There may be some misspelling as this transcript was typed in haste. Apologies.

What would it take to have First Round located in Philadelphia city as opposed to Conshohocken?

We picked Conshohocken as an accident and its proximity to my house.

So you live in Montgomery County?

I live in Montgomery County. MY sense is that I don’t think we’ve lost any deals in the city because we weren’t willing to travel there or the entrepreneur wasn’t willing to travel here. So for me it’s just about quality of life in terms of ability to get home for dinner, get back to the office and go back and forth. You know we work on two time zones: the east coast and the west coast. If it was further away I might not be as productive.

So it’s just a convenience issue?

It’s a selfish convenience issue. When I was starting Half.com and we looked at starting in the city and we were turned off by the gross revenue tax.

Usually when I ask that question people mention taxes.

I don’t feel like we are losing anything by not being in the city in terms of deal flow and access to entrepreneurs. And I think I’d lose something in terms of personal lifestyle and the tax issue on top of that.

Another question in that vein, one of the recent things for TP is that we are trying to do is better cover the VC community here in Philly. One of the things I wanted to ask you is: Do VC identify with the city they are based in or are they inherently nationally minded and they just happen to be…

*Phone rings*

So I think are you asking do VC invest locally or nationally?

Well I was at that Good Company Ventures panel this week and a lot of people said “I’ll invest if its profitable and the rest will figure itself out”

I think ever venture fund has different approaches. Most venture capitalists invest in areas that they know exceptionally well or have a real advantage in. That’s why we won’t touch a clean tech deal. Or a life sciences a deal. Not because it won’t make money but because we don’t know what will make money, we don’t know that space. So we chose to focus on internet-enabled businesses for consumer and enterprise. And well inverts in early stage startups in that space. There are other people that say, “We have really great networks in Philadelphia or the Northeast corridor and that’s where we are going to invest.” I think every venture fund has different criteria for what they are looking for. Most Venture funds invest in companies because they can add value more than cash to the investment. If that’s the case the best way they can add value is being in close proximity to the entrepreneurs they interact with. To interact with that entrepreneur and the ability to recruit, hire, and network their relationships to do that. So that’s why most venture firms sort of do have a preference to invest closer to their office.

Is that the struggle for First Round? Because now there’s a Philadelphia, San Francisco and New York office and there’s four? of you?

There’s four managing partners and three principles and so we have a total now of eight investing professionals. We have networks in all of those areas. I might actually argue that while I have a strong network in Philly, my network is Silicon Valley is just as strong if not stronger. So when I’m trying to help an entrepreneur on the West Coast I feel like I can be extremely helpful in terms of recruiting and strategy. And I’m out west enough that the proximity challenge isn’t insurmountable. So we’ve had to invest to do that. We’ve had to build an office in New York, we’ve had to build an office in the valley and we’ve had to build a team in all of those areas and build a footprint. We view ourselves as four partners that just happen to be working out of whatever office they are at right now.

It seems very fluid where each of you guys are.

We just upgraded our office so you can now pretty much see where we are. We added the stream, we are definitely drinking the Kool-Aid. We’ve found that it was a great way for entrepreneurs to come to the website to sort of know what we are doing and what we are thinking and what we are spending our time on. If entrepreneurs don’t understand the value of the stream they probably aren’t people we’d want to fund anyway.

When does the New York office open, by the way?

It opens in a week and half (from 4/16). It’s at 17th and Park ave right on top of Union Square. Right on top of the Barnes and Noble.

That has to be right next to Fred Wilson.

They are a little ways away they are not on the actual Union Square.

So you are more Union Square than Union Square?

I would not say that. Fred is the mayor of Union Square.

I can tell, I saw him speak at an event in New York once.

Another thing is, you went to Wharton, correct?

I grew up in New York and went to Penn and founded my first company here.

Infonautics?

Infonautics, yep. Back when I was junior and undergrad. By the time I graduated we had 17 or 18 employees here. While I might of wanted to move out of the area to New York or in the Valley you have 17 people in the company with mortgages and me without that pressured me to stay. Then I grew attached to the area, built networks and planted some roots here and started Half.com. And I got Turntide off the ground here and I’ve been here ever since.

That’s what I was thinking, you are almost the ideal Wharton grad for Philadelphia. You come from out of the area, you go to Wharton, and you contribute jobs to the local economy so I wonder many Wharton grads decide to stick around and why?

My path was more of the exception.

Why do you think that is?

Had I not started a company right out of school and not had any employees I don’t know if I would have stayed here. Let’s try to take a different metaphor. I’ve come to see Philadelphia as a place that has a lot great theaters. The Forrest theater, the Walnut Street Theater, The Prince, The Kimmel Center, The Mann center… So really great stages in this area. And there are 70 schools in this area one of the highest densities of schools out there. There are a lot of people at these schools that want to be actors or actresses.

I think I know where you are taking this.

And what I’ve seen though is that if you are a graduating student and are an actor or actress not one of them says I want to be king of the Forrest Theater. Not one of them has a goal of headlining at the Walnut Street. They move to Broadway. And that’s where the ecosystem that they play in is [established]. That’s where the scouts are, that’s where the agents are, that’s where the studios are, that’s where the labels are and that’s where the auditions are. To some degree it’s very hard to compete. Just like any other city saying I want to be the next Broadway or the next Hollywood, it’s very hard to compete with that sort of network effect with those other areas. I’d say that Philadelphia as a tech hub, there a definitely bright spots and it is getting brighter. The fact that Technically Philly exists and it didn’t 18 months ago is telling. You have Philly Startup Leaders and Indy Hall. There are a lot of groups. I think that’s wonderful and I think that’s improving the Philadelphia startup scene… but I think it’s still hard to compete with Hollywood.

What is interesting is that there is a little known music theater in Philadelphia called the Prince music theater. Which has a cabaret theater and its actually one of the best and most well known cabaret theaters in the country. If you’re a touring act you are going to hit the Prince music theater and they built a name for themselves focusing on a very specific niche. While I think it might be hard for Philadelphia to say, “We just want to be like Broadway” It might be interesting for Philadelphia to try to win a niche. Unfortunately is seems like the right place for that niche might be life sciences and pharma. It seems that’s where we have an advantage and that’s probably where Philly should be playing and that’s not where I can play or have any ability to play.

And that was my thought. If the people who are trying to make Philly a tech hub… maybe it’s an uphill battle, maybe its misguided or maybe we should just try and play to our strengths.

I’m a big believer in Philly. I’ve started several companies here that have been successful, I’ve invested in companies that have been successful and I’ve met lots of quality of entrepreneurs here. I would not want to discourage anyone from trying to improve on Philly’s tech scene. But I also don’t know if you need to compare.

New York has a great Chinatown, Philly has a strong Chinatown and they’re good Chinatowns. But stop trying to compete with China.

*laughs*

You know? You can be good for what you are without trying to …

It’s rat race otherwise.

Yep.

I get that. And you’ve mentioned that the bright spots which have emerged. As far as people in our audience, most of them have lived here since 2002, 2003. Not really part of that first generation of online startups like you were. So what have you’ve seen is the biggest difference from the CDNow and Half days versus now?

Back in the …. God I sound like an old timer.

“Back in the day”

Back in the Web 1.0 day, ICG was an active internet investor in the area, SafeGuard was much larger, you had vertical net, CDNow, Half.com and a large number of those tech companies here… there wasn’t the level of grassroots there is toad. It wasn’t as connected.

It was like silos?

Yeah. And that existed everywhere because the communication tools weren’t there.

That’s true, you weren’t tweeting your friends.

You weren’t tweeting, you weren’t facebook updating, and you weren’t blogging. So you what was the source of coverage? How did you learn about this stuff? Well, you learned from the Tech Council, from the Philadelphia Business Journal and the Inquirer and that was it. So I think what’s changed is that the level of communication and collaboration. Part of the challenge also is that one of the things… We’ve invested in almost every major tech market in the country so one of the things I’ve seen when we compare Philly is that we tend to think we have a really good startup generation right now. But for whatever reason, the past generation isn’t as engaged.

There’s not that institutional memory from the first round?

Yeah. What tends to happen in a lot of other ecosystems is, you know, companies get started and some of them succeed and then their alumni… go an start six new companies and those companies… even if companies fail they have people that are on their third and forth venture. For whatever reason, look I’m out of the startup game directly so I’m to blame as much as anyone else but I’m funding them so maybe I’m engaged to some degree, but I’m not starting them. But we are seeing a lot of first time entrepreneurs in the region, which is great. But this is the seed planting stage. You are going to see 100 of these entrepreneurs, ten of them might have some level of success and they might have management teams of five people so they are new entrepreneurs that will go out ant plant. It’s takes some time to move.

That’s like a 30-year effort, right?

Basically, you’re sitting here with your first generation of seed planting, whereas out west you have the redwood forest. By comparison you have generation after generation. Look: you have people that are leaving Facebook to start new companies

And the “Xooglers”

Yup. Even companies that fail…. there’s constant…. If I was to look at the Philly area, I’m excited by the prospect but I’m also realistic about where we are in the cycle. You need to have this crop and find the successful focus of this crop and bring on board the new folks and there’s a much better process of mentoring and engagement and sustainability that comes form that.

And to talk about business failures was one of the questions I wanted to ask. Whenever you look at your career arc you can kind of trace it from company to company. From Infonautics….

To Half and then Turntide, yup.

And then First Round and seems like this upward trajectory. But what is your greatest business failure?

Oh sure there are things… Look, no business that I started ended up looking like I thought it would. Every business plan I have ever written has been wrong. And yes Infonautics went public, but I think Infonautics represents so much opportunity that we let die on the vine. The company didn’t achieve great financial success for each of its investors. We learned some great, informative lessons that helped shape my other companies. Hopefully it made the companies I’ve founded or invested in more successful as a result of those lessons.

Was there any business you started that didn’t have an exit?

You’re not talking about the lemonade stands I did as a kid? *laughs* I’ve been extremely fortunate. They’ve all had ups and downs along the way. And they all had points in time where I didn’t think it would work and where it did.

Going through that path yourself, when you look at a company to invest, are you looking in qualities that you and you cofounders had in the people you are investing in? Do you look at people as say “I remember when I was like this?”

I don’t think you look for clones of yourself, and I have blind spots that I was fortunate enough to have people around the table, co-founders or team members, that were able to help me. So I’m looking for clones of myself. Are there some characteristics that I look for in entrepreneurs? Sure. Do I have all of them? No.

What are those characteristics?

For a startup, I like to fund a heat-seeking missile.

Like a really precisely targeted company?

It used to be that, 30 years ago you had to aim it. From the moment you launched it, you press go and you have no ability to change the course of that missile one you launched it. There are plenty of entrepreneurs that right a business plan and it either hits or it doesn’t. But the heat-seeking missiles are a modern invention that you launch and it adjusts and looks for the heat signature it looks for the target. And if the target is moving it changes. It can start off heading north and then head west or south. As I said earlier if every business plan is wrong I’d much rather find an entrepreneur who is a heat-sinking missile. It has a hypothesis, it has a theory and they are out there trying to achieve some milestones and get business. But also has a pretty good radar to say, “Hey am I aiming for the right thing? Do I need to pivot? Do I need to adjust?” One of the key attributes is…

That flexibility.

That flexibility. You have some entrepreneurs that work on something for six years, that their life calling is to do X. On one hand they are really passionate and they will run through walls to make X happen. IT turns out that during the first six to twelve months you find out that there is a better business doing Y and those guys have a life-calling to do X. Are they in business to be successful or are they in business to be successful doing a specific thing?

I would argue that First Round works in that capacity. Small investments, especially historically when people would put millions of dollars into a company…

We did this to be institutional angels. I’ve been doing angel investing for some time and I saw a lot of value in venture money and raising venture money. And we saw a tremendous benefit from raising seed capital first. You know, we’re evolving, we’re a startup. We’re adjusting out heat signature like a missile.

Does First Round have certain high regard for any big wins? I can imagine Mint being a big thing for First Round.

It’s also bittersweet. You know, I’m a huge fan of what they are doing and the opportunity there and I think it was a great exit for us and a great exit for Aaron, I’m not complaining. But there also the question of could have been even bigger?

It’s almost like no exit is going to be completely satisfactory, right? Because you will always see that missed potential. A dollar sense you can say “this is successful I got X return” but it sounds like you always have that nagging feeling.

There’s always that question. Look, there are plenty of companies that turn down opportunities that you wish you could go back. It’s rare that it lines up so that there is no hindsight one way of they other.

Is that frustrating for you?

It’s just part of the game. It’s not a major complaint. If every company in my portfolio had a Mint outcome I would be very very happy.

I was telling my friend, a Philadelphia public school teach who doesn’t know anything about tech, about this interview and he asked who and I said “This guy Josh who founded Half.com” and he said “I used to use Half.com for all the time” and he also said “Why is that guy working still?” And I thought about it and said, “You would have to ask him.” So that’s my question. Josh, the Philadelphia schoolteacher wanted to know.

I love what I do. I’m a really fortunate guy and I have the ability to sort of do what I love doing. Which is helping create companies that can change the way we do things. I think it is nothing more complex than that.

Just the satisfaction aspect?

There are plenty of people who have been successful. If you were a Goldman-Sachs partner for two years, you don’t have to work. If you look at any actor or actress that has had any success, they don’t have to work. Many entrepreneurs start multiple companies. I often find that entrepreneurs start companies, laser-focused on doing this… look everyone has an economic interest and I don’t think you should hide it…. but if people start companies just for the economics interest and not the personal fulfillment, joy and satisfaction they get out of doing it they probably wont be as successful as people who really enjoy what they do. And I’m just blessed to work in a space where I spend my time doing what I enjoy doing.

There was a really detailed interview about the guy who founded PayPal Max…

Max Levchin.

And now he’s doing Slide and they as him “You just sold PayPal for $1.5 billion, why are you doing this?” and his response was something like “I can’t just sit around”

It’s selfish I do it because I enjoy

But not he bigger level it’s not. Between First Round and Half… Half by itself probably saved me $400 in college so thanks.

*laughs* That’s awesome.

The last question I’ll ask: As a VC… what new trends and things are popping up that gets you excited?

At the macrolevel?

At the macrolevel.

At the macrolevel I think there is a massive disruption that’s occurring.

In what way?

I think the concept of the cloud and everything moving to the cloud is big.

Today’s a good example of that.

Whether it’s your email, whether it’s your word processor, whether it’s your accounting software, whether it’s your database, whether it’s your expense reporting tools…. You combine that with the trend in mobile, that you are pretty much carrying around a full featured computer in your pocket and its pretty transformative. Will desktops continue to exist or will they just be bluetooth enabled screens and keyboard that automatically present your data and environment with a combination of mobile and cloud? But we are ready focused on the cloud and software as a service we are very focused on mobile. I think geography and location-based services is really important. We funded a company called SimpleGeo.

I actually interview the founder for my other job last week. Matt?

Matt. Good guy. But I think they are doing some neat stuff there. I think that the concept of redefining the datasets that are available online and their accessibility online is a big trend. Sort of what we have been calling the implicit web. The fact that you see services like Swipely in our portfolio or Blippy.

Sort of the API-azation of our lives.

Yeah. When you think about it, it used to be that all your data was offline. But as more and more started happening online you left more and more digital breadcrumbs. Like myself: you want to know what TV shows I like? TiVo knows that, want music i like? Apple knows that. What movies I like? Netflix knows that. Where I eat? Open Table knows that. What concerts I go to? Ticketmaster knows that. You keep going though the things you do. What books I like? Amazon knows that. Where you spend your money? Your bank knows that. What websites I like? Delicious knows that. So historically all of that data has been in silos… Now once those silos open up APIs and you connect things to them and through them, I think that is really powerful and transformative.

I’m sure you saw SimpleGeo map of SXSW and I was fascinated by that.

It’s just a little taste of what you can do when you can cross the silos. The datasets that were owned by one thing you can now make available.