How Josh Kopelman Redefined Venture Capital—and What the Next Decade Demands

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.