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

Josh Kopelman is Founder & Partner @ First Round, one of the world’s leading seed funds with a portfolio including the likes of Uber, Warby Parker, Flatiron Health, Square, HotelTonight, GOAT and more incredible companies. As for Josh, he founded First Round in 2004 to reinvent seed stage investing. Since he has invested in over 200 startups and been ranked 4th in Forbes Midas List and named one of the top ten ‘angel investors’ in the US by Newsweek magazine. Josh has previously sat on the boards of Flatiron Health, Clover Health, AppNexus and more. In Today’s Episode You Will Learn: 1.) How Josh made his way into the wonderful world of venture from angel investing and what the inspiration behind the founding of First Round was? 2.) How does Josh think about price sensitivity today? What were his learnings from being priced out of the seed round for Twitter and Dropbox? How has Josh seen his relationship to price change over time? How did witnessing the boom and bust both as operator and investor affect his investing mentality today? 3.) How does Josh and First Round think about reserve allocation? How has their thinking changed and evolved over time? Does Josh believe that ownership is fundamentally built on first check? What does the investment decision-making process look like for reserves? In terms of allocation, how does Josh think about time allocation across portfolio? Spend it with the winners, they return the fund or the strugglers and save cents on the dollar? 4.) Josh has spent over 3,000 hours on boards, what have been some of the biggest inflection points that have changed the way he thinks about being a good board member? How has he seen his style and approach change over time? What advice would Josh give to an individual that has just gained their first institutional board seat? 5.) Why does Josh believe that we fundamentally neglect "the pick" today in startup world? Why does Josh believe a high degree of startup mortality begins at the pick (idea) stage? How do the very best founders aproach this stage? How should these founders approach picking their investors? What should they look for? What should they be wary of? 6.) Why does Josh want to be known as a better picker of partners than investments? How has Josh thought about the building ou of the first round partnership over time? If there was anything he would have done differently, what would it be? Why does Josh fundamentally disagree with attribution? How does Josh think about generational transition? What are the steps required to do it well? Items Mentioned In Today’s Show: Josh’s Fave Book: Thinking in Bets: Making Smarter Decisions When You Don't Have All the Facts As always you can follow Harry, The Twenty Minute VC and Joel on Twitter here! Likewise, you can follow Harry on Instagram here for mojito madness and all things 20VC. Are you thinking about life insurance in the new year? Ladder is the smart and easy way to get term life insurance online. With Ladder there are no commissioned agents and no policy fees — you can be done in minutes. Even better, coverage can start today, if you qualify, and you can cancel anytime. Ladder is licensed and backed by trusted partners, with billions in coverage. Visit ladderlife.com to apply and get an instant decision on fully underwritten term life insurance, and check life insurance off your list TODAY. Ready for tax season? Wishing you’d kept a closer eye on your books this year? Set yourself up for success in 2019 with Pilot. Pilot is a bookkeeping company focused on the needs of startups. Their team of SF-based bookkeepers are assisted by engineers to automate the most error-prone parts of bookkeeping, so you know you’re getting an accurate report every month. Plus, Pilot does accrual basis bookkeeping in Quickbooks Online, so you’re never locked into a proprietary platform. Learn more and sign up here. Don’t wait – the first 100 members of the Twenty Minute VC community get 20% off Pilot Core for six months.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Harry Stebbings?

  You are listening to the 20 Minute VC with me, Harry Stebbings, at H Stebbings 1996 with two Bs on Instagram. And some of you might know that when I started the show over four years ago now, I wrote down the names of five people that I most wanted to have on the show. Peter Fanton and Brad Feld, I'm extremely honoured to have had the chance to have on in the past. And today is another name from that list. An episode that makes me realise just how much I love what I do. And I could not be more thrilled to welcome the incredible Josh Kopelman to the show today. Now Josh is founder and partner at First Round, one of the world's leading seed funds, with a portfolio including the likes of, check this out, Uber, Warby Parker, Flatiron Health, Square, Hotel Tonight, Goat and more incredible companies. As for Josh, he founded First Round in 2004 to reinvent seed stage investing.

• 0:43Harry Stebbings?

  Since he's invested in over 200 startups and been ranked fourth in Forbes Midas List and named one of the top 10 angel investors in the US by Newsweek magazine. Josh has also previously sat on the boards of Flatiron Health, Clover Health, AppNexus and more. I do also want to say a huge thank you to the wonderful Finn Barnes at First Round for the intro to Josh today. I really do so appreciate that Finn. But before we dive into the show with Josh today, you must check out Advisable. Advisable gives you instant access to the world's best marketing freelancers. With over 900 skillsets, from paid search to HubSpot to LinkedIn Ads, they have top quality, fully vetted freelance specialists, ready to work for you in less than three days. Don't risk having a central marketing project fail because you don't have adequate internal resources.

• 1:24Harry Stebbings?

  Go to advisable.com/20vc for a case study on how one of the world's fastest growing startups uses freelance talent to accelerate their growth. That's advisable.com/20vc. And speaking of being prepared, are you thinking about life insurance in the new year? If so, you have to check out Ladder. It's the smart and easy way to get term life insurance online. Ladder recognises that it's the 21st century and you shouldn't have to wait for weeks to get your life insurance in place. And that's why with Ladder, there are no commissioned agents and no policy fees. You can be done in minutes. Even better, coverage can start today if you qualify and you can cancel anytime. Ladder is licensed and backed by trusted partners with billions in coverage. And you can visit Ladder today at ladderlife.com to apply and get an instant decision on

• 2:10Harry Stebbings?

  Underwritten term life insurance and check life insurance off your list today. Now that's checked off the list, so it's time to turn to business. And you didn't start a business to track financial statements or make cash flow spreadsheets. Using Pilot for bookkeeping gives you back the freedom to focus on your business. Every month, your dedicated account manager will send you an accurate, detailed financial report. And Pilot does accrual basis bookkeeping in QuickBooks Online. So you're never locked into a proprietary platform. Plus you'll work with the same person each month. So you can rely on them to become an expert in your business. And with Pilot, you can say goodbye to exporting CSV files and emailing attachments to a bookkeeper you can never get hold of. Get your company's books in order today and get your time back. Check them out today at pilot.com/20vc.

• 2:54Harry Stebbings?

  That's pilot.com/20vc. But you've heard quite enough from me. So now I'm very, very honoured to welcome Josh Koppelman, founder and partner at First Round.

• 3:09Speaker 02

  You have now arrived at your destination.

• 3:12Harry Stebbings?

  Josh, it really is such a pleasure to have you on the show today. Having heard so many wonderful things from Rob Hayes, Bill Tranchard, Hayley Barner, and of course, the wonderful Mr Finn Barnes. So thank you so much for joining me today, Josh.

• 3:23Speaker 03

  Thanks for having me.

• 3:24Harry Stebbings?

  Not at all, but I want to get started today with a little on you. So how did you make your way into the wonderful world of venture, Josh? And what was the original founding story of First Round?

• 3:34Speaker 03

  Sure, so I wasn't sure I wanted to be a venture capitalist. I came at First Round like I came out of company, which is I saw a market opportunity. Before First Round, I'd started and exited three companies. The first company in 91 took $5 million to get to first product ship. The second company in 98 took $2.5 million to get to first product ship. And the third company took $500,000 to $750,000. So in the course of my own career, there was an order of magnitude drop in the cost to get to first product ship, not to grow, but to at least just get a product to touch a customer. During that same period of time, the average venture fund had tripled in size and the average initial investment had tripled in size. So when you look at a VC seeking 3X increase in capital inefficiency and a 10X increase in capital efficiency.

• 4:20Speaker 03

  That's a 30x gap. And I was angel investing during this time and sort of said, you know, there seems to be a real opportunity to create a fund that could institutionalize angel. And that led us to create First Round Capital. I co-founded it with my partner, Howard Morgan. And our first fund was just a $7 million fund raised in 2004, primarily our capital with some friends. And it was a part-time job. And then we kept raising these little annual funds until we could figure out that, you know what? We have something here. And it seemed like a contrarian idea at the time. And obviously, now it's grown into something, a micro VC or institutional seed is a full-on asset class.

• 5:01Speaker 03

  But before I knew it, I was running a fund, you know, but it started as a reaction to a gap in the market, like any good startup does.

• 5:09Harry Stebbings?

  I do want to ask though, Josh, because I actually asked Finn the same question. I asked, when was that moment for you when you really realized that investing was your life's work? You mentioned the element of serendipity there of getting into the game. Was there a moment where you realized that this was really what you were born to do?

• 5:25Speaker 03

  Yeah, I don't know if it's any one specific moment, but I think what I've come to realize is, as an operator, you have to wear 100 different hats. First meeting, you could be dealing with PR, next meeting is career pathing, next meeting is product, next meeting is engineering. You just deal with so many things. And when I did a naked and honest assessment of my capabilities, I saw that of those 100 hats, maybe I'm average at 60 of them. I don't add incremental value or I don't destroy value. I'm probably value subtracting at 20 of them and maybe add some marginal value add on 20. And I think what I learned very quickly when we were starting First Round is that this is an opportunity that lets me focus on the 20% where I might have some marginal value add and eliminate the 80% where I'm average to value destroying.

• 6:10Speaker 03

  And that just seemed magical to me, 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.

• 6:22Harry Stebbings?

  I do have another question before we dive in there. And it was the element of kind of boom and bust. And it's a passion for me because very honestly, I've never lived through a boom and bust. Professionally, you've lived through obviously boom and bust in the early 2000s as more of an operator and then in 2008 as more of an investor. I'm really intrigued, how did that kind of boom and bust visibility for you affect your mentality today, do you think?

• 6:43Speaker 03

  So I think that it's probably made me the most cautious of the investors in the first round partnership. And that's not necessarily a good thing. Having seen the pain that companies went through, that my friends went through, that founders went through in the dot com bust. I've had to consciously try to remember that we get paid to take risk, not avoid risk. And it's one of the real strengths of having a partnership as I do in that my partners could be the ones continuing to pull me to take more risk.

• 7:12Harry Stebbings?

  Yeah, no, absolutely. You've got to have partners for that. But I do want to dive into the show today, Josh. And this show is a little bit different to some other episodes. As I said, when I started the show, you were one of three names that I was always dying to have on the show. And so I'm really going to just use this episode for gaining your wisdom and advice for me personally. How does that sound?

• 7:30Speaker 03

  That sounds great.

• 7:31Harry Stebbings?

  Okay, so I want to start on an element that I always struggle on and it's price sensitivity. As a seed investor, it's commonly suggested that price doesn't really matter. Peter Fenton said, never turn down a deal based on valuation, Harry, it's a mental trap. How do you think about your own price sensitivity today, Josh?

• 7:48Speaker 03

  I go back to some of our earliest investments and also some of our earliest mistakes, right? Like first round offered Twitter their first term sheet, months before Union Square led their round. We offered Dropbox their first term sheet. And I'd say we lost both of those due to sticking to price. So it's clearly scarred in me that there needs to be flexibility on price. That said, it is a slippery slope. You look at a company and you say five pre, seven pre, 10 pre, 15 pre. The difference between five and 15, it's 3X. That by itself could take a fund from a 9X fund to a 3X fund, from a 3X fund to a 1X fund. So while I agree with Peter Fenton, I also agree with Jim Breyer, who once told me that valuation is both art and science.

• 8:32Speaker 03

  The science is picking a price and the art is knowing which 5% of the deals to invest in. At any price. So I think first round and myself, we fluctuated over times like after the the Dropbox and the Twitter thing, we were, we became very price insensitive. And I think now we found a real middle ground where we kind of understand that it's rare that price will be the only reason to lose an investment opportunity, but we also have to have some discipline if we aspire to produce top tier returns.

• 9:02Harry Stebbings?

  Those were two cases where maybe you didn't have the flexibility so early on, kind of thinking on price. If you look back at the ones where you maybe did win the deals and they've turned out very well, where you did flex on price. Is that one that comes to mind? And is that kind of a subsequent reasoning behind that willingness to flex on price?

• 9:18Speaker 03

  Sure. So if Twitter is the painful example, I'd say Square is the counterpoint to that, right? So we offered Twitter a term sheet at a five million pre-money valuation. We were an investor in Odeo, Ebbs Prior Company. So I think I was user, Twitter user number 275. We were right there. We offered five. Fred came in at 20 a few months later. And to make it even more painful, called me and said, you know, we're doing a round of 20. And I, I know I didn't take your term sheet to five, but if you want to put money in on this round, you can. And I didn't do it. We just didn't do it. So he said, no, that's too expensive. At the time, we didn't know what we were doing. It was our first or second year in business. And at the time, we'd never invested in a company greater than a 10 million pre. So we said, you know, this is two, this is 4x

• 10:03Speaker 03

  higher than our term sheet, and this is 2x higher than our all time high. Thanks, but no thanks. I have that email like taped up on my computer monitor. But and it was very painful. And we learned something. So when Jack was starting Square and we met with him, he said, well, you know, 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. And we were fortunate enough to be the second largest investor behind Coslin in that first round there. And so I think that was an example where we were willing to flex on price.

• 10:36Harry Stebbings?

  I absolutely love that story. And I'd love to see that original email. Speaking of kind of that first insertion point there being the first check, I'm always a big believer, Josh, the best investments are made not once, but twice on reserve. How do you think about reserve allocation today? First round, I'd love to hear that.

• 10:51Speaker 03

  So we've learned a lot, right? Our first fund was a $7 million fund with $3.5 million set aside for initial investments and $3.5 million for follow on. So 50 50 split. Over time, that shifted. There was a point in time where I think we had a quarter of our fund being reserved for initial investments and three quarters for follow on. 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. And as a result, when we sit down and say, where do we want our blended capital deployed? We want to make sure that we're buying sufficient ownership upfront, you know, but we are a fairly large fund.

• 11:35Speaker 03

  What's interesting is the fund we're investing out of now is $180 million fund. We're still investing at a super early stage. We're still investing at pre-seed, at seed. And therefore, I know that there's going to be a lot of downstream rounds. And if you look at some of the companies that have gone public, whether it's Blue Apron or OnDeck, we did follow on materially, which did produce stronger returns.

• 11:56Harry Stebbings?

  I mean, that's super interesting because for me, I'm always a big believer that ownership's built on first check. And then often with with some of the best investments, they can kind of get plucked into the tree, so to speak, by the much larger, bigger players. Would you agree that ownership can be built over time then, given those examples? Or do you think that really maybe like me, that it's crucial to build that ownership on first check?

• 12:17Speaker 03

  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. That to some degree, I think your ownership is your first check and later investments are more of a cash on cash return rather than a multiple or IRR return.

• 12:33Harry Stebbings?

  I absolutely agree with that. In terms of the investment decision making process, how does that look like internally? And does it differ when looking at reserve versus initial?

• 12:42Speaker 03

  It does not. As a partnership, we decide investments together. It's two thirds. We don't need unanimity. No partner has a veto. And fundamentally, it's a pretty collaborative process. You know, I would say that it's evolved over the years. We're all type A, we're all driven, we're all competitive. Ventures is a business where you don't have short term milestones. So I'd say in the early days of our partnership, I think that the partners viewed it as a tournament to win, right? You bring a company into a partner meeting and obviously you're excited by it. So your goal of the partner meeting is to get a deal done. And I'd say specifically when Haley joined us, she really challenged us and framed the meeting differently. So that today, when companies come in and I bring a company in,

• 13:26Speaker 03

  either for an initial investment or a follow on 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've brought in and vice versa. So for us, it's really conversational and it tends to be really focused on like, what is the objective truth, what's knowable and what's not? And what are the risks we're taking?

• 13:51Harry Stebbings?

  Absolutely. And I love that element of the partnership discussion. It's something that we're absolutely going to get on to because I did speak to Haley before the show. I do want to discuss another element that I'd love your advice on, to be honest. Yvesa, I tried to estimate how many hours on a board. My estimation has led to 3,000 hours. With that incredible experience in mind, how have you seen yourself evolve as a board member, Josh? Have there been kind of fundamental transformations in you, do you think?

• 14:15Speaker 03

  Yeah, I think that, and I see this with a lot of early board members. I probably in the very beginning, when I look at the boards I was on, I was coming from being an operator. So I was probably overly prescriptive in offering feedback and trying to sort of weigh in on too many things. Entrepreneurs are getting a ton of data. They're getting data from the market, they're getting data from customers, they're getting data from press, they're getting data from employees, they're getting data from competitors, they're getting data from investors and data from board members. And I think it's important to realize that as a board member, you don't have the full context of what's going on in the business. So what I've come to learn oftentimes is that the best board member

• 15:00Speaker 03

  isn't always the person that has all the right answers or thinks they have all the right answers. But oftentimes, the best board member is the person who asks the right questions. By asking the questions, you are enabling and empowering the person who has far more data than you do, the founder, the management team, to make a better decision. And I think that's been a meaningful shift in my approach to boards. It's probably, it just comes with, with experience and humility and realizing that my job isn't to have the answers. My job is to ask the questions. I also think it's really important to focus. Oftentimes, if you get a board deck in advance and you have the opportunity to review it and plan,

• 15:40Speaker 03

  you know, I might come into a two-hour board meeting with one or two specific areas that I might want to ask questions on or investigate. I find that the more you diffuse your questioning, the less impact you have in any one area.

• 15:55Harry Stebbings?

  Absolutely, and I actually heard your skills in kind of zooming in on that pivotal area from Finn, who said it's one of your greatest skills. I am interested, from the many hours of sitting on boards, are there any kind of real moments that shine out to you as maybe inflection moments in your career as a board member?

• 16:11Speaker 03

  Yeah, so I've had the good fortune of serving with many great investors on boards. But actually, one of the first boards I sat on was a company called OnDeck Capital. And that's where I met a VC named Matt Harris. Today, he's at Bain Capital. What I really admired about Matt was his diplomacy, his realization that like in a board meeting, especially around startups, there is a tendency to get passionate. There is a tendency to let emotions drive things. And 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.

• 16:54Speaker 03

  I'm an emotional guy. I tend to wear my heart on my sleeve. So seeing sort of Matt in that board meeting, I think has kind of, it had an impact on me early on to try to keep the emotions in check and realize that there are a bunch of people with a bunch of different opinions, a bunch of different experiences, coming from a bunch of different places, but they all share the same goal. And a little diplomacy goes a long way in the board meeting.

• 17:16Harry Stebbings?

  Now, this is just where I love doing the show because I ruthlessly use. For my own self-improvement, but I have to ask, I've just gained my first institutional board seat with Stride. What would you advise me, given your wealth of knowledge? Think back to that first board seat for you, what would you advise me?

• 17:31Speaker 03

  The first and second board meeting you should go to should be listening far more than participating. I think it's important to context load, to learn how an entrepreneur thinks about a problem. And so I find that my engagement kicks in far higher in meetings three, four, five, et cetera, than meetings one and two. The other thing I would do is I would spend time at the company and with the direct reports before the first board meeting. You don't want the board meeting to be sort of the only way you're collecting information. I think a board meeting is a concentrated point of discussion, but it shouldn't be the only opportunity to collect information about the company. If your only real interaction with the founder and his or her team is in the board meeting, I think you're doing it wrong.

• 18:15Harry Stebbings?

  The final element that I have to touch on is the element of time allocation. How do you spend your time across the portfolio? It's often the big question is, you know, do you spend it with the winners, the outperformers? Or do you spend it with maybe the more struggling companies, maybe salvaging cents on dollars? How do you think about that time allocation across the portfolio?

• 18:33Speaker 03

  So one of the things that I believe is that the first eighteen to twenty-four months are a magical time in a company's life. So much is getting baked. The hunt for product market fit, it's the discovery of go-to-market and distribution and pricing and branding and hiring and the cultures being baked, like it's a magical time. And so one of the things that I've optimized for, rather than trying to divide my time company by company, is I try to think a bit about stage. We really, and I really try to focus my engagement on companies during that stage. So I tend to be far more proactive during that first eighteen to twenty-four months, where I think we've built up a skill set and a competency around those go-to-market muscle movements,

• 19:18Speaker 03

  around the hunt for product market fit. And then we kind of shift to be a little more reactive when a company has gone on and raised a series A and series B. And what's interesting is those first eighteen to twenty-four months. You don't know who the winners are yet and you don't know who the strugglers are yet. You know, there are going to be companies that get an early start that stall and there are going to be companies that are struggling for the first 18 months and then finally hit their groove. So I think of it less in terms of progress per company and instead think of it in terms of life stage of company. And for us, that first 24 months is just a point of maximum impact and maximum leverage.

• 19:55Harry Stebbings?

  I mean, such a lesson in VC here. I do want to move on to the partnership, Alman, which we actually touched on when you mentioned Haley, because I chatted to many of your partners before the show and I spoke to Finn Barn explicitly and he said to me that VC has to be a picker of companies, but a founder has to pick two. And so he asked you, how do you think about the founder and the pick to start with?

• 20:16Speaker 03

  So I've never had the time to write a book, but if I was going to write a book, it would be called The Pick. There are a ton of books focused on marketing, there are a ton of books focused on hiring, there are very few books that are focused on the skill of picking and I believe that picking is a skill. As a VC, for example, I might spend 50% of my time helping companies after we've invested. I might spend 40% of my time sourcing, network building at the top of 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.

• 20:58Speaker 03

  I would argue that for entrepreneurs, that time ratio is even more exacerbated. You know, most founders spend less than five to 10 weeks picking an idea, but they're going to then spend five to 10 years executing on that idea. And so if I had to give one critique of founders, like the most common critique I give is I feel like they're rushing their pick and it's not a muscle that they use often. So, you know, like when I sit down and look like who are the best pickers I've worked with, it's founders like Nat and Zach from Invite Media and Flatiron, but they spent months on their pick. And so I think that the first advice I give to founders is don't set an arbitrage.

• 21:40Speaker 03

  When you set an arbitrary time, you say, all right, I'm going to spend this quarter picking ideas. What tends to happen is you focus on set reduction. You say, I'm going to quickly build a set of ideas and then I'm going to spend the next three months reducing them to reducing that set to find the one idea. And in most cases, 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. And I also think the best pickers are people who are not afraid of asking dumb questions. They are continuously learning.

• 22:21Speaker 03

  They're continuously interviewing people in the field, around the field, customers, prospects, and they're not afraid to change their mind. They don't get locked in or confirmation bias when they make a pick. I could write a whole book on this and I bought the pick.com because one day I probably will. But I think that when you sit down and say, you know, why do many startups fail? I don't believe it, you know, I believe that a high degree of startup mortality is baked in at the pick and not on the execution.

• 22:48Harry Stebbings?

  I mean, I'm sure you will get many outreach from publishers post this episode on the pick as a serial book coming out. But I do have to ask, while we're on the pick, how do you think about kind of advising founders on picking the right investors for them for their journey?

• 23:02Speaker 03

  I think that, and it's an area where I think people are rushing that pick as well right now. An investor is oftentimes more than just capital in both good ways and bad ways. I've seen investors help founders and try to create tremendous value. And I've also seen investors destroy a tremendous amount of value. And I think that founders should be self-aware to know what are they looking for in an investor? And how does an investor's temperament work with them? How does an investor's view on their role work with them? How does an investor's credibility within their fund work with them? And so much of this comes from A, spending time together and B, doing reference calls.

• 23:42Speaker 03

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

• 23:50Speaker 03

  And the ability to do VC references specifically off reference sheet of companies that didn't work out. It's never a straight line. This is a tough journey and you can't fire your board member. You can't fire your investor. So I think it's critical to sort of understand how does this investor work? And how does the fund work? Right? If you're raising money from a seed fund, you should know what percentage of time does this seed fund follow on in the next round, right? Like first round, we pretty much tell founders, when you get the first round, the second round comes free. We will take our prorata and a hundred percent of outside led second rounds. That's something we tell our founders, but like you should ask that of all seed investors and of all investors.

• 24:31Speaker 03

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

• 24:36Harry Stebbings?

  I'm so pleased you said about the importance of doing your diligence there because I clearly took that to heart before the show. Because I actually spoke to one of your founders, Nat at Flatiron before the show. And I also spoke to Finn about your relationship with Nat. I promise I'm not stalking. But they told me about your relationship and Finn specifically suggested I ask this one. But how do you describe your relationship with Nat? And what do you think makes it so effective?

• 24:59Speaker 03

  So I've known Nat now for well over a decade. I met him when he was 18 years old, when he was a freshman at Penn and was blown away by his maturity, his entrepreneurial instincts and by his entrepreneurial experiences at such a young age that he became first round's first intern. And then the following summer, when he wanted to get experience in Silicon Valley, we helped him get a job at one of our companies. And then the following summer, we funded his company Invite Media as the first venture fund. But what's been fascinating about that relationship has been really the transformation. You know, I think I might have been one of Nat's mentors and advisors early on, but it's now transitioned to the point where Nat has built a company to far larger than I've ever built a company.

• 25:42Speaker 03

  He's managed teams far larger than I've ever managed. He's had an exit with his prorata exit far larger than I've ever had. It's so rewarding that I'm learning from him now. And as he's become an angel investor, we get to work together in that capacity as well. So what I About the relationship, it's probably one of the most rewarding professional relationships I've ever had. But where maybe the student has become teacher and it's now a far more of a two way street.

• 26:10Harry Stebbings?

  I mean, it's just incredible to hear that relationship and it goes without saying that Nat said the many incredible experiences you guys have had together. But I do want to switch sides of the table now and before we move into the quick fire round and quickly discuss the first round partnership. We mentioned Haley, we mentioned Finn. I want to start on how do you think about and approach choosing partners, Josh?

• 26:29Speaker 03

  So I believe that when I look back at my career and venture, 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. And I'm thrilled with the partners we have today. I do think if there's one thing I would do differently early on, it would be to go a little further outside my network. In the beginning, I was very focused on people who I'd worked with before and known before. So my co-founder Howard, you know, he was my first angel investor 15 years before we started first round.

• 27:09Speaker 03

  My partner Chris Fralick was the first executive hire at my company Hef.com and I'd known him for 10 years. And Bill Trenchard I knew since he was in college. So and when we added Haley, we had known Haley for six years through our experience at Birchbox. So I think that that enabled us to start with a high degree of trust, a high degree of respect. But I think it also locked us into a very closed network and probably prevented us from attracting a more diverse partnership. And you know, as Finn has talked about, you have technical debt and diversity debt. I think we're paying off some diversity debt now as a result.

• 27:45Harry Stebbings?

  No, I mean, I really hone in on that kind of preferring to be a picker of partners and companies and that's a very bold one. But speaking of kind of venture partnerships and transforming over time, as you mentioned there, great venture firms are commonly suggested to succeed in generational transition. Sequoia often comes to mind as kind of one of the best. I'd love to hear what's your thinking on generational transition, Josh? And what do you think is required for it to be done really successfully?

• 28:10Speaker 03

  Having conversations on this very early because I've seen more great funds get killed and die, or just great brands get damaged because of failed generational transition. And I think there are a few things that are needed. The first is open and honest conversation. So my co-founder Howard Worgen was older than I am, but we had transparent conversations about generational transition for several funds before he stepped back. And as a partnership, we get together often to discuss our personal goals as well as our funds' goals. So I think that we all know where we stand on our own personal journeys, what we're solving for, and it enables us to be really transparent about where we are on our journey at First Round.

• 28:52Speaker 03

  And I think the second thing is a realization that each fund is a new company. It's a clean cap table and it should be divided up based on each partner's contributions to the current fund. I've just seen too many firms get destroyed when the old partners try to hold on to too much economics in new funds. They're trying to sort of claim future credit for past actions. And so at First Round, we really view each new fund as a new cap table so that there isn't that partner tax from the prior generations of partners. And I wouldn't say it's perfect and it's still a work in progress, but as Howard has stepped back, he kind of set a path for other partners at First Round to follow.

• 29:35Speaker 03

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

• 29:41Harry Stebbings?

  Final element I have to touch on stage, or she mentioned credit there. How do you think about attribution today with First Round?

• 29:48Speaker 03

  I could go on for a long time about attribution. So there are clearly two schools of thought and I don't think there's any one right answer. But at First Round, we've chosen to play the venture game as a team. And what I've seen is that when people are obsessed over building their own track record, sometimes they optimize for the wrong thing. If there's a deal referral source that Phil and Finn and I all know, the three of us shouldn't be working that same relationship to try to refer entrepreneurs to us. One of us should, but obviously if you have attribution. And a personal track record, you're thinking about that. You want to build a firm where the founder works with the partner who's best suited to help him or her. So when I first got introduced to Matt Salzberg at Blue Apron,

• 30:32Speaker 03

  well, the company was in New York, Finn was in New York at the time. It was subscription commerce. Finn was point on Birchbox, a subscription commerce company at the time. And Finn had recently investigated a few companies in the food space. It made a ton of sense to transfer that company to Finn. We've had companies where one partner has brought a company into a partner meeting and then during the meeting got backward leaning, got spooked by something. And then another partner said, no, we should do that deal. How do you give attribution for that? It also creates challenges around follow on investments. If you have a pool of reserve dollars, say you have a hundred million dollars in reserve. I think oftentimes if people are solving for their own track record, they're going to sit down, a partner is going to sit down and say, how do I get as big a portion of that hundred million dollars for my companies? And I think that's the wrong thing.

• 31:17Speaker 03

  They should be solving for how do I get as much of that hundred million dollars into the right companies? So look, performance matters. You have to have conversations and be intellectually honest amongst your partnership about performance. But we don't track individual partner IRR, individual track partner performance and nor do we share it with our LPs when they ask us during diligence.

• 31:37Harry Stebbings?

  I'm so pleased to hear that we agree on that one. But I want to move into a quick fire round now. So I say a short statement, Josh, and then you give me your immediate thoughts. How does that sound?

• 31:45Speaker 03

  Looking forward to it.

• 31:46Harry Stebbings?

  Okay, so I'm flying to New York. What book should I be reading on the flight?

• 31:50Speaker 03

  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. Specifically, I was really struck by when she talked about resulting, which is how too many people evaluate the quality of outcomes rather than the quality of decisions. You know, oftentimes you have to recognize that A, there's an objective truth, but there's also a level of uncertainty. And it's important to try to categorize or quantify the level of uncertainty in a decision when you make it. And so I became an Annie Duke fanboy after reading this book.

• 32:28Harry Stebbings?

  I am a massive Annie. Fanboy, it's an incredible book. So on appearance, Josh, you've achieved the most incredible of heights in scaling First Round. So what motivates you today?

• 32:38Speaker 03

  I think the same thing that motivated me when I started First Round. A, some deep rooted insecurity. And B, the fact that I self actualized through my work. 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. But I also get to do that while working in a startup, right? Like inventing things and whether it's our community or our platform or First Round or Review or our products or even the holiday video. I feel like I've designed a job that just works for me and I can't see myself stopping for a long time.

• 33:17Harry Stebbings?

  What muscle are saying do you most frequently revert back to and why, Josh?

• 33:21Speaker 03

  So Lou Holtz, the famous coach of the Notre Dame football team. When all is said and done, more is said than done. And that just stuck with me since I was in high school. Like, I just think there's often a massive sort of hype to substance disparity. And I think that over time, people really build a reputation based on what they do rather than what they say.

• 33:44Harry Stebbings?

  I love that one. I haven't actually heard it before. Tell me, we spoke about kind of the joys in designing a career for you like you have done. But what's been the single biggest challenge maybe in the scaling of First Round?

• 33:55Speaker 03

  I think that the way we've chosen to play the venture game is to sort of transition a portfolio of independent companies to a community of connected companies. People who are, we believe that you could build better startups together than you can separately. And I think that's been part of the biggest challenge. I wouldn't say it's been fun, but it was probably the hardest nut to uncrack, right? How to go from just saying, yeah, we have an online group and yeah, we hold events. But how to truly create cohorts and a peer group where founders are giving and taking and are paying it forward and don't view it as a tax, but actually view it as a benefit. And, you know, I remember back when like social apps were first coming out. Everyone kind of said, oh, you just sprinkle.

• 34:40Speaker 03

  Some virality and you build a viral business and like that doesn't work. Virality is really hard to engineer and build in and you have to build it in from the scratch. And I think that community is not something that could be sprinkled in. Like you really have to work hard and it has to be part of your DNA. And that's to be part of the implicit and explicit bargain that founders sign up for when they choose to work with you. And I think that's been like the biggest challenge and I think things I'm most proud of in scaling First Round.

• 35:06Harry Stebbings?

  What do you know now, Josh, that you wish you'd known at the beginning of the First Round journey?

• 35:10Speaker 03

  I'm wrong a lot. Venture is an amazing, amazingly humbling business. You know, going back to Annie Duke, right? Annie Duke says in her book that like the more you play poker, the more you realize how much you have to learn. And I look back now at the table banging where I banged the table with conviction for this or against this. And I had such certainty and it was very binary. With time, I look back with amazing regret on so many of those binary decisions that in reality weren't binary. In reality, there's, there's a spectrum of probabilities and a spectrum of perspectives. And I think it's important not just to have a perspective and a point of view,

• 35:52Speaker 03

  but to have an understanding of your confidence in that perspective. It shouldn't always be a hundred percent or zero percent. It's fine to truly sort of understand that there's nuance and I wish I had known that earlier.

• 36:05Harry Stebbings?

  And then final question, I'm so sad that, as I said, I called it the 20 minute VC. But final question, most recent publicly announced investment, Josh, and why you got so excited?

• 36:15Speaker 03

  So I'll probably talk about Spring Discovery. It was founded by Ben Kamens, who I'd gotten to know for several months while he was on his journey of the pick. And first what sold me was Ben and the way he ran his journey, the people he talked to. Every time I would get together with him, he'd be exploring a different space, which exposed his intellectual curiosity. And the intellectual honesty that he was taking, that he just wasn't locking in an idea. And I think his idea is a big one. He's focusing on sort of combining modern day AI with longevity. And as I've gotten to know. Know more about health investing. I think there's just a massive disruptive opportunity for AI during this time. It reminds me of sort of, oh, this is like, this is quick fire.

• 36:59Speaker 03

  So I'll, I'll, I'll end it there, but I could go on for 10 more minutes on why I think AI and healthcare is a transformationally disruptive time.

• 37:06Harry Stebbings?

  Oh, go on. It reminds you of what? I, I'm too intrigued. You're leaving me a venture nerd on a cliffhanger.

• 37:11Speaker 03

  So when I started my first company, Infinotix, when I went to college, 1989, the web browser wasn't invented. When I left, the web browser was invented and Netscape was getting started. So that was a magical time because this new platform was coming into existence. And what this new platform did is it enabled me, a rookie, someone in college, who spent all of his time geeking out on the internet. And when, if you looked at a 20-year veteran in the software industry, I, at that moment in time, I had just as much experience on the internet as a veteran did. And sort of, this was a magical time because the gap between veteran and rookie kind of got like thrown out of whack. Normally, the veteran has so much of an advantage. And this new platform kind of nullified a lot of that advantage.

• 37:56Speaker 03

  And I think we've seen that in other like re-platforms. We're seeing it now in crypto, for example, where I'd argue that there are seniors in college who have just more experience in crypto than derivative traders at Goldman Sachs. It's this dislocation in the experience curve that creates real opportunities for rookies. And when you sit down and look at life science and healthcare companies and their medicinal chemists and their traditional drug discovery flows and all of those assets, I would argue that AI right now is such a disruptive platform that it really is reducing, not eliminating, but reducing the gap between veteran and rookie. And Ben came in, let's bring discovery, was just, was an exceptional rookie that I wanted to bet on here.

• 38:37Harry Stebbings?

  I mean, I'm so glad I pushed on that because that was phenomenal. But Josh, as I said before, three names when I started doing the show, you were absolutely one of them. It's been such an honor to have you on. So thank you so much for joining me today.

• 38:49Speaker 03

  Uh, thank you so much for having me. It's been fabulous and congrats on everything you've built. I'm a big fan.

• 38:56Harry Stebbings?

  I mean, what can I say? I've got to stop myself from hyperventilating, hearing that Josh is a big fan. But I do also want to say a huge thank you to Josh for giving up his time today to appear on the show. As I said, I've been the biggest admirer of Josh for many years. His journey with First Round really has been such an inspiration to me. One of the few names on that list, so a huge thank you to him again. You can find him on Twitter @joshk. Likewise, I'd love to see you behind the scenes on Instagram @hdebings1996 with two Bs. But before we leave you today, companies like TravelPerk, Babbel and Pointy use top freelance talent to get more done with less. Advisable helps them and many of the world's most ambitious companies by giving them instant access to the world's best marketing freelancers. With over 900 skillsets, from Facebook ads to marketing analytics to SEO, they have

• 39:39Harry Stebbings?

  top-quality, fully-vetted freelance specialists, ready to work for you in less than three days. Go to advisable.com/20vc to get started with a proven freelancer today. That's advisable.com/20vc. And speaking of getting prepared there, are you thinking about life insurance in the new year? If so, you have to check out Ladder. It's the smart and easy way to get term life insurance online. Ladder recognises that it's the 21st century and you shouldn't have to wait for weeks to get your life insurance in place. And that's why with Ladder, there are no commissioned agents and no policy fees. You can be done in minutes. Even better, coverage can start today if you qualify and you can cancel any time. Ladder is licensed and backed by trusted partners with billions in coverage and you

• 40:21Harry Stebbings?

  can visit Ladder today at ladderlife.com to apply and get an instant decision on fully underwritten term life insurance and check life insurance off your list today. Now that's checked off the list, so it's time to turn to business. And you didn't start a business to track financial statements or make cash flow spreadsheets. Using Pilot for bookkeeping gives you back the freedom to focus on your business. Every month, your dedicated account manager will send you an accurate, detailed financial report. And Pilot does accrual basis bookkeeping in QuickBooks Online, so you're never locked into a proprietary platform. Plus, you'll work with the same person each month, so you can rely on them to become an expert in your business. And with Pilot, you can say goodbye to exporting CSV files and emailing attachments to a bookkeeper you can never get hold of.

• 41:04Harry Stebbings?

  Get your company's books in order today and get your time back. Check them out today at pilot.com/20vc. That's pilot.com/20vc. As always, I cannot thank you enough for tuning in. I'm very excited to bring you Friday's episode with Joel Florrie, founder and CEO at Visco.