Our Investment Strategy

My partner Brad was inspired by a visit from David Swensen to the Charlie Rose show to lay out what we invest in and why. It's a great post. Here's my favorite line:

Our investment strategy is to arbitrage the difference between the
capabilities of the new medium and readiness of the existing economic
and social structures to exploit those capabilities.

Click on that link and go read the rest. And let us know what you think in the comments (here or there).

#VC & Technology

Comments (Archived):

  1. fredwilson

    The secret to a good partnership is the right mix of people. We have three very different partners and personalities at USV. I probably don’t need to describe myself to this audience. That’s what the blog is supposed to do. Brad is the strategic thinker who keeps us on track and honest. And albert is a world class technologist (I really believe that) and investor. Plus we have andre and eric who are younger and more net native and have their ears to the ground. Its a great combo and I’m very lucky to be able to work in this team

    1. Guest

      I guess what bugged me is that it reminded me of this, from my arch-enemy, Chad Waite from OVP:http://www.techflash.com/OV…Somehow cleantech fitted their “investment strategy”, except that I looked into one of their cleantech companies and their claims contradicted the laws of physics:http://m2e-freelunch.blogsp…So investment strategies are fine and dandy, but you need to know something about something in order to make money for your LPs. And based on OVP’s returns they seem to know nothing about nothing…

  2. Dan Lewis

    I fell prey to the misconception. But having looked over your portfolio, I can’t see how exactly — although I admit 10gen does stick out a bit. Why the misconception? Maybe it’s because I read your blog, and I think your passions lie at the intersection of media and technology? Maybe it’s because you invest in pre-revenue media startups such as twitter and tumblr? Dunno. I think its more the former than the latter.

  3. Guest

    I looove first principles, but come on! You can’t just say ” we leverage the disruptive power of the Internet and that’s all there is to it”. Just look at your previous post, it’s not about first principles: being a daily user of your portfolio company is nothing but nitty-gritty.We just have to be careful in how we phrase these things, because this is dangerous waters. Einstein had said that every scientist should be able to explain his work to an eight-year old. And I fully agree with that, however, some people (mostly Republicans) take this to mean that everyone can be an Einstein… This nonsense is heavily propagated in business schools. I had the misfortune to hire a couple of MBAs, who were all about “strategizing”, “big picture”, “concept”, without understanding much about the core industry and technology.Here’s the deal, Fred: extracting underlying principles about your work is very good and useful exercise; however, I hope you do realize that you are navigating the complexity of your investment universe on a daily basis, with all its nitty-gritty detail, and that this is as important for your success as keeping sight of the big picture. The way your colleague has written it, it sounds like you only have this framework and anything you put there is bound to work out.

  4. Michael Lewkowitz

    An excellent post by Brad and particularly solid quote.What i love is the blend of big thinking Brad brings and the full-on experimentation usage you bring. In that line above that’s what I think helps you guys keep finding the magic. Just like in any good venture that hopes to keep innovating you need someone to strategize/rationalize and someone to be experimenting in the trenches.

  5. kidmercury

    that is the killer quote you dropped boss. but let me highlight the killer quote within the killer quote:”readiness of the existing economic and social structures to exploit those capabilities.”because the existing structure (i.e. stock market, old media) is collapsing, in a way, the arb oppty is collapsing as well, as it is making digital economies the status quo.that is, if the existing socio-economic structure is indeed collapsing.

    1. markslater

      i agree. your point is that there is NO arbitrage here – it is imo a complete technical misuse of the word. venture capital is not arbitrage, its a completely different risk pardigm. sounds good though right.

      1. bradburnham

        Busted – yes it is a complete misuse of the word arbitrage, but I was trying to get at an idea. The web will have a profound impact on the global economy. Most institutions do not yet understand the magnitude of this impact. Until they do, there will be an opportunity to back companies that understand the web and use that understanding to disrupt markets. Once everyone fully understands the web and incorporates that understanding into their operations you’re right the “arbitrage” is gone.

        1. markslater

          i actually love the word! reminds of the days of ivan bosky.

    2. kidmercury

      i suppose i wonder how many digital economy disruptions are left without a disruption in finance/capital markets. i think the answer is closing in on zero. IMO the next massive wave of digital innovation really requires new capital markets — finance 2.0, crowdsourcing finance. IMO finance 2.0 runs parallel to larger shifts in the socio-economic structure, namely instability in the whole nation-state system, which we are now seeing via the global economy troubles.

      1. bernardlunn

        That makes sense to me. We have just witnessed a massive explosion in financial markets and nothing will be even remotely the same again. There must be huge opportunities in that new world. Its the big gatekeepers that just had their gates ripped down

      2. fredwilson

        We are thinking a lot about that these days

  6. awatterson

    It’s interesting that in your “First Principle” strategy statement that the word ‘medium’ is singular. Why limit yourselves to only one medium, the Web is transformational for sure, but so is the mobile space, and the green- and bio tech space. It seems like USV’s competitive advantage is in recognizing the short comings “of the existing economic and social structures.” Couldn’t that advantage be applied to markets outside the web?The answer may be as simple as the Web is where your interests are. But in your favorite line I don’t see anything that binds you guys to the Web.

    1. fredwilson

      Good point. We are very interested in mobile particularly as mobile starts to resemble the web more and more

  7. mydigitalself

    Makes perfect sense. Although I had to read the “arbitrage” sentence about 3 times until I figured out exactly what was meant by it.Whenever I find myself speaking like this around the office, I give myself a little slap and revert back to spelling things out in layman’s terms.

  8. Nikhil

    Longtime reader….As someone who is a non-VC in the investment community, Brad’s comment is definitely interesting and is a relatively logical, concise way to explain USV’s alpha. However, there is a critical part missing here – how much of USV’s alpha is derived from the principals’ unique vision and business acumen and how much comes from their networks and unique insider knowledge of the particular area?This is critical because Brad’s entire argument is predicated on USV adding alpha that transcends specific niches. In a ridiculous hypothetical, if the new disruptive area became using mini airplanes for B2B transactions, does the USV value proposition still hold? i.e. can they be market leaders in that market as well?In the hedge fund world, there are many funds that are naked swing traders, that make money by “reading the tape”. They are one-trick ponies and they know it. If for some reason, that strategy were to fail one day, they would be sunk. There are also lots of “absolute return” guys who have gotten absolutely crushed in 2008, when in fact they were just leveraged beta packagers. Brad’s point would be exponentially more powerful if he were to be able to explain the current ratio of USV alpha (general vision, business acumen) vs. USV beta (specific market knowledge, insider networks, etc.) and why he thinks the USV alpha is sufficient to generate excess returns in industries beyond their comfort zone.

    1. fredwilson

      Great commentI think my comment about the partnership we have is the answer to thisquestion. We have a strategy and then we execute it. Each of us contributesto both, but some of us are more strategic and some of us are more tactical.

    2. bradburnham

      Thanks to everyone who has pushed me to be more precise -Nikhil -Your quote…”Brad’s entire argument is predicated on USV adding alpha that transcends specific niches”is exactly right.The point I was trying to make was that we are focused on one opportunity. The disruptive impact of the web. Because of this focus, we have accumulated over the years some experience with how markets will be disrupted (general vision), how successful web based businesses are built (business acumen) and some experience of which businesses are likely to be disrupted first, why and how (specific market experience) and have met a lot of folks who are using the leverage of the web (insider networks). Perhaps we need to think about defining Alpha and Beta along a different dimension.You whimsical example of mini airplanes fundamentally transforming B2B markets suggests that markets can still be defined around discrete technologies and customers sets (airplanes and businesses)We think web services are a combination of electrical engineering and social engineering that cannot be easily classified by technology or customer set. We believe that these services will over time have an impact on all markets and customer sets, and hope that by focusing on them we will be able accumulate the experience necessary to identify good opportunities and help portfolio companies be successful.

  9. Asset Reconstruction

    I think in financial market you are not absolutely sure that you gain only profit . I think your quotation “Our investment strategy is to arbitrage the difference between the capabilities of the new medium and readiness of the existing economic and social structures to exploit those capabilities.” is 50% right.

  10. Kenosha_Kid

    Fred, I wonder if the Internet (and by extension, media/telecom in general) has reached a point where the “long tail” is from an economic perspective over and done. If true, this would hurt Internet startups most of all, as these are almost by definition long tail initiatives, at least in the beginning. As you review your prospects as well as your current portfolio positions, are you concerned at all about having reached a point of diminishing returns?

    1. fredwilson

      I worry about that every day but I don¹t think the internet as a sector isanywhere near thatSome of our investments are, for sure, and we need to deal with thatI think all startups start out as ³long tail² but the best ones are now inthe headAnd you can go from tail to head in a year or two if you¹ve got somethingspecial

      1. Kenosha_Kid

        Thanks.As a quick follow-up:1) Do you think the definitions of “tail” and “head” have changed at all, especially of late, from popularity-based to revenue/profit-based? For example, based on popularity Twitter would be “head”… but is it?2) You can certainly go from tail to head in a year or two, but Internet history has shown the reverse to also occur. Given the current economy (and outlook), does the potential return still justify the risk? (I realize that the answer is “it depends”… but I’m wondering more about a general perspective with respect to new investments.)Thanks again.

  11. Jeff Hilimire

    Upon first reading that quote I really liked it. In fact I still like it. But the more I broke it down I started to realize that there’s something missing. Finding the ideas that the “existing economic and social structures” are ready for, isn’t always a winning formula. At times new ideas can help move people to a new way of thinking, and in ways they wouldn’t have normally seen because of the current situation they are in. And I’d say today more than any other time in my history, we need ideas that force us to reach out to embrace them, pulling us out of this current economic and social situation.