Josh Kopelman

Notes from podcast interviews from 2014 - 2020

Author

Monica Black
August 23, 2024

Josh Kopelman is a founding Partner of First Round Capital. He is a repeat member of the Forbes Midas List.

Table of Contents

Founder Attributes

“Being a founder means going against the grain of everything we’ve been taught.”

Invest Like The Best

Josh believes most of the best entrepreneurs are cartographers who create their own map vs. navigators of existing maps. He looks for experiences in a founder’s past where they’ve gotten off the conveyer belt and been non-conformist. This is very much in line with Mike Maples Jr’s Pattern Breakers framework.

Josh doesn’t try to predict exit value when he meets a founder. He instead tries to see how unique and exceptional founders are, as extraordinary companies are built by extraordinary people. Most extraordinary founders have had a background of being extraordinary.

“People aren’t average until age 35 and then become exceptional when they choose to be Founder & CEO”

Yale Entrepreneurship Center Talk

When Josh looks at investments, almost all the focus goes towards the founder, rather than the product or business plan. Business plans are just predictions of the future and virtually all of them are wrong. Instead, they focus on all the decisions the founder has made that led them to their current product. Initial products are more of a lens to understand:

  • how founders make decisions

  • what they prioritize

  • how they process signal and separate it from noise when collecting data from the market

The best founders have a firm grasp on what they know and what they don’t know. Often, founders think their job in meetings with VCs is to answer all the questions. Josh looks for founders who can articulate what they don’t know and their path to figuring them out.

“A startup’s job is to learn, and a company’s job is to grow. At the seed stage, your goal is to maximize learning per dollar spent.”

Invest Like The Best

Finally, here is a list of other founder attributes Josh looks for:

  • Incredibly competitive

  • Unique, passionate, informed perspective on a problem

  • Comfortable with deferred gratification

  • Understands winning is a team sport — relentless in making sure they have the right people around them

  • Knows what to say no to — figures out how to allocate time, energy, and money over as thin a surface area as possible

  • Figures out how to open doors they don’t initially know how to open

Why Now?

“I’ve made a lot of money funding things early and lost a lot of money funding things way too early.”

Quoting Howard Morgan on Invest Like The Best

Not only does a founder need to be exceptional and right, but they have to be right soon enough (within the ~24 months of runway they have before raising their next round), which is a very tight window to validate and demonstrate traction.

Josh assesses how founders are thinking about timing with a key question:

“If I could give you the #1 position on Google Search, what would it be? And is that a search people are searching for today or are you predicting that people will search for it in the future and, if so, why?”

Invest Like The Best

Josh encourages founders to move quickly. Trying to ship something perfect for your first client can waste a lot of time. Many times, the best products start off lightweight, almost vaporware-like. But, they are gathering data and validating needs and demands, and become more robust in an iterative fashion.

In a similar vein, Josh believes that trying to build a platform from day 1 is extremely difficult, unless you have a really compelling initial value proposition or use case for a single user. Platforms are a great way to scale a business. but not a great way to start. Many platforms get their start with a killer app that’s innate in the product.

On Pricing and Ownership

In the early days of First Round, Josh and his partners offered Twitter and Dropbox their first term sheets. They lost both because of price. With Twitter, they offered $5M pre-money and lost to Union Square Ventures who offered $20M pre-money. USV even offered them a spot in the round and they turned it down due to price.

Since then, Josh has taken advice from Jim Breyer and Peter Fenton to heart:

“Never turn down a deal based on valuation. It’s a mental trap.”

Quoting Peter Fenton on 20VC

“Valuation is part art and part science. 90% of the time it’s science, but the art is knowing the 10% where you totally need to cave on valuation.”

Quoting Jim Breyer during the Upfront Summit

Josh course corrected the next time Jack Dorsey came around with Square. They co-led the first round of funding with Khosla at a $40M pre-money valuation. It worked out 🙂 

Today, it’s rare that price will be the only reason First Round will lose an investment opportunity, but they recognize they need to maintain some discipline in order to produce top tier returns.

Josh thinks about valuation as a representation of two things — 1) the size of the opportunity (⬆️) and 2) the amount of risk between where you are today and success (⬇️).

A few quick notes on ownership:

Josh doesn’t talk about strict ownership targets for First Round, but they believe it is important to build their ownership on the first check, as it gets very expensive to accumulate ownership in later rounds. They commit to taking their full pro rata in 100% of outside-led second rounds. Deciding whether to make any checks beyond that is not an ownership-based decision, but a cash-on-cash return decision.

Decision-Making & Firm Dynamics

Josh frequently says that if he were to write a book, he’d call it “The Pick.” Picking is a hugely important skill in venture and startups. Founders need to pick the right idea. Investors need to pick the right founders. Josh believes that most VCs spend 10% of their time picking, but “the pick” drives 80% of returns.

Time to make the pick has decreased 10x since Josh started First Round almost 20 years ago. They use Salesforce to track “time to decisioning” — the number of days between when a partner first meets a founder to signing the term sheet. This metric has decreased from 90 days in the mid-to-late 2000s to 9 days leading up to 2020.

A big part of Josh’s pick is a balance between “trust me” and “show me” — how much does Josh trust the founder vs. wanting to seek proof that it works? During downturns, investors focus more on “show me.”

Josh and the team at First Round don’t really follow investment theses. By the time something becomes obvious enough for them to have a thesis, it’s almost too obvious. Most of the best companies they’ve funded have targeted something they hadn’t thought of before (and very few people had thought of before).

Founders pitch to the whole First Round partnership as part of their process. Josh mentioned that after a while, the sponsoring partner started thinking of the goal of the partner meeting being “to win” an approval. Over time, and he gives credit to Hayley Barna for this, they have encouraged each other to “find truth.” A successful outcome in a partner meeting can also be learning something from the other partners and not investing in the company. Key questions they ask themselves:

  • What is the objective truth?

  • What is knowable and what isn’t?

  • What risks are worth taking?

The entire First Round partnership votes on each investment. 2/3 approval is required for all investments and no partner has a veto. Most decisions are ~70% based on the founder and ~30% based on market/product.

On Being a Great VC & Board Member

“The best board member isn’t always the person who has all the right answers, it’s the person who asks the right questions.”

20VC

By asking the right questions, Josh tries to empower the person who has far more data than him (the founder) to make better decisions.

“Our job is to bring out the best in the founder, not replace the founder’s insights with our own.”

Invest Like The Best

When Josh first joins a board, he spends the first 2 meetings mostly listening. It’s important to context load and learn how founders think about problems before jumping in. He also makes it a point to spend time at the company with direct reports before the first board meeting to establish points of contact outside the board.

Josh points to Matt Harris from Bain Capital Ventures as the best board member he’s served with. He says Matt is very good at framing conversations in rational, grounded, well-articulated arguments, enabling everyone to save face and optimize on making the right decisions.

Being a great VC extends well beyond serving on boards. Many of the best don’t actively take board seats, though the same approach Josh laid out applies to all interactions between VCs and founders. Josh’s “VC prototype” has the following attributes:

  • Service mindset: Constantly in service of the entrepreneur

  • Empathy: Understand how lonely the entrepreneur job is and that the VC’s job is to ask the right questions.

  • Competitive: Has a drive to win the right to invest in the best founders

  • Intellectual honesty: The VC job is decisioning. You create value based on the decisions you make. The best VCs understand all the ingredients of a decision and are driven to improve the craft of decision-making. This reminds me of Ann Miura-Ko’s approach — she is “spending her lifetime honing the craft of decision-making.”

The biggest question he’d ask GPs if he were an LP is all around decisions. He’d seek to understand a firm’s decision hygiene and unpack their decisions — why did you meet with [x] founder, why did you decide to invest?

Building a Platform

Unlike Floodgate and IA Ventures, the firms founded by my first three deep dives, First Round has invested significant time and resources into building a platform team. In fact, Josh believes they’ve spent more on platform, community, and services than any other seed stage fund generates in management fees.

Why have they invested so much in a platform?

“We want to transition a portfolio of independent companies into a community of connected companies.”

20VC

Josh describes venture as an anti-network effect business. Every new company he invests in results in less time he has to spend with each company in his portfolio. First Round’s platform is an attempt to bring network effects into the VC business.

By connecting CEOs with each other, they can help each other. But they don’t stop there — they connect every employee at every startup they back with each other, in specialized/functional groups, both online and offline. Their goal is to truly create cohorts and peer groups where founders are giving and taking, paying it forward, and don’t view participation as a tax, but a benefit.

First Round views themselves as a company, not a fund. Their customers are founders. Their shareholders are LPs. Their product is the experiences, software, know-how, and network that help founders win. And they are constantly trying to find product-market fit.

Sources

Reply

or to participate.