How To Make Money in Venture | Josh Kopelman, Co-Founder of First Round Capital | Ep. 8

It was universally acknowledged we were in a bubble.

Everybody knew it.

Oh, like the Fed chair, irrational exuberance, Pets.com sock puppet, like, total irrationality. And if you had said, "Oh, no, we're in a bubble," and you said, "I want to sell and exit now," you would've given up eighty-three percent of your profit. You would've made seventeen percent of the total returns you could have made.

[upbeat music] All right, Josh, thank you so much for being here. I'm really excited to do this with you today.

I'm excited, too.

I wanna start with the state of venture. So you started First Round in two thousand and four, so it's over twenty years now, which is awesome, and, um, you've seen a bunch of cycles, and venture has changed, like, a huge amount in that time. And the lay of the land today is different than it's ever been. It's different than when I was building Lattice even, where now we've got not just, like, one or two big firms, but you've got, like, six or eight or ten venture firms that are billions and billions of dollars, and we're not that big of an overall ecosystem in venture. And then, of course, you have a lot of smaller firms. But it seems categorically different because now you're hearing about firms that are playing different games than we've ever played before. And so I kind of wanted to start by just hearing your reflections of where we are as an ecosystem of venture generally around this dynamic.

It's been fascinating to watch. So I think we should talk about it two ways. The first way we could talk about it is, how is it playing at the GP side, and how is it playing at the LP side? 'Cause at the GP side, right, in two thousand and four, you had fewer than eight hundred and fifty funds. If you looked at, like, active check writers, people that were writing more than one check a year, probably a thousand, two thousand people. Today, there's over ten thousand funds. You probably have over twenty thousand active check writers out there. That, that's a change, and I think everyone's commented on it. And, and look, does it make the industry harder for VCs? Sure. Is it probably better for entrepreneurs? Yeah, more capital out there funding more ideas. I think what hasn't been talked about are these fund size changes and what that means for LPs. You know, I think when we started, uh, David Swensen pretty much, like, created the institutional venture asset class. He put us in business at First Round at Yale, um, and you had, like, university endowments and a very select customer that basically said, "We'll take illiquidity in order to get outperformance." And they really... Like, those two matched, right? You needed to have ten-plus years illiquidity in order to get a twenty-plus percent IRR, and that was the deal.

And it happened.

And it happened, right? Like, by and large, you had real good exits, and it, it, it really created the asset class. But, like, I think there are a lot of smart investors out there and smart VCs, and they said: "You know, there's a lot of capital out there. There's capital that hasn't been able to get into this asset class, a lot of capital with, like, bigger purses, sovereign wealth funds, et cetera, and, you know, they might be willing-- they might have a different cost of capital. They might, instead of targeting a twenty-five percent or a four X, they might be looking at a two X or a twelve percent IRR, and they'll take the same illiquidity." And when you bring new investors with different capital returns expectations, it could be really transformational for the industry. So, like, the bull case is the Blackstone-ification of venture, right? You know, what Blackstone did is say it's not about alpha, it's about scale, right? If, if... Let's, let's give an example. If you had a billion dollars, and it was a traditional venture fund, and it could do thirty percent IRR, that's awesome. That's, like, three hundred million dollars. And if you had a... Now, on the other hand, if you had a hundred billion dollar fund and it could do twelve percent IRR, well, that's twelve billion dollars. That's a lot more than the three hundred million in the first.