Moving On: Generational Change at First Round

By Howard Morgan

When Josh Kopelman — one of the best partners anyone could ever have — first suggested the idea of starting a new fund together in 2004, it was not top of mind for me. I’d already started a fund and had been angel investing for years. There was no impetus for me to do it, except for one thing: the desire to create something new to the industry — a VC firm that would operate like a startup itself and always focus on companies at the earliest stage.

Transitions have a way of drawing the mind back to these pivotal moments. As we recently announced, I’ll be stepping down as an investment partner at First Round with the start of our new fund, FRC VI, in January or February. It’s a change that has been planned — no joke — since the very beginning. There’s a reason why we didn’t call it Kopelman/Morgan Ventures. We wanted to shake up a space that hadn’t budged since I started investing in 1982. And we wanted this commitment to invention to persist long after we exited the game.

That’s why getting generational transition right is so important to us. And in our usual spirit of sharing how we think about the role and responsibility of VC, I wanted to write about the thinking that’s gone into my departure and what we’ve learned.

In my 35 years in the business, I’ve seen many firms falter after their founding partners leave. It’s one of the hardest problems any venture firm faces. Unsurprisingly, it’s why many avoid it as long as possible. But the economics of a fund work against this plan. New partners means giving more people economics — and that has to come from somewhere. This is why some fall into the trap of raising larger and larger funds, something Josh and I were adamantly against.

Growing your fund size almost inevitably leads to style drift. You might have begun as a seed stage fund doing $500K investments, but suddenly you’re triple the size and partners can only manage so many opportunities. Soon, you’re feeling pressure to put $2–3 million into each new investment, and your early-stage fund becomes a Series A fund. This demands different skills (some you may not have on the team), different analysis, a different approach than you set out to take.

There’s a right way and a wrong way to sidestep this trap. Either no one leaves and carry gets too small to motivate a new partner, or someone has to leave to make room. Fortunately, I’ve been looking forward to getting back to angel investing and spending time with my family for a while. But I also like the thought that my well-timed departure is helping us hold on to our character and a community that has made a difference for hundreds of entrepreneurs.

We’ve been transmitting knowledge and culture to the next generation of partners — perhaps the biggest hurdle — for years. And we do have some advantage in this. Our startups have so much contact with First Round the company — our extensive Platform Team and the other partners — that our relationships are sturdy and multilateral.

During onboarding, every founding team is heartily welcomed by our entire partnership and introduced to the wide array of services Platform provides (from events to advising to internal software). Over the next several years, they’re invited to CEO and CTO Summits, Salons, and other experiences where they have access to all of the partners and our wide-ranging network. Together, all of these efforts buffer the impact of a transition like mine. The entrepreneurs I’ve worked with know First Round well, what to expect, and how to continue to get value from us.

The other key stumbling block when changing partners comes when raising the next fund. Again, First Round sits in a unique position with the LPs we’ve been fortunate to work with. Our investor base is incredibly stable, and we pride ourselves on being the most informative and transparent partners in their portfolio. To ease my transition, we involved our newest partner, Brett Berson, in our latest fundraise — prior to him assuming the title. Our LPs got to know him, and it gave us an opening to talk about why we chose to bring him into the fold.

I’m incredibly proud of the firm I’ve helped build — of the change we’ve successfully brought to venture and our resilience as we, ourselves, evolve. I’m confident that my partners will go on to have more success and continue to innovate over time. Now we have a template for adding great talent every few years while allowing others to move on to new adventures.

It’s also important to note, I’m not going cold turkey. Just as many law firms have an “of counsel” position, allowing them to call upon retiring partners as need be, I’ll keep my office at First Round NYC, continue to work with some of my early investments, and remain on hand to answer questions that will most certainly come up. It’s a testament to First Round that it’s such a hard place to leave.