Part 3 in this series focuses on Charlie’s upcoming launch of the New York chapter of The Open Angel Forum and gives a key piece of advice to anyone thinking about starting a company.

Sean: Tell me a little bit about the [Open] Angle Forum I know you’re bringing it to New York soon so interesting to hear about it.

Charlie: So the Open Angel Forum that started a few months ago. I actually posted something a little before Jason [Calacanis], but Jason kind of has this much bigger megaphone than I do. So I think there are a lot of folks that basically make money-brokering introductions between startups and angel investors, which isn’t necessarily a bad thing I just don’t think it needs to exist. I think this is something that the community should be able to get together and do, you know, on its own without necessarily charging the entrepreneur, who by the way has the shallowest pocket out of the whole bunch. And so I think we realized that…and at the same time these weren’t necessarily the folks who had the best connections to angels and sort of financing too, you know. I don’t necessarily get my best deals by going to a conference where somebody paid a thousand dollars to go. In fact, I don’t necessarily want to find an entrepreneur who decided it was a good use of their own personal capital to spend a thousand dollars to get to me. I’m pretty accessible, and I think most investors generally are. We may have overstuffed inboxes that may take a couple times to get through, but we’re paid to find good deals and we have to look at a lot of deals. So, you know, the open angel forum basically, you know, it’s set up a as a dinner, you know really sort of relaxed, sort of intimate setting, smaller. We’ll take six or seven companies and, you know, introduce them to about a dozen angels. We’ll have some sponsors there, you know, who basically, you know, pay for the whole thing. But a much better way, I think, to interact in a small setting basis, and this is something we hope to do, you know, a couple times a year. I think the day is April 8^th. I should know that off the top of my head we just moved it. But we’ll take applications up until about, I think a week or two beforehand. So I think it’s definitely worth applying if you’re going through angel financing, and so far it’s been a success. They’ve done it in L.A. and Boulder, and companies definitely have gotten financing from it.

Sean: The model is, so you have sponsors to help pay for the event but also the angel investors pay [to attend] as well?

Charlie: No

Sean: It’s the sponsors?

Charlie: Yea…so there’s you know whether it’s a lawyer or a recruiter or somebody, you know, along those lines, but no the angel investors don’t get charged either. So both sides that need and want to connect  [are] as seamlessly as possible, there’s no barriers to them necessarily participating.

Sean: So you posted a week ago in your blog, any takers yet?

Charlie: A bunch. Yea. No I very quickly looked at the spreadsheet and it was like very overwhelming. So, I know I don’t have to think about it, you know, until we sort of make the decisions later on. But there’s a lot of interested folks.

Sean: How do you pick?

Charlie: It’s tough, you know. I think one thing we definitely are counting on is a little bit of diversity. So there’s a couple folks that I talked to that I thought had interesting models that would make for a nice mix. You know we didn’t want necessarily six or ten people doing the same type of thing. I think, you know, different judges may have their criteria, but I would love to see somebody who had a really great idea, might not otherwise be as tapped in as some other folks to this community. You know, probably, maybe less likely to pick somebody who would have gotten to these people otherwise.

Sean: And can you say who the angels are?

Charlie: We’re still trying to figure that out actually. There’s a whole bunch of people, and in fact, I think one of the big questions is who’s an angel? Right? You know look at somebody like Rodger Aaronberg who [has starting his own fund], and will still make angel size investments. There’s a number of VCs who want to come who want to make angel size investments. And that’s, it’s kind of a tough call. I think, you know, a piece of feedback, and I’ve had a debate with a lot of folks about this, is you should try and get people whose main job and main routine it is to make these kinds of investments. Where you’re finding somebody who does this by exception, I think it’s tougher for you to get that kind of time. They’re not as used to dealing with companies at this sort of stage. So, you know, were looking for people who are active, can write checks. And that’s the worst part about some of these forums where you pay money. Half the people I know haven’t written a check in two years and the entrepreneur sort of feels like it’s a waste. So there are a bunch of active people in New York that will get invites, and will all be a matter of sort of scheduling.

Sean:  If you were to give some advice…so it sounds like we both agree New York’s a great place to start a company, plenty of money, plenty of customers here. You don’t need to be on the left coast. You don’t need to have a Stanford MBA or degree. Anything else you would suggest to someone thinking about starting a company?

Charlie: I think, really, one important thing to keep in mind is…I think VCs and angels are seen as people who take risk, and actually I think if you really want to get an investment taking as much risk off the table to think about…There’s a couple of things. I think you know we look at team, we look at product, and you know, you look at market. And product…you’re never gonna have all three of those things.  But, you know, if you have the most experienced team ever, a product that’s already in the market and getting traction, and a huge market, well that’s a real and concern, that’s a late stage investment. On an early stage for a seed you might have an unproved team, with an interesting product, and a big market.  And you sort of have to pick and choose, you know which, which missing piece you’re basically gonna have your bet on. The more of those pieces that are question marks the tougher it is to kind of get there. So if you know you’re missing key motors of your team and you don’t have the right product, but it’s a big market, you know, what can you do to take some of those pieces of risk off the table? Can you bootstrap your way to an interesting product? Can you validate the market with a customer, you know, a couple of customers who are willing to buy it or even invest in the product? You know, try to take as much risk off the table as possible, you know, I think is a key piece of advice.

Part 2 of my interview with Charlie focuses on why New York is a great place to start a company and talks about why the early stage funding gap in New York has largely been closed.

Sean: So change of focus a little bit, what do you think about, sort of, what I’m calling the reemergence of the internet startup scene in New York?

Charlie: Well I think it’s been reemerging for quite a while. I joined the scene, you know, back in sort of late 04’ early 05’ when I started working for Union Square ventures. And I was certainly guilty of growing up here in New York, being distracted by the sort of Wall Street world. I worked in an institutional finance, and didn’t really know there was a technology scene. And, you know, when I started working in venture the New York tech meet-up was thirty people in the back of Scott [Heiferman’s] offices. And now they can barely contain the 750 people that show up at FIT, you know, once a month. I think it’s phenomenal. I think it’s fantastic, because I think what’s nice is…I think a lot of the pieces have always been in place. You know access to customers, critical mass of technologists, and look they may not have all been working for startups but there was never any shortage of engineering or programming talent in New York. They were just working on real time trading applications at Goldman Sachs, which by the way is an interesting technical challenge. A lot of people I think knock the financial scene as something that is, you know, not as worthwhile. But if I’m a programmer, and I know that whatever I build is gonna be used by hundreds of thousands of traders a day that’s pretty cool actually. And I think startups need to realize that because technical people look for great challenges there’s never been a shortage of money in New York. It’s New York, you know. I think there is a reemergence of dedicated, early stage, knowledgeable money. Entrepreneurs who have done this before are coming back to make angel investments who can really add a lot of value. I think there’s certainly a bit of reemergence in the community. That you can be someone who doesn’t know a lot of startups, doesn’t have a lot of startup experience, and very quickly get ramped up in terms of who are the people to connect to, where to get your information from, you know where to do hiring. That sort of thing.

Sean: You wrote in your blog a year ago, and actually a couple days ago, that there was a huge gap in early stage financing. And you wrote a couple days ago about [The Open] Angel Forum, and how that gap is closed or solid. Do you really think it’s closed?

Charlie: I think so. I mean, I think in New York there’s a number of very smart sources to get early stage or angel money. And the interesting thing is if you polled the whole entrepreneurship scene, most people would probably disagree. But that’s because less than ten or five percent of all entrepreneurs pitching ever get financed at all right. So I think it’s very fascinating that, you know, poll a hundred entrepreneurs, people who say they have an entrepreneurial idea did you get money? If the systems works well the answer should be no, because frankly most ideas shouldn’t get financed. Or whether or not they are good or bad ideas may not be appropriate for third party financing. I think those people that have good ideas, have good experience, and have the means to execute on a business, don’t find it particularly difficult to raise financing here in New York. I think there are a lot more people, a lot more smart places to get money, a lot more places to go, and for the most part do a pretty good job of financing most of the good stuff here.

Sean: What do you think the best thing is about starting a company in New York?

Charlie: The best thing about starting a company in New York, I think, is living in New York. I mean this is a phenomenal place to live more than anything else. And I think, you know, your access to a really diverse set of people and diverse set of networks…I mean the power of your network I think increases with the diversity. If the only people that you know are other startup people the likelihood that your network , its sort of the power of lose connections, the likelihood that your network is really gonna help you out that much both from a feedback perspective and from an introduction perspective is probably pretty low. In New York, you know I just think of myself as having grown up here. I mean, I know folks that are in the finance industry from when I worked in, and the technology industry. I teach up at Fordham so I know a bunch of educational folks. I kayak, and so you know the potential useful connections that come to me, particularly from the feedback perspective. If you’re gonna be a direct to consumer play, you’re gonna struggle if the only feedback you’re getting is from your other tech friends who are all on twitter, and all blog, and you’re only sort of thinking one way about things. Secondarily, I love the community here. I think the community here is very open. I don’t… I think sometimes in other areas you might feel like if you didn’t work for certain companies or you don’t have a certain pedigree you’re sort of not on their radar. And I think New York has a very kind of blue-collar approach to, you know, building companies. I think as long as you work hard, and pay your dues, and show you’re [very] passionate about something people are very accepting of it. Were all kind of in this together, sort of help each other out.

Sean: You don’t need a Stanford degree?

Charlie: No definitely not. Definitely not. A Fordham degree, but no [not a Standford Degree].

Part 1 of my interview with Charlie O’Donnell above and below focuses on financing startups, pros and cons of incubators like TechStarts and YCombinator, and First Round’s own investment criteria.

Part 2 focuses on why New York is a great place to start a company and how the early stage funding gap in New York has largely been closed.

Part 3 focuses on Charlie’s upcoming launch of the New York chapter of The Open Angel Forum, and First Round’s most recent investment in Backupify

Transcript: Charlie O’Donnell Interview Part 1 of 3:

Sean: We’re here with Charlie O’Donnell from First Round Capital, Charlie thanks for being here.

Charlie: No problem.

Sean: Maybe you can just tell us, as a way to get started, just about First Round, and you know what you guys are up to.

Charlie: Sure. So, we’re very properly named. First Round Capital, we like to do investments as early as possible. So I think people like to sort of think of us as a seed or angel stage investor that’s typically what we encounter [with] a lot of the companies we meet with. But at the same time we can follow on and were a hundred twenty-five-ish million dollar fund, and you know can do some larger amounts as well.

Sean: And you’re fund is based out of Philadelphia?

Charlie: Yes

Sean: But you guys are opening an office here in New York and [you] have one in the Valley as well right?

Charlie: Yea, so we got a couple of partners in Philly. Rob Hayes is out in San Francisco with a team there. Josh Kopelman and Chris Fralic work out of Philly office. Howard Morgan works out of everywhere. He spends quite a fair bit of time in New York, and we’ll be sort of needing our New York office, which will be open hopefully by the end of the month if not the first week of March right in Union Square.

Sean: I saw the photos on your blog and posted it as well, where exactly is the office?

Charlie: So it’s right in Union Square. It’s 200 Park [Ave] South, which is the north end of the park right across the street from the W. So great location, well worth the wait, and we’re excited about it.

Sean: Awesome, so what’s your sweet spot in terms of the amount that you like to invest?

Charlie: So I think our average, at least in New York, our average deal size has been right around six hundred grand. But that’s kind of a mix between, we’ve kind of done some smaller initial amounts and some larger initial amounts. I guess it depends on whether or not were part of a company’s initial angel ground. We like to have the opportunity to look at that. Sometimes companies come to us after they’ve raised five hundred friends and family have been looking to do two million dollar ground or something like that. We’ll certainly take a look at those too, but I think where we feel we have the most value is in the very early stages of a company. The product development cycle. You know, really focusing in on where the most value is going to be created in a company.  [And] helping companies get to a venture round.

Sean: So what do you look at, besides being early stage, what do you look for [in an investment]? What are you guys focused on? In terms of what’s your decision making criteria?

Charlie: I think a lot of it is trying to figure out you know where the value inflection points are. You know, when somebody comes in and says you know we’re raising a five hundred million dollar, uh, five hundred thousand dollar round, my number one question is ok where does this get you. And the answer shouldn’t be a year, because that doesn’t mean anything I can’t buy a year. But uh, and I am quite sure you can spend the money in year but does it lead you to a place where significant value is being created? So, if you’re in the local market, does it get you to five cities, is five cities meaningful for you as a company? Why is that? You know does it get you a certain product that you think is a viable product as a company. That’s really important, you want to see really, really high leverage for that amount of money whatever it is that you’re raising. I think obviously scalability. Um, I think the number one thing I’ve seen missing from most pitches is customer acquisition. Um, how do you, how will people find out about this? Can you efficiently acquire customers? And where are they and how are they going to encounter you’re application, and figure out that you even exist. I was just talking to an entrepreneur the other day who said okay when they come to our site. I said wait wait, they don’t know you. How do they even figure out that you exist, so that’s really important.

Sean: What about team?

Charlie: Team is critical. But team is sort of an interesting thing because you know a lot of the folks that we’ve backed haven’t necessarily been veterans of eight start ups before. And you know so I think, for me personally I like to see a good match between the product and market and the skill set of the entrepreneur. So if this is a product that really, really needs a strong hit the ground running kind of sales team, and this in the DNA of the entrepreneur, and you feel like this is the right person to execute that kind of plan, that’s really important. I talked to a company not too long ago who was really going to depend a lot on search traffic, and that’s something I think is really important to have in the DNA of the founders, to think about. You know how do you make a well-structured, search-friendly site. And you know I think at the early stage we’re playing in there’s going to be missing parts to the team. I don’t think we ‘re necessarily looking for complete teams. But, knowing that the pieces that are in place are really strong pieces is important.

Sean: What do think about these mentor programs like YCombinator and Techstars, and you know what do you think about them in general and how do you guys sort of compare?

Charlie: Well so I think there’s a very wide range right. I think TechStars and YCombinator have clearly taken a lead and those fall into a category of incubator programs. They come with money, and…which is always good. Because if you can get teams to focus on something for a particular period of time, put a little money in their pocket, I think that helps attract people to it. I think it gives good incentives, on you know on the part of the people running the team. There are other kind of incubator programs that are focused on helping people get financing. I think those are tough. I would love to see more of those programs focus on helping startups build great companies, cause at the end of the day great companies get funded not great pitches. You can have the best pitch in the world, if you don’t have a great company and a big market it’s gonna really be hard. And at the same time I think any investor worth their salt can see through a bad pitch to a good product. Sometimes you just don’t have that front man as part of, or whatever, as part of the team. And so I think a lot of focus should be shifted from, I mean not everybody needs to raise venture funding. I probably tell more people not to raise money or to raise smaller amounts of money. Or to go out and just start generating revenues, that’s the best form of financing there is. Financing that doesn’t come with ownership attached to it.

Sean: The model seems to be, you know if you read through the lines, they put in ten to twenty thousand dollars [and] they get five to seven percent of the company. You think that’s a fair deal?

Charlie: I think it depends. You know I think there are some instances where it could be two college kids working over the summer and this is maybe the only way that they will ever be able to access any capital, and you know the kind of networks that folks like TechStars and Y Combinator could bring.  So I think that’s very valuable to them in that situation. But if you come out of an industry, you’ve made really good contacts, I sort of feel like most people should be able to raise, through their own social capital, a couple hundred grand of angel financing to get something off the ground. Because I started to think, if you don’t have good industry experience somewhere and haven’t been connected to successful people, where did you get the idea that this was a good idea. I think a lot of people when they start their businesses they’re working somewhere for a little while. I think that’s when they see the opportunity in markets. It really depends on what the entrepreneurs looking for.

First Round Capital is planning to open a New York Office after making over a dozen investments in NYC based startups and hiring a local Entrepreneur-in Residence in Charilie O’Donnell.

First Round was founded in my hometown of Philadelphia by Josh Kopleman.  In a city known mostly for cheese steaks, cream cheese and soft pretzels, Josh is an anomaly in that he founded not one but two successful internet companies in Philadelphia: Infonautics Corporation, which went public on the NASDAQ in 1996 and Half.com, which was bought by eBay for $350M in 2000.

To kick off their increased focus on New York this year, First Round is doing a startup roadshow the first week of January dubbed “New York City Startup Trek 2010″ to meet with as many entrepreneurs as possible. Below is the email we received yesterday from our shared-office landlord TechSpace, one of the stops on the tour:

“Are you one of the thousands of innovative startup and tech folks working at Sunshine Suites, Techspace, the NYU/Poly Incubator, New Work City, or the Incubator at RoseTech?  On January 5th, First Round Capital is making a trip around the city and we want to meet you on our “New York City Startup Trek 2010″.  (#frctreknyc)

Five investment professionals from First Round Capital, a seed stage venture capital firm opening up a new office in NYC after making over a dozen investments here, will be visiting 8 incubator/temp office space locations throughout the city.  (And yes, we’ll be huffing it on foot!)  We’ll do a walkthrough, shake some hands, say hi (please say hi back!), and then set up shop for an hour for a very informal meet and greet.  We’ll be happy to answer any questions about technology, seed investing, our interest in the NYC tech community, etc.  This doesn’t have to be a pitch session, but we to hear about your companies and find out if we can help.

In attendance from First Round:

Josh Kopelman, Partner
Chris Fralic, Partner
Howard Morgan, Partner
Phin Barnes, Principal
Charlie O’Donnell, Entrepreneur-in-Residence

- We’ll also have a interested members of the media who will join us and who want to write about the New York startup community and where the startups are working.

- We’ll be coming with bags of Perky Jerky, which is, I kid you not, caffeinated beef jerky.  The founder is a friend of our firm and he thought it was the perfect entrepreneur pick me up.  I think its pretty fun leave behind.

Schedule of TechSpace visits for Tuesday, January 5th:

WEST VILLAGE: 12:30PM-1:30:PM (95 Morton Street)
UNION SQUARE: 3:15PM-4:15PM (41 East 11th Street)
CHELSEA: 5:00PM-6:00PM (44 West 28th Street)

Then join us at the NY Tech Meetup at 7PM at FIT’s Haft Auditorium on 27th St btwn 7th and 8th Avenue.

If you would like your startup company to be highlighted by a reporter coming along with us, please contact charlie@firstround.com and we’ll see how many features we can get out of each location.  Please include info on the founders, company stage, and a brief description.

We hope to have more coverage the week of the tour, so check back here then.