First Round Capital's Chris Fralic On The Billion Dollar Exit

The last time AdExchanger spoke with First Round Capital partner Chris Fralic in May 2011, Fralic indicated that “hot deals” were getting done faster and valuations were skyrocketing. He warned, “The negatives to be on the lookout for are down rounds as things cool off – it’s not fun…”

As the innovation of ad technology depends, in part, of the funds flowing from venture capital firms, AdExchanger caught up with Fralic by email recently to get his lay of the ad tech landscape today and the investment industry at-large.

Fralic says First Round remains “aggressive” when it comes to ad tech.

AdExchanger: “The Billion Dollar Exit” – Some VC talk about the importance of their investments aiming for billion dollar exits. Yet, in 2010, Invite Media – an FRC investment – sold for less than $100 million. What’s FRC’s view on the billion dollar “home run”?

CHRIS FRALIC: There’s been a lot of discussion about VC fund size and returns – most agree on a negative correlation though others don’t, but the real issue is often the difference between company math and VC math.

We invest out of a fund size that we think aligns us with both the companies we invest in as well as our investors, and we’re investing at the earliest stages where valuations tend to be lowest. When we make an investment, we’re still trying to be part of companies that can win big markets and can have a global impact. But if it turns out the opportunity isn’t as large as we thought, or an entrepreneur makes the choice that an exit is the right decision at that time, we’re still able to support the entrepreneur and are still aligned with them. We encourage the entrepreneur to keep that “optionality,” so it’s not just a moon shot to billions or bust.

At the same time we’re pleased to have been investors in some companies that have reached that magical billion dollar threshold like Bazaarvoice and via the CoTweet acquisition, ExactTarget, and we expect others in our portfolio to get there too.

Is new ad technology investment of interest to First Round? If so, what are some areas of interest?

We’ve been very happy with our investments in ad technology and believe we’re one of the most active investors in the sector. I think Terry Kawaja would agree that we have most of the LUMAscape buckets covered. We were investors in one of the original DSP’s with Invite Media and one of the original DMP’s/Audience Management platforms Demdex, who both had exits. Other trends and companies we continue to be excited about include ad infrastructure platform Appnexus, social advertising companies like 33Across and Adaptly, companies redefining engagement like Solve Media, or making email real-time like LiveIntent, mobile insight and advertising powerhouse Flurry, and many others.

But as my friend Ed Zimmerman of Lowenstein Sandler puts it, there’s a bit of a “constipation” problem with ad tech – too many companies funded and but a relative “dearth of exits.” Google continues to systematically buy or build every major area of the ad technology stack, which forces companies to adapt and innovate or to be marginalized and sidelined.

I’m personally really interested in how content and advertising are smashing together, and how the lines of paid, earned and owned media are blurring. I think social and mobile will continue to have massive impact on ad tech. I think we still underestimate the mobile opportunity, and ultimately it will perform better than display and be evenbigger. I like to remind myself of how to properly think about the importance of mobile on everything by re-reading this post from MG Siegler.

What is the investment thesis for FRC overall today?

We really don’t have an investment thesis, however there are core characteristics that tend to run through the companies we invest in. One of them is the stage we invest in, and we’re of the belief that even the biggest companies on the planet start small. Seed stage is all we do, it’s what we love and know best – and we’ve done it over 200 times so far.

The internet/cloud is a core component for sure, and we don’t do biotech, green tech or life sciences for example. We invest in what we know and where we think our network and community add value, and that’s meant a focus on things like Ad Tech, Fintech, Consumer/eCommerce, and SaaS/Enterprise companies. Historically we’ve focused on companies that are at least initially capital efficient – and while they might be capital intensive over their lives, they can prove a lot with a relatively small amount of capital up front.

What changes are you seeing with entrepreneurs these days as opposed to a few years ago?

Entrepreneurs today have a lot of resources at their disposal – from offline communities and mentors to online services like as AngelList for fundraising and Kickstarter to gauge consumer demand. It’s an entrepreneurs market – and that’s a good thing. Entrepreneurs are becomingly increasing active in verticals such as healthcare and even hardware as costs of starting those companies continue to decrease. The proliferation of angel investors makes fundraising easier than before but also increases the challenge of choosing the right investors and partners for the entrepreneur. The fact that great investors and entrepreneurs are blogging and sharing and opening up about what they do and how and why – that’s extremely helpful to today’s entrepreneurs.

The other change is place – Silicon Valley is still and will likely remain the most important single tech hub in the world, but it’s certainly not the only option if you want to be a tech entrepreneur. Great ideas and companies and people can start anywhere, and I’m partial to the amazing growth and vitality and spirit of the New York City tech scene over the last few years – there’s no other market I’d rather be in.

Some entrepreneurs treat their pitch deck to VC like they’re creating a “Rembrandt”. When you’re being pitched for investment – how much does a visual presentation (i.e. Powerpoint) matter? Any tips on what works? (10 slides or less etc.)

The answer for me is a 10 page slide deck, and for an excellent reference I saw this great post by Ryan Spoon on how to create an early stage pitch deck. It contains really good advice, and while you don’t have to follow it exactly, I’d say it’s directionally dead-on for early stage investors like First Round. Here’s another format I liked from a UK startup pitch event.

If there’s a product or site to demo, that’s great, and get to it quickly. Talk about your team and why you’re the ones to solve this problem early in the conversation. Don’t be afraid to say “I don’t know” if you don’t know something. Spend time learning about the investor in advance – just like the investor should do with you before the meeting.

It might be helpful to add some things NOT to do. Don’t use the standard boilerplate form that’s two pages, all text, with all your bankers and lawyers and advisors listed in a vertical box on the left side – it doesn’t represent you uniquely or very well, and it looks a newsletter from the 1990s. The other thing to NOT do is send your 50 page double-spaced business plan with 10 year projections – at least not for the first meeting.

Seth Godin is rightwhen he says no one ever bought anything in an elevator, HOWEVER you should be able to give a compelling Twitter size description of what you do. Lead with that, talk about the market and the problems you solve for customers and your team. I’m still amazed at the number of pitches where I’m 5 slides and 15 minutes into it and I’m still not sure what the company does.

Follow Chris Fralic (@chrisFRC), First Round Capital (@firstround) and AdExchanger.com (@adexchanger) on Twitter.

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