If you're an Internet entrepreneur in search of seed funding, Josh Kopelman should be high on the list of people you want to run into at a cocktail party. Kopelman is himself a successful entrepreneur three times over—most notably as the founder of Half.com, which was acquired by eBay (EBAY) in 2000 for around $350 million. Now, with his three-year-old early-stage venture fund, First Round Capital, Kopelman is putting his expertise to work backing Web software startups such as StumbleUpon (BusinessWeek.com, 2/9/07)—which was also acquired by eBay in May, for $75 million—VideoEgg, and Satisfaction (BusinessWeek.com, 10/10/07).
He also sits on the board of Facebook's new $10 million fund for Facebook application developers (BusinessWeek.com, 10/8/07). Kopelman says First Round Capital has been approached by about 1,500 companies so far this year, and that he himself hears two or three pitches from entrepreneurs a day. A recent conversation with BusinessWeek's Kerry Miller yielded three recurring themes that Kopelman says he's sick of seeing from startups—plus one thing he'd like to see more of.
1. Business plans that depend on getting acquired by Google (GOOG).
There are more people that win $5 million in the New York lottery than get acquired by Google (BusinessWeek.com, 10/22/07). I do not think companies should be built solely to be acquired by three or five companies (BusinessWeek.com, 9/4/07) in a quick period of time. I don't think you should be building "hamburger companies" that are built to flip.
That said, it's always validating when someone comes to you and expresses interest in acquiring your company early. You've got to give kudos to Facebook for turning down probably an awful lot of acquisition offers on the way up, recognizing that they'd create more value if they stayed independent (BusinessWeek, 9/25/07). As a VC, I often now see young people who are in the mercenary mode vs. people who really are passionate about what they believe. The most successful entrepreneurs I've seen are really excited by what they're doing—they're not passionate about creating an exit.
2. Revenue models that revolve around advertising from Google AdSense.
Often the companies we see tend to say, "We think there are three or four different ways we can make money. We might not know which ones will work or which ones will scale." We're comfortable signing on to that kind of risk. But if a company comes to us and says, sort of, "The way we'll generate revenue is by putting Google AdSense on our pages," and really hasn't thought through anything beyond that—those are the companies we tend to really pause at. We're not looking for someone who can predict the future, but we do like people who are thoughtful and deliberate about how they're going to build a business that solves an urgent and pervasive customer need, and also how they could maybe generate revenue from that.
3. Businesses that piggyback on Facebook instead of picking up where Google left off.
I think I've seen my fair share of white-label social networks, and I've seen my share of cute Facebook apps. We haven't funded any Facebook apps since they launched. I think a Facebook application is now a necessary component (BusinessWeek, 8/22/07) in an online marketing and customer acquisition strategy—I just don't know if you're going to find venture-backable companies there. We like to see companies that offer the consumer real value. One could argue that amusement is real value, and I agree, but I'm not sure if today's app du jour is going to be what does it.
Matching Interest to Offer
Amusement apps tend to be very faddish, and I also think those are the hardest to monetize because the use of those apps doesn't derive from intent like a search query does. So, just because I super-poked you or bit you and turned you into a zombie doesn't really give me anything as an advertiser to figure out your intent or something to target against.
What Google did a very good job with was to recognize that when someone is searching for something, they're indicating interest. And if you can match interest with an offer, those ads are going to be far more successful than those that don't. The advertising business is still an incredibly wasteful business. I don't think the game's over in that space. By looking at Google, you can see how someone who can create efficiency out of what was inefficient can create value. There's real money to be made there.