Want to Know How First Round Capital was Started?

Posted on Apr 20, 2011 | 16 comments

Want to Know How First Round Capital was Started?

If you read this blog often you’ll know that I’m a huge fan of First Round Capital.

They have totally changed the way you run a VC firm, investing heavily in systems & events for their founders that are pushing the boundaries of the way our industry works.

One example is that they introduced a program where their founders can pool together shares from their company and exchange them for a small portfolio of other First Round Capital companies. I’m a huge fan of this innovation.

What people don’t know is how First Round got started and often people know less about the amazing background of one of its co-founders, Howard Morgan (everyone tends to know Josh Kopelman as one of the highest profile players in our industry overall). But now you can learn the origins first hand on this YouTube video as well as how to approach them, how they make decisions and what innovations they’ve introduced.

I have sat on a board with Howard and have known him a few years. I am simply blown away by his industry knowledge, contacts, detail orientation and hard work. Howard is successful enough that he doesn’t need to work. It is clear that he is simply passionate about being a VC and participating in this industry. I think you’ll enjoy hearing him, but if  you’re in a rush check out the summary notes below.

Big thank you to Ramin Vaziri (aka RamVaz – a regular live watcher of our show. I feel like I know him better personally since he’s always in the chat room during the show asking questions). As a courtesy if you enjoyed his write-up please check out his startup company, ChannelStack.


Howard Morgan earned a PhD in Operations Research/Computer Science in 1968.  He then went on to teach Computer Science at Cornell, Caltech, and University of Pennsylvania.  Through his research he helped bring ARPANET to Philadelphia in 1973.  In the early 80’s he left academia to work on venture capital investing with Jim Simons, Renaissance Technologies.

The discussion with Howard Morgan starts off by acknowledging Josh Kopelman as a co-founder of First Round Capital.  Prior to First Round Capital, Howard had invested in two of Josh’s companies Infonautics Corp. and Half.com.  Infonautics went public in 1996 and Half.com was sold to eBay in 2000.  Josh and Howard began co-investing as angels and in 2005 they started a $10 million fund.

They decided on a one year vintage fund structure because they were not sure they wanted to be VC’s over the long-term.  They decided to run the fund close to home in West Conshohocken, PA where they still have offices.  During the first year of the fund they took forty-eight trips to California!  In 2008 they raised a much larger fund $132.5 million and opened another office in San Francisco.

They chose the name First Round Capital because they thought capital would be deployed most efficiently at smaller seed stage rounds considering the cost to build an internet business had come down drastically.

Investing Strategy

Howard states the most successful angel investors are the ones who can place many small bets, increasing the possibility of hitting a home run.  He also says it is important to be able to participate in follow on rounds so as not to get “crammed down”.  First Round Capital makes 20-25 investments a year with an average size of $500k.  They follow on when milestones are met.

Investor Involvement

Initially they are very hands on, this is baby nurse mode.  Hopefully after twelve months a Series A round can be raised and the new VC’s will share nurturing duties.  At this point First Round will still be involved but step back to a more passive baby sitter role.

First Round Capital’s Tools, Techniques, Processes

First Round Capital invests heavily in its own infrastructure to help add value to the portfolio companies.  They did not take salaries during the first two years and invested more money in the firm than they received from management fees.  They have sixteen people on staff.

  • CEO Network – CEO’s from the portfolio companies are introduced to each other.  This becomes a support group and allows them to help each other succeed.
  • The Exchange Fund – This allows the entrepreneurs to diversify their founders stock into other portfolio companies stock.
  • CEO Summit – Two people are invited from each company to attend an event with big name speaking guests.  These speakers help coach CEO’s on important executive decisions.  It is also a good opportunity for CEO’s to mingle with VC’s who might lead future rounds of fundraising.
  • SecondRound.com – This is a proprietary CRM system that was built to help manage the fundraising process.  A portfolio company looking to raise another round of capital can use this tool to research and connect with VC’s.  It also helps First Round Capital track communications and helps them introduce the CEO to the desired VC’s.

The Biggest Deal That Got Away?

Howard answers Twitter and Zynga.  First Round was an investor in the podcasting company Odeo before they made their pivot to Twitter.  Odeo returned investment funds back to their investors when they decided to create Twitter.  Twitter wanted to raise money for this new venture at a pre-money valuation which was quite a bit higher than First Round’s $10 million limit.  First Round Capital’s pre-money range is usually between $3-5 million.  The same limit also kept them from investing in Zynga.  They have since made a few exceptions but not many.

How do people get access to First Round Capital?

Office Hours – Two or three partners post a sign-up sheet to meet with entrepreneurs.  These partners travel to a city and take ten minute pitches from the entrepreneurs.  A few deals have been funded through this program.

It is possible to submit a plan through email but it is not the best approach.  A better approach is to get a warm introduction through a lawyer, VC, or entrepreneur.  First Round Capital receives about 2500 submissions each year.  From those, 1000 get a quick no because it’s not the right fit.  The next 1500 get a 10-15 minute phone call to decide if it is worth following up on.  Then 500 of those get a one hour meeting.  100 get serious due diligence where the entrepreneur meets with several people from the firm.  Ultimately, only 25 will be chosen.

How to get from first meeting to second meeting?

Personal qualities are the first filter:  integrity, intelligence, and not too dogmatic. Then they consider if it is a big enough market.

Is a completed product necessary to get funding?

No.  But Howard comments wire frames or some progress toward a product should be achievable given how inexpensive it is to produce.  Mark comments on the importance of being able to ship product.  Howard agrees and cites a quote from Stephen Sondheim “Having just the vision is no solution, everything depends on execution.”    He contrasts incremental improvement against postponed perfection and states the importance of execution and the ability to ship product.  He says many people often have similar plans but the best execution wins out.

What are the most common mistakes in first pitch?

To say something that is not credible.  Howard gives an example of an entrepreneur wildly overstating a market size.  Chemistry with the entrepreneur is also important considering you will be working together for the next few years.

What is ideal board structure?

For a company that raises a seed round of capital a three person board that includes the CEO, Investor, and an Independent member is fine.  After raising the next round two more seats can be filled.

How to run a board meeting?

  • Highlights/Lowlights – summary of key events since the last meeting
  • Financials versus Budget – waterfall charts are a good illustration of how management is adjusting the budgets
  • Management should communicate how the board can help – strategy, markets, key hires, introductions.
  • Executive session – a meeting without management to discuss performance and how to help.


  • http://www.alearningaday.com Rohan Rajiv

    Neat summary. Thanks Mark.

  • http://twitter.com/ManAtWorkBlog Man At Work

    Hey Mark,

    Sounds like a really great organization. Would you ever introduce a reader to someone from First Round Capital?


  • http://postalpix.com Michael S

    This is great. Summary gets straight to the “meat and potatoes” I was looking for.

  • http://twitter.com/#!/Mr_RamV RamVaz

    Hi Mark. This Week In Venture Capital is must watch TV for me. I look forward to it every week; I learn something new every episode. It is a great example of how online video is giving consumers more choices than ever before. Thanks for including the live chat room in these great conversations.

    Howard Morgan’s accomplishments are extraordinary. There was a ton of knowledge dropped in this episode. I encourage everyone to watch the full interview.

    See you on the next episode.

    Ramin Vaziri

  • http://twitter.com/dpkilleen Daniel Killeen

    This is where venture capital is going – everyone’s money is green and it’s all about bringing more to the table. First Round helps great companies through the early stage with value-add services beyond a network and board representation. Fred Wilson from Union Square Ventures sums this up nicely – “I believe that VC is a service business and our customer is the entrepreneur.”

  • http://bothsidesofthetable.com msuster

    Best to find entrepreneurs to intro. They have so many great ones – can’t be that hard!

  • http://bothsidesofthetable.com msuster


  • http://technbiz.blogspot.com paramendra

    Your written summaries are very helpful.

  • Anonymous

    Mark, your summaries are good. Will refer to that later. To add on to the board meeting part, there is a very good guide made by an entrepreneur and a law firm. Check out my blog for more:

  • http://profiles.google.com/jeeshenlee Lee JeeShen

    Great insight for young entrepreneur. Looking forward more topics of such in the future.

  • http://twitter.com/wfjackson3 Willis F Jackson III

    I like the info about their funnel. It is good to know what you are going into, and makes the need for introductions that much clearer. If you only have a 1% statistical chance as it is, help yourself out with an introduction.

  • http://www.facebook.com/profile.php?id=689987025 Jebb Dykstra

    First Round Capital’s approach is quite impressive. Howard’s resume is even more impressive.

  • http://www.mealdrop.com Michael Zaro

    Thanks for opening up the industry even further with these interviews. They have been very insightful.
    The idea of diversifying throughout your portfolio brothers is awesome. Who else is doing this?

    We are considering colo-ing with some other fast growing startups in the area in sort of a band of brothers incubator. Any thoughts on something like this working there?

  • http://polidigital.org Joshen5252

    Excellent video. Very insightfull video on the VC world and First Round Capital.

    Thanks again!

  • http://polidigital.org Joshua Ansell-McKinnon

    Howard talks about start ups coming without finished products and getting funding. Is there any groups or incubators help match entrepreneurs with different skill sets to build products and get funding? Do start-ups get funding with ideas back by research and models (wire frames)?

  • Anonymous

    Simply great ! Simply principles like investing more in what’s producing and diversifying things at the same time. That’s what one can do if he / she does not rule the investment like Buffet