Josh Kopelman, co-founder of First Round Capital, dissects the venture landscape with brutal clarity—from fund-size arrogance to founder alignment—and outlines a future where relevance, returns, and reinvention all collide. His philosophy is less about hype, more about rigor; less about status, more about strategy. In a sea of venture noise, he brings signal.
Key Takeaways
Venture has shifted from alpha to scale—many firms now chase AUM, not exceptional IRR.
Josh's "Venture Arrogance Score" questions if today's mega-funds can justify their slice of future exits.
Success in venture is increasingly about timing harvest cycles, not operating in equilibrium.
First Round's approach favors early-stage focus, high ownership, and radical internal rigor.
Duration risk is killing IRR—even great 4x funds can yield disappointing returns if they exit too late.
Relevance compounds access in venture—activity begets activity.
Long-term firm durability requires culture, analytics, and discipline—not just luck or capital.
First Round behaves like a product company—with strategy, sprints, R&D, and feedback loops.
LP expectations are misaligned with fund mechanics—time is the biggest risk.
AI may present a true margin-expanding shift—unlike previous "software multiples" illusions.
Venture’s Evolution: From Scarcity to Saturation
In 2004, there were ~850 funds. Today? Over 10,000. The number of active check writers has exploded from ~2,000 to 20,000+.
Institutional LPs once drove venture with high-IRR, long-term bets. Now, capital comes from diverse sources with lower return expectations.
The rise of mega-funds means more players are aiming for 2x outcomes, not 4x. That has shifted the game from performance to scale.
Josh points to the "Blackstoneification" of venture: prioritizing total cash over return percentages.
This has made VC friendlier for founders (more money available), but riskier for LPs (return compression).
Founders get options. But LPs may end up holding the bag if returns don't keep up with historical patterns.
Today’s environment favors allocators more than builders. And it rewards firm size over sharpness.
Venture may no longer be about finding the rare company—it’s about earning the rare return.
The Venture Arrogance Score: A Brutal Truth
Josh introduces the "Venture Arrogance Score"—a back-of-the-napkin way to evaluate fund logic.
Start with fund size (e.g., $7B). Assume they’ll own ~10% of each company.
That implies $70B in aggregate exit value is needed just to return capital. 4x that? $280B.
Given annual US venture exits average $180B (or far less recently), a single fund needing $90B/year in exit value is wildly ambitious.
No fund has repeatedly captured more than 10% of total exit value. The math just doesn’t add up for many mega-funds.
Founders, LPs, and even GPs rarely ask: what percent of the total pie do we need to capture to make this model viable?
The conclusion: many fund models are structurally flawed—and only make sense if exit markets explode or expectations fall.
It's not about optimism—it’s about arithmetic. And most funds aren’t running the numbers out loud.
Returns Are Made in the Madness—Not the Median
Venture doesn’t thrive in equilibrium. Josh notes that 90% of First Round’s returns came in just 36 months.
Historically, VCs make most of their profits during irrational cycles—not stable ones.
Example: In the 1997–2000 bubble, 83% of one fund’s lifetime returns came in the final three years.
If you exited early due to fear of irrationality, you forfeited the lion’s share of your upside.
The hardest skill? Holding. Staying in the game during frothy irrational peaks.
Secondary markets help—offering partial liquidity while holding core exposure.
IRR is crushed by long durations. A 4x fund returning over 18 years might yield just 11% IRR.
Time isn’t neutral. It’s corrosive to capital if not managed deliberately.
Great funds don’t just pick well—they exit well. Timing is the final edge.
Relevance Compounds—And Shapes Who Wins
In venture, relevance isn’t vanity—it drives access. The more visible you are, the more deals flow your way.
Founders care who can help them. The VC with the loudest signal often wins—even if they don’t have the best returns.
Activity begets activity. The "hot hand" fallacy in sports is true in VC. Just making visible moves creates momentum.
The system rewards motion, not accuracy. And perception of value often outweighs actual value in deal flow.
Josh warns this creates distortions. Funds with subpar returns may still dominate visibility—and therefore access.
True durability comes from marrying relevance with substance—not just riding hype.
You don’t win by being first. You win by being remembered—and requested.
The next generation of firms will be built on attention, but survive on trust.
Why First Round Stays Small—and Focused
While others chase scale, First Round sticks to its roots: seed-stage, early ownership, and long-term alignment.
They do ~70–80 seed deals per fund cycle, aiming for 8–9% ownership on exit.
Their focus is the “Imagine If” stage—where founders are still forming the core idea, not optimizing for growth.
They invest over ~3 years per fund for time diversification.
Reserves are used carefully—following on only when alignment and support are intact.
Growth-stage participation is limited to preserve founder trust and avoid internal conflict.
They’ve passed on expansion opportunities, even when they had portfolio winners and LP demand.
Staying small isn’t a constraint—it’s a choice. Clarity of strategy trumps access to capital.
Running a VC Firm Like a Company
First Round doesn’t operate like a traditional VC. They run like a startup—with sprints, product roadmaps, and internal innovation.
Brett Berson, a non-investing partner, acts as a CEO-equivalent for operations, R&D, platform services.
They log every investment decision in a structured format—36 questions scored before discussion.
Internal debates focus on disagreement, not consensus. The firm looks for where partners see differently, not where they align.
They treat decision-making as a product. Feedback loops, retrospective analysis, and historical audit trails are core.
This structure allows them to improve fund over fund—not just rely on partner intuition.
They iterate on pitch processes, founder onboarding, even internal meetings—like shipping code, not stories.
The firm is a lab. Every process is tested. Nothing is sacred.
What the Next Decade Asks of Venture
Software eating the world didn’t always deliver margin superiority—it delivered growth, but often with traditional unit economics.
Many sectors funded at software multiples (e.g., shoes, salads, banks) may revert to industry norms.
AI, however, might be different. It could bring both superior margins and societal transformation.
Josh remains an AI bull—seeing it reshape healthcare, education, productivity.
Yet First Round still invests in people and problems—not solutions or trends.
The firm aspires to evolve continuously—like a company—not just crank out funds like an 80s band touring on old hits.
Founders should pick partners aligned on time horizon, risk appetite, and decision frameworks—not just capital.
Venture, at its best, is not capital allocation. It’s belief in motion. And belief, when structured right, scales.
