VC Josh Kopelman isn’t so sure about SPACs, but he thinks so-called rolling funds could prove powerful

TC: Your own industry has obviously changed quite a bit since you founded First Round. There are now hundreds of firms that are going after early-stage deals. How have your results been impacted by what’s been happening in the market? Are you still getting the same return on investment that you did in the past?

If you’re talking about changes in the last five years, no one’s results are in, so for me to talk about unrealized markups over the last five years, sure, they look fine. But I’ve been in this business long enough to realize that there’s a big difference between realized and unrealized [gains]. But in general, if you look at the intermediate metrics, companies where we lead their first round have twice as high a chance of raising their next round than the industry average. So we’re still seeing promising signs, but we recognize that what was a contrarian idea 15 years ago — institutional seed — is now a very consensus idea.

TC: Results take time in part because companies have obviously waited longer and longer to go public over the last decade or so. Do you think that the IPO process is broken? We’re seeing a lot of people saying we need new vehicles to get startups across the threshold.

I’m not sure I’d argue that it’s broken. I think you’re seeing far more companies exit, and we’ve seen a real acceleration in both the number of exits and the size of those exits, which is a promising thing.

I do think there is a benefit to the transparency that a public market shines on a company, because it’s how you truly lock in a value. We’ve all seen companies that have real garnered valuation x in the private markets, only to find that it wasn’t a true representation of the company’s ultimate value when it was fully transparent in the public markets.

Now with SPACs, that’s a whole new element that’s coming in.

TC: What do you think of them?

On the one hand, just for fun, I made sure that we owned Lastround.com in case we ever wanted to launch our SPAC. [Laughs.] But it’s hard to know the true benefit of a SPAC. And I think that now that we’ve begun to see a market shift toward allowing direct listings with a fundraising component, you might see that as a far more viable and frequent fundraising or a liquidity device.

TC: What do you think the advantages are of direct listings versus SPACs?

I think direct ratings are more economical. You aren’t allocating a heavy portion of the cap table towards a promote. [Editor’s note: SPAC sponsors acquire founder shares for nominal consideration that typically ends up with them owning 20% of the outstanding common stock.] They’re not warrants that are performance based. It’s very clear that what you’re really doing is just finding the right market-clearing price for the company.

As I’ve watched the last few years develop, I sort of thought of myself in camp Gurley [meaning as a proponent of direct listings].

TC: When you have portfolio companies that are maybe asked if they might be interested in using a SPAC to go public…

That’s happening.

TC: So what do you say? How do you advise them?

It would be foolish to have a conversation about one absent the alternatives, right? You should be sitting down and having the conversation of, ‘Alright, what are you solving for? Is it liquidity? Is it a capital raise? Is it public currency? Is it to be able to offer your earliest employees the liquidity and cash to benefit from the time they’ve put in?’ You have to look at all the options. I don’t think it would ever make sense to look at a SPAC without looking at the options. I also think if you’re contemplating a direct listing, you should look at the benefits or drawbacks of a SPAC as well.

TC: What do you think of these rolling funds that allow managers to share deal flow with fund investors on a quarterly subscription basis?

I think it’s very creative. I’ve personally participated as a limited partner in some of them. When I started First Round with Howard Morgan back in 2004, neither of us were sure [about how long we’d do this]. We had three questions when we started. Number one was ‘would I enjoy being a VC rather than an entrepreneur?’ Question number two was ‘could I overcome my geographic handicap?’ because at the time I was living in Philadelphia, and most of the companies that we were funding were on the West Coast. And question number three was ‘am I any good at [VC]?]’ So I had a really hard time raising a traditional fund vehicle. I didn’t have a hard time in the capital markets. I had a hard time signing up to make a 10-year commitment to [the job].

FRC I is really a bunch of one-year funds. We raised funds for a one-year period of time where we said, ‘All right, like, we’ll invest in 2005 and see how we like it, and if we like it, we’ll raise another fund in 2006. And then we’ll do it in 2007.’ And after about three years, I got enough confidence on my answers to those three questions that I felt comfortable signing up to a 10-year tour of duty. So I think that anything that enables people who might want to explore a career in investing, and to be able to pursue it and to explore it without having to sign a 10-year commitment, is a really powerful thing.

TC: You mention Howard Morgan, who has since moved on to a chairman role at the investment firm B Capital. A lot of VCs are moving on from active investing roles. How are you thinking about success at First Round? Is this a brand that you feel strongly should exist 20 years from now? The industry seems to be evolving in a way where the emphasis is on individual players versus the shingle above the door.

Personally, I’m not going anywhere anytime soon. I enjoy what I’m doing. I think we have a very strong team in terms of the future. We are actively looking for a new partner right now. I think that in a world where capital is increasingly available, what differentiates more than anything is the brand.

When First Round was first getting started, there were so few seed funds that it was like walking into a Footlocker and seeing just three sneakers on the shelf. A founder could try on all three and kind of see which fit, then pick. But today, when you walk into that shoe store and you see 1,000 shoes on the shelf, it’s really hard to know where to go first. And we believe that the brands that have proven their ability to create winners before really matter. Just like Nike is defined by the entrepreneurs who have benefited from its product, I think brand actually matters more now than ever before.

TC: You’re hiring a new partner. Obviously, diversity has been a big issue for VCs and entrepreneurs in the startup world. What are you doing to encourage diversity, not only within your fund, but also within your portfolio companies?

We took the step of actually posting a public job description for it, and a call for applications [because] all too often partner recruiting gets done inside of proprietary networks. We’re guilty of doing that. If you look at my three other investing partners, Bill or Haley or Todd, the one thing all three have in common is that previously, they were all founders of a First Round company.

So rather than just fishing within our own community, we’re trying to go beyond that and are running an active process of trying very hard to make it a fair and open process. We were very influenced by a blog post by Brian Dixon at Kapor Capital, where he said if you don’t publicize the jobs that are available at your venture firm, then you’re intentionally being exclusionary. People can’t get a job that they don’t know exists.

We agree with him, so we’re focusing on trying to find new sources of prospective partner talent. We have a number of initiatives throughout our firm, [including] a pledge we recently signed to make sure that every term sheet we put out preserves allocation for funders of color or underrepresented funders. So not only are we thinking about diversity inside our firm, or inside of a company, but we’re also thinking about diversity on the cap table.

We’ve [also] been running a number of training programs, and we have a pretty strong process with new investments to help them focus on building diverse talent pipelines as they hire, because one of the things we’ve seen is that if you don’t focus on building a diverse team in your first 10 hires, it gets much harder to expand because people tend to hire from within networks. If you start off lacking diversity, it just gets harder later.

TC: Many questions have been raised about the culture of Silicon Valley in recent years, but it feels like there are suddenly more clashes between investors and the journalists who cover tech, too. Do you have any thoughts about why?

I wouldn’t say that I have any particularly profound thoughts. I think that what we’re seeing is that whereas tech used to be a separate ecosystem, tech is now part of everything. You no longer have sort of healthcare tech. It’s just like healthcare. You’d no longer have consumer or social tech, it’s just part of the fabric of the world.

So I think, rightly so, you’re seeing journalists who were maybe previously sort of tied up in the ecosystem now have to a cast a more skeptical eye on what’s happening in tech. I think it’s just part of the maturation process. And I think the more that tech grows to represent all industries. I think you’re going to see all journalists covering tech.