What Are Early-stage VCs Looking for? Founders with Grit

If it’s lonely at the top, it’s even lonelier at the start. Josh Kopelman knows firsthand the struggle and isolation of starting a business because he launched three before creating First Round, a venture capital firm that specializes in seeding companies in their earliest stage of growth. Kopelman talked to the Knowledge at Wharton show, which airs on SiriusXM channel 111, during the recent Wharton Global Forum in New York about what he looks for in startup founders and why it’s important to keep an eye out for ideas that are so far out of the box, they just might work.

An edited transcript of the conversation follows.

Knowledge at Wharton: First Round is not your first company. Tell us your story about how you got it off the ground.

Josh Kopelman: I started and exited three companies before First Round. The first company I started took $5 million to get the first product shipped, so I had to raise a lot of venture capital to get started. My second company was called Half.com, and that took $2.5 million to get the first product shipped. My third company was a company called Turn Tide, which was started in 2003, and that took $750,000. I was angel investing and funding companies that were getting to first product ship for $500,000.

In my own short career with three companies, it went from $5 million to 500,000. At the same time, venture funds have been doubling and tripling in size and writing bigger checks. I was saying, “Wait a second, entrepreneurs need less capital to get off the ground. VCs want to write bigger checks. There’s a gap in the market.” That was the idea behind First Round.

Knowledge at Wharton: What were the bumps in the road that you saw in all three companies?

Kopelman: It’s never a straight line up. There’s a lot of survivor bias where, when you exit a company successfully, everyone says, “Oh, that’s great.” But starting a company is amazingly lonely. You’re sitting at home every day, thinking about decisions you’ve made poorly. Our first company was called Infonautics. We built an online search engine 10 years before Google, and we blew it. We were focused on proprietary content versus open content. Did that company go public? Yes. Was it a successful exit? Yes. But it’s high up on my woulda, coulda, shoulda list in terms of we felt that when we had a plan and sold that plan to investors, we couldn’t change it. We felt locked in and committed, and that was a big mistake. The right answer should have been, yes, we know we sold the investors one thing, but the market changed. The idea changed. We should have had the courage of our convictions to go to our investors and say, “Now we want to do something different.”

Knowledge at Wharton: Let’s talk about branding. A lot of people remember [online shopping site] Half.com and the impact that it had in the late 1990s and early 2000s. I saw an interview you did on the Today show about the relationship with the city in Oregon, trying to change its name from Halfway to Half.com Oregon.

“Starting a company is amazingly lonely.”

Kopelman: Yeah, you look at that video and I have a lot less gray hair back then! Launching a dotcom in 2000 … you had so much money pouring into advertising and media. We wanted to do a stunt that would put us on the map. My marketing team would get together and brainstorm. We spent three hours in the room, and my head of marketing got so angry that he said, “If you want to get on the freaking map, just find a town named Half and convince it to change its name to Half.com.” We all laughed and said, “You know, that’s not a crazy idea.” The next day, we Googled all of the towns that began with Half. We figured Half Moon Bay [Calif.] would be a little too expensive. But we found Halfway, Oregon, population 375. The next day, he’s on a plane out, meeting with the mayor. And $75,000, two jobs and a snow plow later, the city council unanimously agreed to change its name. It got us over $30 million in media exposure. It was insane the level of attention that we got — 60 Minutes, Today, The Wall Street Journal, The New York Times.

Knowledge at Wharton: At First Round, what are the ideas that attract you the most right now?

Kopelman: I would argue that it’s more founders than ideas. We invest at the earliest stage, at the seed stage, so everything that we see is wrong. As soon as a founder gives us their pitch deck, we know the product is wrong. We know the pricing is wrong. We know their go-to-market is wrong. We know their team isn’t complete. We know the technology isn’t built. So fundamentally, we have to bet on the founder.

The first thing we look for is an ability to go off the conveyor belt. I’m a believer that in life, especially today, kids are raised on a conveyor belt. You go from elementary school to middle school, middle school to high school. You get pushed to do extracurriculars, pushed to study hard for your boards. You go to college. You’ve got to do well in college, get the right internships. It’s a conveyor belt. You show up the first day of any class in Wharton and what does the teacher hand you? A syllabus. It’s a road map. You don’t have to guess what to read. You don’t have to guess when the quizzes are and the tests are. We look for people who have an expertise in going off the road map because starting a company, no one hands you a map. No one hands you a syllabus. You have to figure it out. We’re looking for people who have historically done that and are comfortable doing that.

“We invest at the earliest stage, at the seed stage, so everything that we see is wrong.”

Knowledge at Wharton: You’ve been involved with Uber, Blue Apron and all these different firms that have a story. Wasn’t Uber started out of a basement or a living room?

Kopelman: One of the co-founders of Uber is Garrett Camp. We had funded his last company, a company called Stumble Upon, which eBay bought. As he was gearing up for what was at the time called UberCab, my partner, Rob, saw a tweet that Garrett put out there saying, “Just experimenting with UberCab.” He wrote him an email and said, “All right, I’ll bite.” The next thing you know, we had them come into our partner meeting, and we were fortunate enough to lead their seed round.

They spent about six months working out of our West Coast office in the beginning. It was an incredible story to see that journey upfront, to see that company go through hyper-growth and deal with challenges, overcome those challenges and transform transportation in most cities in the world.

Knowledge at Wharton: Because you have the interest in the people more so than in the company, do you feel comfortable in any sector?

Kopelman: There are sectors where we feel like we could make a more educated decision because maybe we know more about it, but we’ve funded everything from ad tech to e-commerce to enterprise SAS to rocket companies to drones. We have companies with the largest satellite constellation in space, and we funded a company that sells bras.

What we really look for is that contrarian idea, the idea where the founder thinks they have a view of the world that other people laugh at. We’re wrong a lot. Our woulda, coulda, shoulda list is massive.

Knowledge at Wharton: But isn’t that what the startup world is in general? The percentage that make it is very, very small.

Kopelman: Venture is a very humbling business. I’ve been doing it now for 13 years, and the longer I’ve done it, the more I realize how much luck plays a role and how uncertain and imprecise the craft is. Fundamentally, you’re trying to judge the unjudgable. In sports, when you step up to plate you know whether you hit the ball or didn’t. Here, you wait 10 years to figure out whether you got on base or not, whether you got a home run or not. It’s a very hard business, and the longer I do it the more I realize how much more room I could have to improve.

Knowledge at Wharton: One of the firms you fund is a company called RaiseMe, which provides achievement-based scholarships. Why did you choose that one?

Kopelman: The founders are very compelling, but the idea was also extremely compelling. They’re realizing that universities are trying to reach out and build relationships with students while they’re in high school to attract the right demographics, to try to build a diverse student population. They realized universities give a ton of scholarship money that is issued after a student is accepted. They said, “What if we could give micro scholarships while students are in ninth grade, 10th grade and 11th grade? You got an A on your English test, $25 micro scholarship to this school.” Students can pick a handful of universities that they want to be eligible to receive micro scholarships, and they’re updating their performance in high school, whether it’s an essay, whether it’s a test, whether it’s an attendance grade.

“What we really look for is that contrarian idea, the idea where the founder thinks they have a view of the world that other people laugh at.”

There are students this year who graduated and had over $5,000 in scholarships from one or two universities, and they had a four-year relationship before they sent in an application. We thought that was really interesting. It took this pool of hundreds of millions of dollars in scholarships and transformed it from an after-the-fact benefit to a marketing program.

Knowledge at Wharton: The evolution of e-commerce is such an amazing area to watch. Can a smaller idea compete with the Amazons of the world?

Kopelman: Absolutely. I believe that you’re seeing an explosion in direct to consumer brands. I’m wearing my Allbirds. I’m wearing my Warby Parkers. Amazon doesn’t play in that space, so new brands can be created all the time.

I also think that in the next 10 years, autonomous vehicles are going to fundamentally transform the nature of retail. When your printer is out of toner cartridge, why do you need a warehouse or a Staples when there could be trucks with toner within five minutes, and getting a toner cartridge is just as easy as calling an Uber today? What does Starbucks look like when the drink comes to you? Imagine what happens with everything else in retail when it’s portable? I think retail is rife for disruption.

Knowledge at Wharton: What’s your advice to entrepreneurs?

Kopelman: I think one of the challenges today is that the entrepreneurial path is amazingly glamorized, whether it’s the Social Network movie, Facebook, Shark Tank. It’s never been easier to start a company. The costs to start a company keep coming down, the barriers keep coming down, but it’s not all up. A lot of what we look for is understanding the founder’s grit and resilience. Do the founders understand the risks that they’re about to take? Is it an informed process? A lot of it is an honest conversation about what they are signing up for, because I think many founders are often surprised by the struggle.