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.