Why is venture capital, the industry that funds innovation, so very un-innovative?

By Erin Griffith , written on February 7, 2013

From The News Desk

That's what Josh Kopelman thought when he was contemplating turning his angel investment hobby into an actual firm. And, having built four successful companies prior, he approached it the way a founder would approach a startup, rather than a managing partners approach to building a firm.

"If you look at the venture business, for an industry that funds innovation – it really doesn’t have that much," he said at PandoMonthly New York tonight. "There are many firms where I’d say their single greatest innovation over the last 20 years was raising carried interest from 20 percent to 30 percent."

So he built First Round Capital with the the idea of building a community between its portfolio companies, not the old-fashioned way of VC's holding all the knowledge and passing it individually to their portfolio companies. Sure, it's important to have partners that add value. "But wouldn’t it be amazing instead of having companies that operate as independent silos, you can build a community of entrepreneurs that share that knowledge with each other?,” he said

First Round Capital has developed an array of services to its portfolio companies. They include a Yelp for service providers. And a "HackPR" website that connects reporters working on stories with companies that can help them. And a venture concierge, which employs five Wharton MBAs to do market research for the companies. And a trusted message board employees at startups where they might be the only one in their role -- CTOs, etc -- to talk to people in the same role at other startups.

It's optional for portfolio companies. “We’re not sitting here trying to impose a level of service, you know, ‘I must impose a level of value today!" he said.

As Sarah wrote in December, it harkens back to Kleiner Perkins' "keiretsu" philosophy.

First Round has stayed away from a popular agency model, where firms have an in-house PR services, recruiting services, and design services available to their portfolio companies. It doesn't scale well, he said. The more investments you make, the more resources you need to provide. "If your firm is building a community, with every company you add you increase the value of the community," he said.

Not all of First Round's community-building services have worked. They tried an exchange fund that allows First Round portfolio companies to voluntarily invest in a tiny piece of each others' companies. There was too much friction with compliance and companies weren't really interested.

"We’re experimenting," Kopelman said. "There are things we do that work, and things we do that don’t."

To watch the interview in its entirety, click here.