Posts from VC & Technology

Video Of The Week: The Gotham Gal on TWIST

Last summer, The Gotham Gal went on Jason Calacanis’ show, This Week In Startups. I had never watched it until this morning. It’s fun to see two people who know each other well (they worked together in the late 90s) do a conversation. It’s an hour long but there is some good stuff in here.

The Difference Between Large Funds and Small Funds

I have always been a “small fund” oriented investor. Both models work if executed well, but they are different.

With small funds, you only need to find a few good ideas a year to get behind. That is true in hedge funds, private equity, venture capital, and probably many other asset classes.

With large funds, you need to get behind every good idea every year.

There are some investors out there than can execute the large fund model. I imagine you can list them and so can I. But there aren’t many who can.

There are many investors out there that can execute the small fund model. You can do it with a geographic focus. You can do it with a sector focus. You just need to know a few things really well and then select the best among what you know and ignore everything else.

That is essentially what we do at USV. Because we only manage funds in the $150mm to $200mm range, we only need to invest in 6-10 new companies a year and we only need a third of them to work. So that means 2-3 good investments a year and we are doing well. Given how much opportunity is out there, 2-3 good ones a year is doable. Even if we miss on lots of great opportunities.

I don’t lose a lot of sleep over missing good deals. We can afford to do that.

But imagine if you had a $1bn fund to invest. Then you’d need 10-20 good investments a year. If good investments are defined as billion dollar exits or better, then that would require getting a meaningful percentage of them. Maybe you would need to get 33% to 50% of all good deals every year. I couldn’t sleep if I had to do that.  Because I know I couldn’t do that sustainably. Very few can.

The Business Insider Interview

A few weeks ago Alyson Shontell came into USV to talk to me. She wanted to talk on background about the NYC tech sector. She recorded our talk which lasted about an hour.

After transcribing the talk, she reached out to me and suggested printing the entire thing as a Q&A. I was nervous about that because I was pretty candid about things in our talk as it was on background.

But after reading the transcript, I understood why Alyson wanted to run it in its entirety. I ran it by the Gotham Gal and my partners and they said it was OK. So I asked her to change one thing where I felt I was not being fair to someone, and that was pretty much the only change.

They ran it yesterday and I just ganked the source code so I could cross post it here. I hope you enjoy it.

It took Fred Wilson 10 years to become what he calls a “half-way decent” venture capitalist. It took him 20 to become a startup legend.

Lately, rumors have swirled that the Zynga, Tumblr and Twitter investor might step away from the firm he co-founded, Union Square Ventures, and retire. The 52-year-old investor has written about his post-Union Square Ventures plans on his popular blog, A VC.

“My daughter Emily asked what I plan to do when I retire in the next ten or fifteen years,” Wilson wrote in December. “I replied that ‘I plan to do what Mom does (angel investing)’. It looks like a lot of fun and I think I might be pretty good at it.”

As Wilson wrote, he doesn’t plan to retire in the next few years. But stepping away from his day-to-day role at Union Square Ventures has crossed his mind. The firm, which was founded in 2003 by Wilson and Brad Burnham, has been grooming successors for the initial partners with more recent hires such as former Delicious President Albert Wenger and Betaworks Co-founder Andy Weissman.

A few weeks ago, we had an hour-long conversation with Wilson about his career, the New York tech scene, and what will happen when, inevitably, Wilson decides his venture capital days are over.

The interview was intended for a longer piece on the New York venture community, but the transcription was so compelling, we asked Wilson if he’d mind us publishing the full interview instead.

Here are the topics we covered (it gets really good half way down, when he starts talking about why 2012 was a difficult year)

  • Why 20-somethings are starting funds straight out of school, and how the investing industry is changing
  • What investments Fred has personally made in the last few years, and what USV’s thesis is
  • Who some of the rising VC stars in New York tech are right now
  • What Fred does when he feels uninspired at work
  • How he handles investments that aren’t going to pan out, plus what happened to Turntable and Brewster
  • Why Tumblr’s sale didn’t feel like a major win for New York tech
  • Why the New York tech scene has seen better days
  • Fred’s retirement plans

Below is the lightly edited Q&A with Fred Wilson:

BUSINESS INSIDER: What’s happening to the world of venture capital? Tools like AngelList make it easier to find deals. Young people are going out and raising funds. Is the industry changing?

FRED WILSON: For somebody who has spent a decade doing venture capital at a big firm to leave and start their own firm, that’s kind of always been the way the venture capital industry has worked. I’m seeing a lot of it even right now, this year. Not in New York as much. But certainly a lot of it is going on in Silicon Valley where partners who are in their late 30s or early 40s are departing the more established, bigger firms and starting new firms.

The reason that’s a pretty good model is because they have been doing venture long enough that they understand how it all works and they go and raise a fund and they put their name on the door. Generally speaking, those funds perform well because you don’t have a legacy portfolio so you’re just working on the new stuff. If the world’s changing and a new thing is coming, you can get on that more quickly sometimes than other people can.

It’s a tried and true mechanism to create new blood, energy and creativity in the venture business. I think that’s something we’ll continue to see happen. Then, you have these other things you mentioned, like AngelList and a lot more angel investing and seed investing activity.

That’s been a big theme for what’s been going on in the venture business over the past five to ten years. I think that is a good thing because it allows more people to participate in the financing of startups. You don’t need to have a $100 million fund to do that. Actually, with the launch of the syndicates feature on AngelList, you can be in business as a venture capitalist with other people’s money without even raising a fund because you just get a bunch of people to follow you on AngelList and effectively, you could marshal up a million dollars of funding without even having to raise that money. I think that will make raising the first round — the seed round for most entrepreneurs — a lot easier. And it has gotten way easier I think, which is why there are so many startups to talk about every day.

BI: You mentioned that it’s always been a trend of people leaving bigger firms to start new ones. What about, for example, Josh Kushner? He raised a fund soon after he graduated from college. Is this something we should expect to see more of?

FW: I think there are a few people in the venture business in New York who come from families that have the resources to start their venture capital careers.

In New York, because of the media industry, the real estate industry and Wall Street, there are a lot of families with large capital bases. It wouldn’t surprise me that we’d continue to see young people getting out of college and deciding that this is what they want to do and having their families support them in that. That could be an emerging trend. In the Bay Area, too. I’m sure something like this has happened in the Bay Area as well.

josh kushner kevin systrom prime minister

Flickr via Number10Gov

The Prime Minister with Instagram co-founder Kevin Systrom and Thrive Capital partner Joshua Kushner. At 28, Kushner is a rising star in New York venture capital.

BI: Mike Rothenberg (28), Dave Tisch (32) Joshua Kushner (28), Nikhil Khalghatgi (30) and Mike Brown (30) are all examples of young people who have raised their own large funds. But you’ve said you feel venture capital should be an “old man or woman’s business.” Why?

FW: What I meant by that —

BI: Not that you’re old.

FW: Well, I am 52. I’m pretty old. What I meant by that is there are a lot of people in the venture capital business who used to be entrepreneurs. In fact, if you look at a firm like Kleiner Perkins, Gene Kleiner and Tom Perkins were entrepreneurs and then when they got into the second half of their careers, they moved to become VCs.

The same thing is true with Ben Horowitz and Marc Andreessen. They were entrepreneurs and when they got into their 40s they thought, “Starting a company is hard work and we’ve done it a bunch. We know a lot about it. Maybe, if we transition to being VCs, we can have hundreds of entrepreneurs become successful with all the things we learned being entrepreneurs.”

I think there’s this classic thing where, when you’re in your 20s and 30s, you’re an entrepreneur. And when you’re in your 40s and 50s, you’re a VC. That’s kind of what I meant by it.

I don’t mean that Josh Kushner or Dave Tisch or Mike Brown — some of the younger VCs in New York — can’t be good VCs. Although, I do think it’s a business that takes a little bit of time to learn. You can learn it much faster if you move from being an entrepreneur into being a venture capitalist 15, 20, 25 years into your career, because you have a network and you have all that experience and a lot of it is transferable.

But if you come into the venture business right out of college or grad school as I did, it takes a long time to learn the business because you’ve got to learn everything.

If you come into the venture business right out of college or grad school as I did, it takes a long time to learn the business because you’ve got to learn everything.

BI: You’ve said it took you 10 years to become a “halfway decent” venture capitalist. Now you’re one of the best-known and admired investors. How did you create your legacy?

FW: I’ve been at it for a long time. I was doing deals here in New York City in 1990, so that’s almost 25 years ago, and there weren’t many people who were doing deals in New York City in 1990. When Jerry Colonna and I started Flatiron Partners in 1996, we were really alone with RRE, one of the two New York-centered venture firms. We were high-profile for some reason. I don’t entirely know why. We certainly didn’t really deserve it. We made a lot of money, but everybody made a lot of money in that period. If you couldn’t make money in the venture business from ‘96 to 2000, you were bad. Just really bad.

We were OK, we weren’t great. But we were good enough and we made a bunch of money. We did some high-profile deals like TheStreet.com and The Industry Standard — which was the big magazine at the time — Inside.com, which was another media-focused thing, so there were a lot of people writing about us. Maybe that’s what it was.

By the time we started USV in 2003 I’d been investing here in New York for over a decade. I think along with Kevin Ryan [Editor's note, Ryan cofounded Business Insider, and is Chairman] and a few other people, I sort of became one of the veterans of the community.

fred wilson

Fred Wilson/Tumblr (taken by Jessica Wilson with her Google Glasses)

Fred Wilson’s computer shows a handful of breakout companies his firm has invested in.

BI: When people think of USV, they think of you. But there are other partners there doing great jobs. Tell me about Albert Wenger. Could he one day run USV?

FW: Albert did the MongoDB deal. I think in some ways MongoDB is one of the most interesting New York success stories of the past decade because it’s the kind of company you wouldn’t expect to find in New York. It’s a hardcore tech company; a database software company. Oracle and MySQL and all the big database companies came out of Silicon Valley. Albert’s a computer scientist and he was really taken with what Dwight Merriman [Editor's note, Merriman cofounded Business Insider] and Elliot Horowitz were building there.

Albert has Foursquare and Edmodo, which is a really big education network platform based in Silicon Valley. He’s got Twilio, which has become hugely successful and Wattpad. He also found Etsy for us.

If you look at the portfolio Albert’s built since 2008 when he joined us from Delicious, he’s made 15–20 investments. I think at least half of them could be billion-dollar companies. A couple of them already are.

He’s probably the best relatively new VC in New York City based on his track record. There are other people you mentioned — Josh Kushner, Dave Tisch and Mike Brown — who could emerge as good or better than Albert, but they haven’t been at it quite as long. I’m really pleased to see the success he’s had because he’s super bright and he’s great to work with.

BI: Why does he fly under the radar?

FW: It’s hard because I have such a big profile and it’s difficult to have multiple front people in a venture firm … Brad Burnham has been an equal partner with me since the very beginning. He should get as much credit for our success as I do. He doesn’t, and that’s not right or fair. It’s because I’ve been more public and more out there with my blog and public speaking. I’d like to try to tone it down as much as possible and push them out into the forefront. But it will take a long time before [the public perception] changes.

albert wenger usv

Flickr/Joi Ito

Albert Wenger is the future of Union Square Ventures. Fred Wilson estimates half of his portfolio companies will be billion-dollar businesses.

BI: What about your newest partner, Andy Weissman? How did you recruit him from the firm he co-founded, Betaworks?

FW: My view of it (and Andy and John Borthwick may have slightly different perspectives) was that Betaworks had one foot in being an incubator and one foot in being a seed investor.

We invested with Betaworks in Tumblr, Kickstarter and a number of other startups. From afar, I felt like John really wanted Betaworks to be more of an incubator and Andy wanted Betaworks to be more of a seed investor. They were struggling to figure out if they should create more startups like Bitly and Chartbeat, or if they should do more investments in Tumblrs and Kickstarters. It felt to me that what John really wanted to do was become more of an incubator — a holding and operating company. I didn’t think Andy was as excited about that path. I approached Andy.

We had already had a lot of experiences with him before we asked him to join us as a partner. We knew how he conducted himself with entrepreneurs. So I said, “We need another partner because we’re doing another early stage fund and we need to have some more capacity. Would you be interested in possibly joining us?” He was.

Then he went and said to John, “Look, I think you want to take Betaworks in more of an incubator direction and I really have my heart set on doing venture, so maybe we can find a nice parting of the ways,” and they did. He joined us for our 2012 fund, which we raised in the final quarter of 2011. He’s been here for about 2 ½ years.

What’s interesting is, we’ve done three early stage funds and we’re about to embark on our next one. The first early stage fund, the 2004 fund, Brad and I essentially made 10 investments each. Then the next early stage fund, Albert joined us. Brad and I made four investments each and Albert made 10. Then our next fund, Brad and Albert and I made three investments each and Andy made eight investments.

That’s kind of how we’ve done it: We’ve invited one new person to come in and that person drives a lot of the new investment activity in that fund because the existing partners have legacy portfolio companies we spend a lot of time on. There’s no way I could make eight investments, for example, in the next three or four years. But when someone comes in here without a legacy portfolio, they can do that. That model has worked really well for us.

Now what’s happened is that Brad and I are coming off of almost all those investments we made in the 2004 round. I’m not on the board of Twitter anymore. Delicious, TACODA, Twitter, Tumblr and most of those companies have exited now. There are a few that haven’t, like Etsy, where I’m still on the board. But now we have all this new capacity that we didn’t have three or four years ago. So our next early stage fund we’re not going to have a new partner come on because Brad and I can collectively be the new partner.

Andy came in and he’s done a bunch of really good investments for us. Unlike Albert, I can’t tell you yet that Andy’s got the greatest portfolio of any VC his age [because he hasn’t been at it for long enough and cycles take about seven years], but I think early signs are quite good for Andy. He has really fit in and helped us make a lot of investments that fit right into our model.

Andy Weissman

Flickr/NYC Media Lab

Andy Weissman is USV’s newest partner.

BI: What were the three startups you invested in during the last fund?

FW: One we’ve not announced. It’ll be the last investment of the 2012 fund and we haven’t closed it yet, but I’m leading that. Then Sidecar and Coinbase.

BI: What is USV’s investment thesis? Social platforms?

FW: What we say is “networks.” Social was the predominant kind of network we invested in during the 2004 fund. That fund had Twitter, Tumblr, Zynga and Delicious in it. The 2008 fund was more things like Kickstarter, Edmodo, Wattpad and SoundCloud, which are networks. They are social, but not like the others.

Edmodo is a really good example of what I mean by networks. Edmodo is a Facebook-like network that public school teachers use. It’s free, so any teacher can just say, “We’re going to be using Edmodo in this class this year.” Then the teacher invites the students to connect to her on Edmodo, and in their timelines they get all their homework assignments, their reading assignments, their practice tests and all that. When they go home it’s all in their Edmodo. It’s a network, teacher-to-teacher, then teacher-to-student … It’s social, but not in the way Instagram is social. It’s social in the pursuit of education; like Wattpad is for writing and reading; or SoundCloud is for making and listening to music.

The 2004 fund had these big horizontal social platforms. In the 2008 fund, it was more vertically-oriented networks that had a social component to them. In the 2012 fund, it’s really been more marketplaces. So Funding Circle, Kitchensurfing and Sidecar. We’re still doing “networks,” but we’ve been looking more for transactional networks where there’s money exchanging hands. It’s not that we wouldn’t do something purely social, but we haven’t so far.

BI: Is that because all the social platforms and networks have been built already?

FW: No. I think it’s just that we invest in what’s interesting to us. We maybe suffer a little bit from from been-there-done-that and want to move on to whatever’s next. I do think that being first to something is often better. If you think about the big social platforms, LinkedIn and Facebook were started in 2004, and Twitter was started in 2006, and they are as big, or bigger than, any other social platform out there. I think Instagram may be as big as Twitter now, but the next wave of social platforms have in general been a little smaller: Tumblr and Pinterest and Foursquare.

The next wave of social platforms didn’t quite get to the same scale. I think that oftentimes the first of a category ends up being the biggest of a category. Then as the category matures and there become more segments, those segments might not be as big, so we tend to like to try to be in the first wave. In crowdfunding, Lending Club and Kickstarter I think are going to be bigger than the next wave of crowdfunding things, which are more constrained and more niche. It doesn’t mean that those aren’t going to be good, but I think getting there first is oftentimes the best.

BI: You said Instagram is as big as Twitter. In terms of active users?

FW: I think it is. Not in terms of revenues. But I think in terms of active users they’re probably as big as Twitter. It’s easier to post a photo than it is to write a Tweet.

NYSE birds eye twitter executives dick costolo

NYSE

Fred Wilson was a Twitter investor and board member.

BI: It’s all about the selfie craze, too.

FW: Although the selfie craze has really moved to Snapchat, right? It feels to me like photo sharing went from Facebook to Instagram. Then with the arrival of Snapchat, there’s now the stuff that I really want people to see and then there’s the stuff that I really only want my friends to see.

A lot of the stuff that was on Instagram has now moved to Snapchat. It doesn’t mean that people are not using Instagram, but if I go back and look at my Instagram feed a year ago versus today, there’s a lot of people who were in my Instagram feed a year ago who aren’t there today. They’ve been replaced by brands.

So now my Instagram feed is full of things like the New York Knicks and restaurants posting amazing photos of food. The young Facebook user base who left Facebook to go to Instagram has now seemingly moved mostly to Snapchat and my generation plus brands are what’s on Instagram now. That’s in the U.S. I think outside the U.S. might be a very different story.

BI: Do you think trends like ephemerality and anonymity are here to stay? 

FW: I think social is here to stay. The idea that people use the Internet to connect and share with other people is, I think, a forever phenomenon.

I think a lot of what we’re seeing is a reaction to Facebook and how Facebook was so dominant as a social platform for the past 5-10 years. The things that Facebook forced you to do — to use your real name, to post something publicly that everybody could see … these are things that people ultimately had a bad reaction to.

We use the word ephemeral, but to me, part of Snapchat is the fact that it’s controllable. It’s more about the control than the ephemerality. With Snapchat, I know who’s going to see this and I know it’s not going to move out beyond that place.

We use the word ephemeral, but to me, part of Snapchat is the fact that it’s controllable. It’s more about the control than the ephemerality.

With anonymity, for a long time it was all about real names. Mark Zuckerberg was like, “Real names is it, and anonymous is bad.” Now all of a sudden we see a lot of innovation happening with people using anonymity. I think all of this might be just a phase we’re going through.

The Democrats controlled the White House and Congress for 20 years and we got The Great Society, and then Republicans came into control in the Reagan-Bush era and we got a new model, which was a reaction to that. Now it seems like the public is moving back a little bit away from that and we’ve had Democrats in the White House now for most of the past 20 years. Public mood shifts. They go this way and they go that way.

I think a lot what we’re seeing now is because the Facebook model was the dominant model for a long time and I think a lot of people now are interested in these other models. But I think they’ll have their run and then it’ll be something else.

BI: Switching gears a bit: 2012 was not the best year for you, if I recall a blog post I read.

FW: Yeah, 2012 was a bad year for me because I had too much on my plate. A lot of it was dealing with companies that weren’t going to succeed and I knew they weren’t going to succeed, yet I had to spend a lot of time on them. It got in the way of being able to make new investments.

I also wasn’t particularly inspired by the things I was seeing. I talked a little bit about been-there-done-that. The whole world of social wasn’t particularly interesting to me. It was a combination of all of that, really. 2013 was better. I made two investments and found this other one, which we’re going to close in another week or two. We were much more productive in terms of new investments.

With Bitcoin and the blockchain, I found something that got me excited again.

fred wilson

Flickr/Lachlan Hardy

2012 was a tough year for Fred Wilson, who felt uninspired and spent a lot of time helping portfolio companies softly land.

BI: How do you deal with feeling uninspired? Even if you get in a rut, you don’t seem like someone who will ever retire.

FW: There’s a question about what’s the right thing for USV. With Andy and Albert, there’s a next generation here that at some point needs to become front and center. I’ve got to figure out a way to allow that to happen and not be hogging the limelight.

Maybe an answer is to go from being the lead founding partner to more of a lower profile so their profiles can rise. But I really like working with entrepreneurs and finding new things, new technologies, new business models, new things to get excited about. I can’t imagine that I wouldn’t be doing this work in some way. But I don’t know that it will be in exactly the same way that I do it now. I’ll figure that out as it goes.

We just raised two new funds, which we’re going to start investing in at some point this spring, and Brad and I signed up to be full partners in those funds. That means we’re committed to continuing our involvement at USV in the same way that we’ve been involved for the past ten years for another three or four years, minimum, because that’s how long it takes to invest a new fund. Then there’ll be another fund and then we’ll have that same decision to make.

If you come back here in three years, we can talk about whether or not I’m going to sign up for another early stage fund. Right now, I’m all in.

BI: What made you personally decide to go through with this new fund?

FW: Part of it was feeling a lot better about the fact that there were things I wanted to invest in. There were also four or five investments that we either sold or wrote off or wound down in one way or another in the past year-ish that I was the lead investor on.

BI: Turntable comes to mind.

FW: Turntable and Canvas and Boxee.

BI: What about [once-buzzy contact app] Brewster?

FW: No, Brewster’s still going. Brewster’s doing okay. There was TargetSpot, which we sold to Radionomy. Boxee sold to Samsung. Turntable wound down. Canvas wound down. I think there’s one other, but I can’t think of which one it is right now.

Those — let’s call it five because I’m pretty sure it was five — were probably collectively taking up half of my time. Now I don’t have to work on any of those, so that frees me up for a lot. Working on companies that aren’t going to be successful is, I think, an important part of being a VC because you say to the entrepreneur, “Take my money because we’re going to bring my time and our resources to help you be successful.” Just because they’re not successful doesn’t mean you can just bail on them. Eventually, these things wind themselves down and move on, but you have to be there through that whole process.

It’s like having a kid, right? You can’t decide to have a kid and then at age 10 just say, “Okay, I’m out of here.” You’ve got to get the kid into college.

We pride ourselves on that here at Union Square Ventures. I’ve written about this a lot, but our ratio is about a third, a third, a third. Meaning that about a third of the things we invest in literally don’t work out at all, things like Turntable and Canvas. A third of the things we invest in work out, but don’t work out very well. They lead to some kind of a sale, but it wasn’t a very successful outcome. Only a third of the things we invest in actually turn into the Twitters and Tumblrs and Etsys and Zyngas of the world.

That means that two-thirds of the things you’re spending time on are things that aren’t going in the right direction, which is kind of a bummer.

fred wilson seth goldstein

YouTube/Seth Goldstein

Fred Wilson with Turntable co-founder Seth Goldstein. Wilson helped wind down Turntable last year.

BI: Investing in a startup like Turntable has to be hard. You put money in and it seems like a rocket ship — then all of a sudden it tanks. What’s that like?

FW: Well, I think we made a bunch of mistakes there, some of which I would blame on the board and some of which I would blame on the company. But in general I think we did not react to the data. The problem with that service was people churned out of it very quickly.

People would come in, fall in love with it and then six to eight weeks later, they were done with it. We knew that pretty early on, but it was hidden by the fact that the number of people who were coming on board every day was higher than the number of people who were churning out. It looked good, but we actually knew that there was something about the service.

I think the problem was that it was too demanding. You had to be in it. It was too social of an experience. What I think we could have done, if we had moved quickly, is that we could have created a passive listening experience. The reality is, if you’re into electronic music or Indie Rock music or Hip Hop or whatever, there were Turntable rooms that were creating as good of a passive listening experience as anything you could get on the Internet, with these super-engaged small groups of users who were creating the streams. If there was a way to just put a Turntable room on and listen to it in the background, I think we could have built an interesting business. But we didn’t move to do that. We just stuck with it too long and it fizzled out.

BI: Spotify came out pretty soon after and stole some of the thunder.

FW: Spotify had been around. I think Spotify launched in the U.S., though, in a big way. I think those are different things. I don’t feel that that was the problem. Someone told me a long time ago that 80% — and this number has been true since the dawn of recorded music — 80% of listening is when someone’s playing the music for you and 20% of listening is when you’re playing the music for yourself.

Vinyl records, CDs, MP3, iTunes and Spotify are experiences where I get to control what I’m listening to and Pandora or AM radio or FM radio is when someone plays the music for me. I think there’s a huge market out there for, “I don’t really want to think about it. I just want to listen.” Pandora is huge.

I think with Turntable we just got that mix wrong. But it was good while it lasted.

BI: USV was in Tumblr. Tumblr had a billion-dollar exit to Yahoo, but it didn’t get the New York scene excited like Instagram did in Silicon Valley. They were both the same sale price, both sold to big companies. Why did their sales caused different reactions?

FW: Some of it might be the narrative. Instagram came out and when it was super hot, Facebook bought it. Their whole thing happened in the span of 24 months. Tumblr, we invested in in 2007 and it exited in 2013, so it was a six-year experience.

I think people understood that the sale of Tumblr in some ways was a reflection of the fact that Tumblr struggled to become a business.

The product is still hugely successful. If you look at the numbers in terms of number of active participants on the network and pageviews, all of that keeps going up even after Yahoo bought it. It’s never, ever slowed down.

But Tumblr really struggled to build a business, a sustainable business that could make it an independent company the way that Twitter successfully did, the way that LinkedIn successfully did, the way that Facebook successfully did. The sale to Yahoo in some ways was, I think, a reflection of the fact that they ran out of time on that.

The sale price was awesome and David made a great outcome for himself personally and we did really, really well on our investment. But I do think that the narrative there wasn’t quite the same thing. It was maybe a little bit like what could’ve been, had Tumblr been able to figure out how to make itself a stand-alone business. Maybe it could’ve ended up going public and being worth five or 10 times what it sold for.

By the way, the same thing’s true with Instagram. If Instagram had stayed independent, it would be worth a lot more than $1 billion, no question. Both of those companies probably sold too cheap, relative to what they could’ve been had they remained independent companies. But I think the Tumblr story is different because they gave it a shot, whereas Instagram never even tried.

David Karp Tumblr

Satya Murthy

David Karp, founder of Tumblr

BI: What’s happening in the New York City scene? Is there something happening here that makes the startup scene less exciting than in years past?

FW: What I was thinking as you were asking the question is that I’d love to look at the data. We make about eight investments a year, maybe 10. It would be interesting to look at the percentage of those investments that are in New York vs. outside of New York and to see if that’s changed.

I feel like the percentage of investments that we make in New York, out of the total that we make every year, has come down, and that we’re making more investments in other places like Europe, Silicon Valley, Waterloo, Toronto (Kik is in Waterloo and Wattpad is in Toronto). …

I think a couple things are happening in New York. I think that there are a bunch of companies that have been around for a while in New York. Tumblr is an example of that. Foursquare is an example of that. Etsy’s an example of that. Kickstarter’s an example of that. Gilt could go on and on and on. These are not new stories and haven’t been new stories in a long time. They’re doing really well and soaking up a lot of the talent.

But what’s an example of a company in New York that has come out of the gate in the last few years and really made a name for itself? Another company’s Warby Parker, but Warby Parker’s been around for four, five years. I’m just trying to think. It feels like the breakouts that we were having in New York in the 2008, 2009, 2010 period produced a lot of interesting companies.

Kickstarter’s going to be 100 employees probably by the end of this year. Etsy’s going to be 500 employees. MongoDB, Foursquare have 200 employees. So these are all big companies now. Has there been a breakout? I don’t know.

BI: Not that I can think of.

FW: You would know. Let me just look quickly at some data and see [pulls up computer screen]. The companies we’ve invested in in New York …

There’s Codecademy, Shapeways and Stack Exchange. Now Stack Exchange is amazing. It’s a huge company. People don’t write about it, but Stack is an unbelievable success. But because it’s like GitHub, it’s a service for geeks, people don’t write about it.

We had three companies in 2010 in New York. In 2011, there was Skillshare, Codecademy, Brewster, and then Canvas and Turntable, which are no longer. In 2012 we did Behance, which got sold. Then in 2013, we did Kitchensurfing, VHX and Splice. Those are all three interesting companies, but they haven’t broken out yet. I think all three could do amazing things, but they haven’t yet, so I don’t know. But we continue to invest in New York: Three out of eight is not a bad number. That’s 40%.

BI: Going back to your 2012 rut and coming out of it: Discovering Bitcoin seemed to lift your investing spirits. Why?

FW: I first heard about Bitcoin in 2011. It was in the winter, so maybe January or February of 2011. I bumped into my friend who was the founder of our portfolio company, Covestor, in the Garment District.

I said, “What are you up to?”

He said, “I’m starting a Bitcoin company.”

I’d never heard of Bitcoin, so I said, “What’s that?”

And he said, “I’ve got to tell you about this. It’s amazing.”

He came in and told me about it. We thought about investing in his company, but everybody here at USV was like, “I don’t know if we can do this. This thing is sketchy. There’s all kinds of weird stuff going on here.” So we spent about a year, and it was mostly me and Albert, doing our homework on Bitcoin. By the middle of 2012, we felt like we should invest in something. That’s when I bet on the Coinbase guys.

They were at Y Combinator. I immediately knew I wanted to invest in Coinbase, but they were coming out of Y Combinator and they did a seed round, and frankly it wasn’t really a good fit for us in terms of how much they were raising.

About six months later, in early January of last year, Brian reached out to me and I said, “Yeah, we want to invest.” I guess we were interested in Bitcoin for a long time and Coinbase was the first company we saw that was built on top of Bitcoin that we thought was a good investment. It’s turned out to be a great investment. The fundamentals of the business are great in terms of their revenues and their users. They have over a million hosted wallets now — that’s like a million bank accounts basically — which is amazing. It’s a million people.

 

Fred Wilson Joanne Wilson

Instagram/Fred Wilson (taken at the Etsy pop up shop in Soho)

Fred and Joanne Wilson met in college and they moved to New York City so Joanne could pursue a career in fashion. Both are now investors and bloggers.

BI: I think the majority of the world still has no idea what the heck Bitcoin is, so to have a million that quickly is impressive.

FW: And they’re in the U.S. If you don’t live in the U.S., you are less likely to use Coinbase because it’s a U.S.-dollar centric investment, U.S.-banking centric. The thing about Bitcoin is that Bitcoin’s like this global system. What service was your first email account on?

BI: AOL.

FW: Good. I was afraid I was going to date myself. In the early days, you would have AOL email, or Compuserve email or Prodigy email. Then SMTP came on as this underlying protocol and all of a sudden, if you are on AOL, you could email someone who was on Prodigy. It changed everything.

The thing about Bitcoin is Bitcoin is like SMTP, so you have the Chinese banking system and you have the German banking system, which is really the EU now, and you have the Brazilian banking system and you have the U.S. banking system. They all kind of sit on top of Bitcoin, but if you want to do Bitcoin in the United States, you’ve got to use a Bitcoin provider that’s connected into the U.S. banking system or there’s no way for you to get your money in and out of Bitcoin.

What’s happened is, these companies that have gotten built up on top of Bitcoin tend to be geography-focused. So Blockchain.info is really Western Europe-focused and BTC China is focused on China and Coinbase is focused on the U.S. What’s interesting about Coinbase is they have a million customers in the United States, so it’s not even a global customer base. If they go to Europe, which I hope that they will do, they could potentially double in size just by opening up a new market for them.

I just really like the technology of Bitcoin. The thing that I believe in more than anything is that when you have technologies that open up markets, lots of good things happen.

The thing that was always amazing about the Internet is that anybody could put a Web server on the Internet and then anybody anywhere in the world could open up their browser and connect to that Web server and nothing else had to happen. That was the only thing that had to happen. Bitcoin’s kind of the same way. It’s a completely open system. Nobody controls it. It’s not owned by a company. It just is. It’s Bitcoin.

I think as a platform to build stuff on, the way that the Internet was in the early ‘90s, it’s just amazing. I think the architecture with these blockchains is going to get replicated for lots of different applications. It won’t be Bitcoin. It’ll be Namecoin for identity, it’ll be Mastercoin for exchanges. There’s all these new blockchains that are coming up that support different use cases. I think this architecture is really, really important. That’s what got me excited about it.

BI: Final question just to bring this conversation full circle: To clarify, no retirement plans anytime soon? You’re in venture capital for at least a few more years and even if you were to take a step back, USV would go on?

FW: I can’t imagine a time when I’m not going to be part of USV, but I can imagine a time when one of my partners — Andy or Albert or both of them — are the people.

People say, “Oh yeah, go talk to Fred at USV.” It’ll be, “Go talk to Andy at USV,” or, “Go talk to Albert at USV.” They’ll become front and center in people’s minds when people think about USV. I think that’d be a good thing.

That’s what happened at Kleiner Perkins. Gene Kleiner and Tom Perkins passed the business to John Doerr and Vinod Khosla. That would be a good thing for us to do as well.

Fred Wilson dog

Instagram/TheGothamGal (that’s me and Ollie)

If Wilson ever retires, will it look like this?

My Nightmare

I don’t normally remember my dreams but I remember my dream last night. We were celebrating the sale of a company in which the founders and investors had done very well. During the course of the celebration the founders explained that they sold the company because they have a bigger and better idea that they plan to do next. I asked them if they would allow us to invest in their company and they said they would consider it but that the seed round was going to be priced at $140mm pre money. I had a tantrum and stormed out. That was when I woke up.

I don’t really know what that says about the state of my mind or the anxieties I experience. But it felt like a betrayal. A slap in the face. We had worked closely together and had gotten to a very successful outcome and now the result was a crazy price that we would have to pay to stay in business together. It pissed me off.

Valuation is just a number. It’s the price you pay for your shares. You don’t know if you got a good deal for a while, but eventually you will know. But valuation is also a psychological thing. It says how much you value a person. How much an entrepreneur is valued in the market. And how much an investor is valued in the market. The clearing price reflects both sides of the transaction.

I guess that’s why that dream woke me up.

Fads and Phases

Alyson Shontell quoted me in a BI story yesterday. The quote was exactly what I said:

I think a lot of what we’re seeing is a reaction to Facebook and how Facebook was so dominant as a social platform for the past 5-10 years. The things that Facebook forced you to do — to use your real name, to post something publicly that everybody could see…these are things that people ultimately had a bad reaction to. I think all of this might just be a phase we’re going through…I think the public mood shifts, I think that a lot of it was the Facebook model was the dominant model for a long time and I think a lot of people are now interested in these other models. I like to think [trends like anonymous apps] will have their run and then there’ll be something else.

I guess its up to interpretation whether I called this a “phase” or a “fad” but I most certainly don’t think these anonymous apps are a fad. Chat Roulette was a fad. Facebook was a phase. These anonymous apps are more likely a phase than a fad.

Now that I’ve cleared that up, I can go to yoga.

The Search For The Next Platform

I found this part of Mark Zuckerberg’s post on the Oculus acquisition most revealing:

We have a lot more to do on mobile, but at this point we feel we’re in a position where we can start focusing on what platforms will come next to enable even more useful, entertaining and personal experiences.

Facebook was a bit slow to get aboard the mobile train. Unlike Apple and Google, they do not have a mobile OS. And they were slow to evolve the core Facebook experience from web to mobile. But once they got religion about it, they moved very quickly to do that and now have an excellent mobile experience on both iOS and Android. And with Instagram and WhatsApp, they have three of the top ten third party mobile apps globally (Facebook, WhatsApp, Instagram). So they have gotten to a good place on mobile (and that’s what the $19bn WhatsApp buy was all about).

And now Zuck and his team are looking up and saying “what’s next?”. It’s not that different from what Larry Page and his team are doing at Google. The Charlie Rose interview with Larry that I made Video Of The Week last weekend was a bit of a review of all the things Google is doing to figure out what’s next (balloons, driverless cars, Nest, DeepMind, etc).

If you look at these big acquisitions like Nest and Oculus, you might scratch your head. What does a Apple-style proprietary closed thermostat have in common with Google’s mobile strategy? What does a Virtual Reality headset have to do with Facebook’s social graph? Nothing in both cases.

But the roadmap has been clear for the past seven years (maybe longer). The next thing was mobile. Mobile is now the last thing. And all of these big tech companies are looking for the next thing to make sure they don’t miss it.. And they will pay real money (to you and me) for a call option on the next thing.

It isn’t clear if the next thing is virtual reality, the internet of things, drones, machine learning, or something else. Larry doesn’t know. Zuck doesn’t know. I don’t know. But the race is on to figure it out. Trillions of dollars of collective market capitalizations are on the line. So a couple billion here or there is chump change. Except for the people who collect that chump change for selling them an option on the next thing. It’s real money to us.

So for the next few years (I have no idea how long this search for what’s next will go on), a game to be playing is building a platform that can plausibly be the next big thing. It’s a risky game. But the payoff can be large. And you can even start by crowdfunding your first round. Man I love this business.

Ageism

There has been a lot of chatter recently about ageism and the old vs young debate in tech. The New Republic has a post up today on the topic. And last week the New York Times Magazine featured a long article on the topic.

There is no doubt that tech is a young person’s game to some extent. And there is no doubt that VCs are biased towards younger founders and against older ones.

However, it’s not an absolute thing. I’ve written about this before here at AVC. At USV, we have backed founders in their teens, 20s, 30s, 40s, and 50s. I think we would back a founder in her 60s or 70s too but we have not yet had that opportunity in an investment that made sense to us. The Gotham Gal recently backed a founder in his late 60s. I am pretty sure that will be a good bet.

I saw this graphic on Tumblr today. It made me happy. Ray Kroc started McDonalds when he was my age (52).

founders over 35

 

My point is this. Yes tech is biased toward younger people. To some extent, USV may be biased in that direction. We have not done a distribution of the ages of the founders we have backed but I suspect it would weight a bit toward the younger ages. My bet is that the median age of the founders we have backed would be mid 30s.

But as this graphic shows, you are never too old to start a company. And I promise you that USV will consider any investment in our sweet spot (large software based networks) regardless of the age of the founder. Age is a two way street. Youth brings some positives. But age brings experience. And that is a pretty valuable thing.

The USV MBA

Since starting USV in 2004 (we actually started USV in the summer of 2003, but it took Brad and I over a year to raise our first fund), we have had a two year analyst position. The idea is we bring in a young talented person early on in their career, they learn a lot about the startup world from inside a VC firm, and we get leverage from having a person who can do a lot of the support work that the partners need to do our jobs. The job gets stale after a few years and since we don’t have a career path at USV, they leave after a couple years.

It has worked out well. Our first analyst Charlie O’Donnell, has gone on to do a number of things and now runs his own seed fund, Brooklyn Bridge Ventures. Our second analyst, Andrew Parker, is now a partner at Spark Capital in Boston. Our third analyst, Eric Friedman, is now Director of Sales and Revenue Operations at our portfolio company Foursquare. Christina Cacioppo came next and she has been working on her own startup since leaving USV eighteen months ago. Here’s her online profile if you want to see what she’s been up to. Zander and Brian are still with us, but will be moving on this year as their two year stints are coming to an end. These two young men are super talented and if you are interested in hiring the very best into your company, you should reach out to them. Tweeting at them should work (I linked to their twitters above).

I like to think of this two year stint as the USV MBA. We don’t issue diplomas but we pay salaries instead of charging tuition. You learn similar things but the cases are real time, not after the fact. And I would assert with a fair amount of pride that a USV Analyst stint on your resume is worth as much as a top tier MBA, maybe more. And the alumni network, while small, is fantastic.

All of that is to provide the setup to the news that we are hiring for our next two year analyst. Zander blogged about it last week and it’s been highlighted at the top of usv.com for the past week, so many of you probably already know about this. But there is only one more week to apply as applications are due by April 1st at 11:59pm eastern time. So I thought I’d make sure everyone who reads AVC knows about this position.

The application is pretty simple. You give us some links to your online presence, you answer two questions over a video interview app called Ziggeo (which is my partner Albert’s wife Susan’s startup), and you hit submit. We take it from there. We look at the links and the videos and select a bunch of people for in person interviews. We hope to have the position filled by the end of April/early May.

If you want to apply, go read Zander’s post and the detailed instructions are at the end of the post. If you are like me and like to skip the instructions and just get on with it, the application page on usv.com is here.

The a16z Podcast

This showed up in my SoundCloud stream over the weekend. I finally got around to listening to it this morning.

The iOS vs Android debate certainly does seem like old news, but what happens next is a super interesting topic. The first part of this podcast is about iOS vs Android, but the second half gets into more interesting territory.

I like that Andreessen is giving Benedict the opportunity to build an audience on multiple platforms. I am not sure if this is Benedict’s podcast or if we will see others, like Marc, Ben, Chris, and the other Andreessen partners on this podcast. But regardless, this is yet another great information source coming out of the VC business.

The idea of a VC podcast is not new. Bijan and Nabeel at Spark have been doing this for a couple years. You can listen to a bunch of their podcasts here.

The Bubble Question

Everywhere I go, everywhere I speak, I get asked this question. Are we in a bubble?

I’ve been getting asked that question for at least four years now. It’s hard to sustain a bubble for four years. But we are also not in a normal valuation environment for high growth tech companies and we have not been in one for a while.

Here’s how I have been answering the question.

I learned in business school that the multiple of earnings one should pay for a business is roughly the inverse of interest rates. The reason for that is if you buy a business that makes $10mm a year and pay $100mm for it, then you are effectively getting a yield on your investment of 10% (annual earnings/purchase price). This math is terribly simplistic but fine for the purposes of this post. If interest rates are 5% instead of 10%, then you would pay $200mm for the business ($10mm/$200mm = 5%). So the math here is interest rates = annual earnings/purchase price. Again this is very simplistic because it does not deal with the important questions of what interest rate you use, how you deal with earnings that are growing or declining, and a host of other issues. But at the end of the day, this math [annual earnings/purchase price = yield] is fundamental and everything about asset values, capital markets, and valuations stems from it.

Since the financial crisis of 2008, policy makers in the developed world have kept interest rates at or near zero. They have flooded the market with cheap money in an attempt to heal the wounds (losses) of the financial crisis and incent business owners to invest and grow their businesses. That has not worked particularly well but it has worked a bit. Though their words have changed in recent years, their actions have not changed very much. We still are in a policy framework where money is cheap and interest rates are near zero.

If you go back and apply the formula [yield = earnings/purchase price] and use zero for yield/interest rate, then one would pay an infinite amount for an earning stream. Of course that doesn’t make sense and it has not happened. But valuations are at extreme levels because you cannot get a decent return on your money doing anything else.

At some point this will change. The yield on the 30 year treasury yield has been sub 5% since the financial crisis. If (when?) it gets back to the 6-8% range where it was for most of the 1990s, we will be in a different place. Here’s a 40 year history of the 30-year treasury yield. You can see that we have been in a very low rate environment for a while now.

30 year treasury yield

The other thing we have noticed is that this low rate environment has caused asset value/earnings ratios to be non-linear. What you normally see is the value/earnings ratio grows linearly with earnings growth rates. If earnings are growing 20% per year you get a value/earnings ratio of X. If earnings are growing 40% per year, you get a value/earnings ratio of 2x. But what we are seeing is you get something that looks more exponential than linear when you start modeling this out at higher earnings growth rates. When earnings growth rates get to 50-100% per year and look like they can continue to grow at that rate for a number of years, you get value/earnings ratios that are eye popping. It seems that investors are so starved for returns that they are willing to pay that much more for earnings that can grow quickly.

It is the combination of these two factors, which are really just one factor (cheap money/low rates), that is the root cause of the valuation environment we are in. And the answer to when/if it will end comes down to when/if the global economy starts growing more rapidly and sucking up the excess liquidity and policy makers start tightening up the easy money regime.

I have no idea when and if that will happen. But until it does, I believe we will continue to see eye popping EBITDA multiples for high growth tech companies. And those tech companies with eye popping EBITDA multiples will use their highly valued stock to purchase other high growth tech business and strategic assets at eye popping valuations.

It’s been a good time to be in the VC and startup business and I think it will continue to be as long as the global economy is weak and rates are low.