I possibly can."

This quote outlines the philosophy of being a supportive and engaged board member, emphasizing partnership with the CEO as a key aspect of the role.## Board Member Impact

  • The effectiveness of board members varies, with only a small percentage being truly valuable and trusted partners of the CEO.
  • Many board members are described as "mostly harmless" or occasionally helpful, primarily contributing through funding.
  • Some board members can be destructive by leading meetings astray, giving poor advice, or speaking too much.
  • New or first-time board members may try to be overly helpful or push their views too aggressively.
  • Chris Fralic references Peter Drucker's approach to board meetings, where Drucker would listen for the duration and ask a critical question at the end to encapsulate and drive the key point.

"If I look at all the board members I've seen in action, the number that are really adding value, really trusted partners of the CEO are in a small percentage."

This quote emphasizes the rarity of truly impactful board members who establish a strong partnership with the CEO and add significant value to the company.

Memorable Board Members

  • Anthony Lee of Altos Ventures is highlighted for his substantial and positive impact on Roblox.
  • Lee has been with Roblox since its early stages, even before First Round got involved, and remained on the board through its public offering.
  • Altos Ventures owned about 24% of Roblox when it went public, showcasing the significance of Lee's involvement.
  • Lee is noted for his consistent presence and hands-on approach, regularly visiting the company and engaging beyond board meetings.

"Anthony Lee of Altos Ventures... He's been in the company since before we were, and he has remained on the board to this day."

Chris Fralic identifies Anthony Lee as a significant but under-the-radar figure in Roblox's success, underscoring his long-term commitment and substantial ownership at the time of the IPO.

Roblox's Competitive Concerns

  • The partnership had concerns about potential competitors like Lego Universe and Club Penguin.
  • There was fear that Roblox would remain less prominent compared to Minecraft or Fortnite.
  • The worry was that Roblox would not be able to distinguish itself and rise above its competitors, though it eventually did.

"We were concerned about things like Lego universe, which was rumored to be launching and might be a competitor."

The quote captures the early competitive concerns for Roblox, highlighting specific potential threats that were considered at the time.

Key Drivers of Roblox's Success

  • Roblox's success is attributed to consistent improvements and attention to detail over many years.
  • A pivotal moment for Roblox was adapting to the Xbox platform's requirements, which led to a focus on quality.
  • Being on Xbox meant Roblox had to limit its offerings to a few high-quality games, which improved the user experience and set a standard for the platform.

"My takeaway would be it was a thousand small things that they kept tweaking and working on consistently for years and years."

Chris Fralic points out that Roblox's success was not due to a single breakthrough but rather the cumulative effect of continuous improvements.

Unsung Heroes at Roblox

  • Keith Lucas and Craig Donato are identified as key but less recognized contributors to Roblox's success.
  • Lucas had a versatile role in the company's early years, contributing to product and engineering aspects.
  • Donato, as the chief business officer, is credited with significant influence on the business side, coinciding with Roblox's growth period.

"Keith Lucas was at the company for ten years... Craig Donato... runs everything on the business side."

This quote spotlights two individuals who played critical roles in Roblox's development, yet may not be widely known for their contributions.

Personal Experiences with Roblox

  • Chris Fralic shares memorable experiences, including attending the first Roblox user conference with his son Max in 2011.
  • A poignant moment for Fralic was witnessing Roblox's listing on the New York Stock Exchange and supporting CEO Dave Baszucki during this milestone.

"It was the surreal, cool, almost dreamlike moment to watch him take the company public after 13 years of working with him."

The quote conveys the emotional significance of Roblox going public for Chris Fralic, who had been involved with the company for over a decade.

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