Josh Kopelman, managing partner and founder of First Round Capital, describes his job as “a modern-day switchboard operator.”

It’s not quite that simple, of course, but Kopelman, a keynote speaker at the Wharton Private Equity & Venture Capital Conference 2014, said the key to his strategy as a venture capitalist is not to toil in secret until his portfolio firms are ready for prime time, but to use a private form of social media to make the process faster and smarter. If two minds are better than one, 60, 100 or 200 are even better. “In fact, we don’t refer to our portfolio as a portfolio, we refer to it as a community,” he noted.

Kopelman got his start in a University of Pennsylvania dorm room when, as a Wharton undergraduate in 1992, he co-founded Infonautics Corp., which marketed an early Internet search tool. That firm went public on the NASDAQ in 1996, and three years later Kopelman founded Half.com, which eventually became one of the world’s largest sellers of used books, movies and music. It was acquired by eBay in 2000. In 2003, Kopelman helped found TurnTide, an anti-spam company that was quickly acquired by Symantec.

During those first 10 years, Kopelman was an entrepreneur — starting his own companies. Then in 2004 he started helping others start companies, founding the venture capital firm First Round Capital. The two industries, he said, are very different. The entrepreneur’s world is complex, with a new issue cropping up every hour.

“Venture firms were set up as they were set up 30 years before. They were run as they were run 30 years before.”

“The venture capital business is not complex,” he said. “The venture business is simple. Now, to be fair, simple doesn’t mean that it’s easy, but it’s simple. A venture capitalist pretty much does two things. They pick companies and they help companies.”

But although many might think the VC industry lives on the cutting edge, Kopelman found himself joining an industry that had grown stagnant. “Venture firms were set up as they were set up 30 years before. They were run as they were run 30 years before. In fact, I would argue that the single greatest innovation in the venture capital industry from 1974 to 2004 was the increase in carried interest from 20% to 30%.” Carried interest is the firm’s share of profits, with the rest going to the investors, or limited partners.

VC firms help their portfolio companies in four ways, he explained: By providing money, agency and services, advice, and a chance to join a broader community or business network. In recent years, many in the industry have redoubled their emphasis on the agency/services role. “That’s where a venture capital firm realizes that their start-ups, their companies, have a lot of common challenges,” Kopelman said. So, if all the companies in the portfolio have trouble with recruiting, a VC firm might build an in-house recruiting agency to help them. “[What if] our companies are looking for help with [the] press? Let’s go out and hire the world’s best PR people…. Do it with business development, do it with design.”

While this approach has worked, it presents a certain irony, as the VC firm becomes very different from the type of firm First Round prizes in its portfolio: One that benefits from networking, has the ability to scale and can deliver value through software, not services. Among the shortcomings of the agency-style VC firm: As it adds more firms to its portfolio, the VC firm’s services are diluted, and the firm tends to focus its efforts on the bigger portfolio firms rather than the smaller, younger ones that need help most.

“So even though these [agency-style VC firms] have delivered transformative value, I think we’ve all seen what happens to agency businesses and services businesses like this in the past,” Kopelman noted. Critical to the success of a VC venture, Kopelman added, is the partnership relationship, in which the start-up gets advice from the VC partners, or from other companies in the portfolio.

“The more savvy entrepreneurs I know choose the partner not the firm [when deciding which VC firm to work with]….. Oftentimes, companies build 50% of their value during the five years they are building the company, and then 50% of the value is on the table during the five months or five weeks you are negotiating an exit,” he said. “Having that right partner around the table can make a huge difference….. You have the venture capitalist in the middle taking learning and best practices from company A and sharing it with company B. You’re sort of a broker of information.”

Information Sharing

But the limited number of partners on the VC firm’s roster cannot always offer the most up-to-date or on-target advice, because “the half-life of operating knowledge is very short,” Kopelman noted. So how can VC firms improve on the agency/services model?

With a “community endeavor” — a broader sharing of information, insight and advice, Kopelman said, explaining that at First Round he has tried to reduce the VC firm’s broker, or middleman role, making it easier for the portfolio firms to talk directly to one another.

“We created a Yahoo group and we invited our CEOs onto that Yahoo group,” he said, recalling the beginnings of First Round’s internal network. When one of the portfolio firms suffered a website crash, for example, a First Round partner started telephoning experts for help — but also suggested the firm email the CEOs in the Yahoo group. Within hours, and before the partner had finished his round of calls, the firm had solved its problem and was up and running, thanks to help from CEOs thousands of miles away. “It showed the power of a community,” Kopelman stated.

“We created a Yahoo group and we invited our CEOs onto that Yahoo group.”

To improve this process, First Round has developed a non-public network to connect members of its 200 portfolio firms. The community, for instance, has 60 people devoted to search engine optimization, traditionally an isolating job. With the in-house network, these people can help each other resolve issues faster. “The same thing happens for recruiters. The same thing happens for community mangers, customer support managers….”

Traditionally, a partner in the VC firm would talk to a top executive at the portfolio firm about a problem or management issue, but with the network, dozens can chime in. “Now instead of a venture firm delivering value to a handful of C-level people, we are able to distribute it far down the stack of the employee base.” First Round’s goal, said Kopelman, is to soon have 25% of the 10,000 employees at the portfolio firms participating in this network.

While there are many networking options on social network sites, First Round prefers a private system, so that executives can discuss matters involving trade secrets or post questions on sensitive issues like how to fire an employee. “Unlike an open community, it’s curated….. It’s trusted, it’s confidential,” he pointed out. First Round does not invite other VC firms into its network, feeling that the confidential system provides a competitive advantage.

“We think that starting a company is the loneliest thing that you can do,” Kopelman continued. “There is so much uncertainty and so much doubt. There are so few people that you can talk to.” In some cases, the executive at a portfolio firm might be reluctant to reveal his problems to the VC partners, but willing to seek advice from someone at another portfolio company. “Having peers, having a community really helps.”

While adding a new company dilutes the effectiveness of a VC firm using the agency/services model, it enhances the value of the community in a network model, Kopelman noted. “We add a designer to the design group, we add a recruiter to the recruiter group…. There’s more value that benefits everyone else…. We have over 300 designers that are sharing best practices now.”

The community is also used for planned events like workshops. Limited partners have been supportive, and portfolio executives who have benefited from the network adopt a “pay it forward” philosophy toward others, he said. Kopelman adds that this approach will become more common in the industry. Partners will still provide value and VC firms will still provide money, but building community will be the big trend in the years to come.

“We think, as a result, this will help our companies win,” he said. “And it’s a lot more fun to build.”