A few days ago, I shared an interview of First Round Capital Board Partner Chris Fralic regarding the firm’s thinking when it made an early-stage investment in Roblox, an online gaming and game-creation platform. Fralic mentioned that Roblox was one of the firm’s best investments ever. That caught my attention and made me wonder just how good of an investment it was. So, I did a little digging.

Roblox went public via direct listing in March 2021. Its market capitalization (i.e., valuation) was ~$35.5 billion when it began trading on the first day and ~$38 billion when trading closed for the day. According to Roblox’s S-1 filing (page 172), First Round owned 6.8% of Roblox when the company filed to go public. The S-1 filing also shows that First Round registered zero Class A common shares in the direct listing (page 172), which I assume means that it planned to sell its entire position. Assuming that First Round sold at or around the $35.5 billion market cap at which shares began trading on the first day, its position was worth approximately $2.41 billion.

The S-1 filing also shows that First Round made the Roblox investment via a single entity, “First Round Capital II, L.P.” (page 172), which likely means the firm invested into Roblox out of its Fund II. Note: When companies go public, you often see venture capital firms have spread investments across several entities, which makes it harder, if not impossible, to calculate the firm’s return. For example, the S-1 lists Altos Ventures as an investor owning 23.6%, but according to a footnote, its ownership is spread across numerous entities (page 172).

I did some digging on First Round’s Fund II. It was reportedly of 2008 vintage (i.e., that was the year it was raised) and totaled $125 million raised from limited partners (LPs).

When VC firms pitch LPs to invest in a fund, they usually communicate a 10-year life cycle to the LPs. This means that VC firm general partners plan to deploy the capital raised from LPs into start-ups, exit those investments, and return proceeds to LPs all within a 10-year period. That’s the plan, but things don’t always go as planned.

At the time of Roblox’s direct listing in March 2021, First Round’s Fund II may have been three or so years past the 10-year fund life cycle. It makes sense that the firm would liquidate the entire position when Roblox went public so it could realize and distribute the gains from the Roblox investment to LPs and start winding down the Fund II entity (assuming that no other active investments remained).

It’s hard to know the exact return on this investment, but I made some guesses at the fund level. If this direct listing resulted in about $2.41 billion being returned to the fund, that means the direct listing alone returned about 19.2x the entire $125 million fund. That’s astonishing when you consider that a stellar return for a seed fund is in the 3x–5x range. It’s even more astonishing when you consider that this estimated 19.2x return doesn’t include cash received from selling Roblox shares in the years leading up to the direct listing (which Fralic confirmed the firm also did) or returns from other companies that Fund II invested in (Uber appears to also have been a Fund II investment (page 266)).

It’s easy to see why Fralic says Roblox was one of First Round’s best investments.

I’ve been using a particular software tool for several years. I pay an annual rate based on the number of seats (i.e., licenses) I need and pay the full amount once a year. At renewal time, the price has always been the same as on the original contract I signed, and I’ve happily renewed for another year of the service.

I recently received a renewal notice, and it included a cost increase. It points to a clause in our agreement that gives the company the option to automatically increase pricing annually. I’m fine with the increase, but I became curious. Why enforce this clause this year after not enforcing it in past years?

A SaaS entrepreneur I talked to had a hypothesis. During the last few years, the company grew quickly. Its product is quite good and has been popular. (I personally referred a few companies to it.) It probably added new customers easily. The entrepreneur believes the company’s revenue growth from new customers was so impressive that it didn’t need to enforce the contractual price increase (or didn’t think to).

 Now, in 2023, it’s a different story. The product is still good, but many of the technology companies it sells to have cut employee headcount and budgets. He suspects this led to a material reduction in the number of seats companies renewed for and that, in some cases, companies declined to renew their contract at all. The company likely wants to show revenue growth (or mitigate revenue decline as much as possible), so that’s why it’s exercising the contractual price increase option.

It’s an interesting hypothesis. I have a call scheduled with the company to discuss my contract. I’ll end up renewing, but I’m going to ask if that hypothesis is true.

A few days ago, I shared that Bessemer Venture Partners posts the deal memos of some of their most successful investments online. Along the same lines, I recently found an interview in which First Round Capital Board Partner Chris Fralic talked about the firm's thinking when it invested in Roblox. First Round Capital is a seed-stage venture capital firm and often writes the first institutional check into a company. Roblox is an online gaming and game-creation platform. Per Fralic, Roblox was one of the firm’s best-performing investments. 

A few interesting takeaways from the interview:

• In early 2009, First Round passed because the $10 million valuation was too high
• Chris watched his son and his son’s friends spend increasingly more time on Roblox throughout 2009
• Chris maintained a relationship with Roblox even though his firm had declined to invest
• Six months after declining to invest, the firm wrote a $500k check at a $14 million valuation
• In May 2011, the firm wrote a $3 million investment at a $40 million valuation
• Roblox was a company that was mostly substance, not hype, so it flew under the radar of many venture capital investors for many years
• First Round sold some of its shares along the way before Roblox went public
• First Round owned more than 5% when the company went public via direct listing in 2021

Roblox went public via direct listing in March 2021. Its market capitalization (i.e., valuation) was ~$35.5 billion when it began trading on the first day. According to Roblox’s S-1 filing (page 172), First Round owned 6.8% of Roblox when the company went public. Its position was worth ~$2.41 billion when shares began trading.

It was interesting to hear a VC firm partner recap how he decided to invest at the seed stage of what ended up becoming a very large company.

For those interested in learning more, Chris did a great job of detailing his reflections, lessons learned, and more about First Round’s partnership with Roblox in this blog post too.

A few days ago I shared my big takeaway from an article about Andrew Bialecki, founder of Klaviyo: he bootstrapped his company at first and advises founders to raise the least amount of capital needed to get traction in the early days.

Andrew owned 38% of his company when it went public, which is a bigger share than you normally see. I usually consider 10% to 15% a big win for the founder.

Digging into Klaviyo’s early fundraising, I learned that the company was founded in 2012 and didn’t raise capital until 2015. In that three-year period, it surpassed $1 million in revenue and became profitable, per Forbes. The company then received a $1.5 million investment from Accomplice and a few angel investors, according to a press release.

Andrew’s advice about raising minimal capital early on sprang from his own experience in doing so, which likely was a material factor in his ability to maintain a large ownership stake. Andrew’s advice and his outcome are useful things for early-stage founders to consider when they’re thinking about their fundraising.

This is my one-hundred-eighty-second weekly reflection. Here are my takeaways from this week:

• Valuation – I spent time enhancing my investing framework. Valuation is part of that framework. Traditional valuation approaches don’t make sense for some business models or companies. Digging into the data, using common sense, and applying a valuation approach tailored to the situation more accurately captures their value. In fact, doing so can uncover value that others are overlooking (or don’t understand).
• IPOs – Arm Holdings, Instacart, and Klaviyo have completed their public offerings. Time will tell how receptive public markets are to these companies. Recently, I dug deeper into a few IPOs and the liquidity they generated for the early-stage venture capital firms that backed them.
• Solopreneurs – I chatted with a few solopreneurs recently. Anecdotally, more people are wanting control of their professional trajectory and their time and are considering solopreneurship.

Week one hundred eighty-two was another week of learning. Looking forward to next week!

I read an article about Andrew Bialecki, founder of Klaviyo. He started the company in 2012, and it went public this week. As of the writing of this post, the company has a market capitalization of $8.5 billion. Bialecki owns approximately 38% of the company— shares worth over $3 billion.

In the article, Bialecki gives a simple, but important, piece of advice: “My advice to founders: Raise as little as you need and prove some traction with customers. Once you do that, fundraising for the rest of your life gets a lot easier.”

Bialecki and his cofounder didn’t have venture backing when they started the company; they bootstrapped it. They focused on getting to profitability and then went out to raise capital after they had 1,000 customers and $1 million in revenue.

That approach put Bialecki and his cofounder in the driver’s seat with investors and ultimately led to their owning an outsize percentage of the company when it went public.

I like this advice and their approach. It drives founders to focus on building something customers will find value in and pay for—versus building something investors are interested in. If you create value for enough customers and they pay for it, investors will always get on board. But if you’ve had your eye on investors instead of customers, you may be disappointed.

A few months back, I shared that 2021 was a gargantuan year for IPOs, with 1,035 of them—the highest number I could find in the last quarter century. 

In 2022, we saw just a fraction of that number of IPOs, 181 to be exact. As of the writing of this post, we’ve had 114 IPOs in 2023, which means we’re tracking for fewer than in 2022.

A few weeks ago, I shared my thoughts on the draft S-1 filings by Instacart and Klaviyo in anticipation of going public (see here and here). This week, both companies held their IPOs (NASDAQ: CART and NYSE: KNYO). Both offerings are complete, and the companies are now trading on public stock exchanges.

I suspect that venture capital investors and founders of late-stage tech companies will closely watch how both companies perform in the public markets over the next few weeks. If their stock prices are flat to up, we could see an increase in the number of technology companies filing to go public and maybe even see more IPOs in 2023 than in 2022. If their stock prices fall materially, I wouldn’t be surprised if 2023 is another year of declining IPO activity as companies elect to wait for better conditions in early 2024.

For better or worse, these companies will likely have a material impact on upcoming IPO activity and technology investor sentiment.

When early-stage founders pitch investors, the process can be long and exhausting. They end up pitching countless investors in hopes of one or two saying yes. By employing a bit of scheduling strategy, they can improve their chances of getting a yes.

Great pitches are the result of practice. The more you pitch, the better you get. The more you pitch, the more you realize what isn’t resonating and adjust. The more unanticipated questions you get, the more you incorporate the answers into your deck (or an appendix). After countless reps, the pitch flows smoothly and you’re more confident. The chances of getting a yes are better.

Most founders aspire to have a particular investor on their cap table. Maybe it’s an angel investor or venture capital firm with industry expertise and relationships. When you pitch your first-choice investor, you want to put your best foot forward. You want them to be blown away by your pitch (or at least interested enough for another meeting).

Because practice leads to a great pitch, it may not make sense to schedule your preferred investor early in the fundraise process. If you do, they’ll get a pitch that still needs work. Instead, pitching the investor you really want to land after you’ve done more reps pitching other investors and fine-tuning the pitch can be a good idea.

Scheduling meetings with several investors is great, but you want to be thoughtful about when you reach out and schedule time with your first choice.

One thing I’ve noticed is lots of media reports about IPOs being priced at valuations below their most recent private fundraising round. Instacart is an example. A few founders and friends trying to make sense of this asked me about it. Why would you take a company public at a valuation materially below its valuation in your last VC fundraising round?

The answer can sometimes be related to needing to raise more capital but being unable to do so privately because of cap table complexity. I recently listened to Bill Gurley, a famous VC investor, articulate why IPOs can be the easiest way to raise capital when a company has a complex capitalization table.  

For anyone interested in understanding this topic better, Bill shares his thoughts in this clip and this one.

Today a friend sent me a link to an interview on a topic I’m interested in. I’d never have known about this interview if he hadn’t shared it. I listened to it, and it was terrific. I got lots of ideas from it and shared it with others. We ended up having a great text exchange about the interview.

Today was a reminder of the power of sharing links to interesting information. (I define “interesting” as being about a topic the recipient has expressed interest in.) It’s such a good way to build and maintain relationships. Essentially, it’s curation. Sifting through information, selecting the most value-added items, and presenting them to others gives them something of value and leaves a positive impression of you in their mind. It also saves them a massive amount of time. Said differently, it’s a simple way to offer value to others and stay top of mind with them.