I enjoy learning about venture capital firms, and First Round Capital is one I kept tabs on. Its investments in Roblox and Uber were what originally sparked my interest in the firm a few years ago (see here and here). Josh Kopelman, founding partner, gave an interview recently in which he shared facts I didn’t know about First Round and explained some important concepts in VC.

Here are a few of my key takeaways from the interview:

• VC firms have grown from fewer than roughly 850 employing 1k–2k investors writing checks in 2004 to, today, over 10k funds employing over 20k investors writing checks.
• Venture firms, to attract larger pools of money into the VC asset class, are beginning to adopt the Blackstone asset management firm model. Blackstone is playing a scale game that focuses on cash-on-cash returns. Traditional venture capital has focused on alpha, which provides a superior internal rate of return (IRR, a measurement of compounding rate of return). Blackstone’s model is to provide higher cash dollar returns, as its dollars under management are massive, but lower-percentage returns that are steadier.
• The Venture Arrogance Score is a calculation Josh runs that looks at two things: how big the fund is and what percentage of a company the fund owns when the company exits. He said a hypothetical $7 billion venture fund that aims to own 10% of a company when it exits would need to capture roughly 50% of the dollars that venture capital realizes at exit during the three-year period when the fund is making investments. No firm has ever captured more than 10% of the total venture capital dollars realized from companies exiting.  He details the math in this section of the interview. He doesn’t say this, but assuming that a single firm can get 50% of the total exit value created by all founders in the U.S. when history says the very best get less than 10% is arrogant. The math doesn’t math on generating superior returns for massive venture funds.
• First Round aims to make 70 to 80 investments from each fund and own 12%–15% of a company initially. It targets 8%–9% ownership after dilution when a company exits. The firm takes Series A pro rata.
• First Round has been in business 20 years and made 90% of its profits in a 36-month period. VC makes its money by holding investments until the market is at the irrational disequilibrium or “extreme f*ing greed” part of the cycle. Bill Gurley agrees with this view (see here).
• A VC investor who started in 1980 and retired in 2000 made 17% of his profits in the first 17 years (1% per year). He made 83% of his profits in the last, 1997–2000 period.
• Multiple expansion in irrational disequilibrium and “extreme f*ing greed” is how VC returns are maximized.
• First Round is run like a company, not an investment firm. The firm has a CEO-type partner who doesn’t invest. He focuses on strategic planning, running experiments, iterating and learning, and offering products and services that add value to founders.
• First Round’s partners make their money from carry (profit sharing), not management fees.
• For the first seven years, First Round spent more on staff and products and services for founders than it took in from management fees. It invested ahead of planned growth. The partners had to contribute almost $8 million from their own pockets to fund the management company during this period.
• First Round still spends most of its management fees and has a staff of approximately 50 people.
• Value in venture capital firms is created by how they make decisions. Yet, many firms don’t capture their decision-making process so decisions can be analyzed and learned from later.
• Many venture capital firms are run poorly because founding investors don’t think of the firms as companies creating products or offering services to customers.
• First Round created a 36-question rubric that each investor answers before the partners discuss a potential investment. They want to capture each partner’s independent thinking before groupthink has a chance to creep in. This creates the fabric for debates about investments and game tapes to be reviewed later. Their goal is to capture the root of their investment decisions.

Those are my big takeaways from Josh’s interview, but he discusses a lot more. If you’re interested, check out the entire interview here.