Posts from Union Square Ventures

I've never liked the term net neutrality to be honest. And in the wake of the FCC's legal loss to Comcast over bit torrent throttling, the net neutrality camp (which I am very much in) is on its heels. This post is not about that decision or its ramifications, which I think are significant. It's about the need to frame the issue in a different way.

My partner Albert got me thinking about Internet Freedom with his post the other morning. Internet Freedom is about sustaining the era of permissionless innovation that has characterized the first fifteen years of the commercial Internet in this country and brought us thousands of new big profitable companies, millions of jobs, and a vast array of new services and devices that have changed our lives and made them better.

Our firm, Union Square Ventures, focuses most of our time on finding companies, investing in them, and working with the entrepreneurs to build them. But a few years ago, we made the decision to invest a small amount of our time on public policy issues, like net neutrality, patent reform, spectrum reform, immigration reform, and a handful of other ones. All of this and more is about Internet Freedom. Our business requires it. If we lose Internet Freedom, we won't have any companies we would want to invest in and we'll close up shop and move on with our lives. That would be our loss.

The bigger loss would be to our society which has benefitted mightily from Internet Freedom and will continue to benefit as long as we don't lock everything down and close everything up. So as Albert says, "the price of Internet freedom too is eternal vigilance." 

We'll be stepping up our efforts inside our firm and outside our firm in this area. It's so very important.

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• Court Tells FCC It Has No Mandate To Enforce Net Neutrality (And That's A Good Thing) (techdirt.com)
• What Happens Now with Net Neutrality (dailykos.com)

I'm on vacation this week and trying to keep work to a minimum. And I've got a post up on the USV blog today bidding goodbye to our colleague Andrew Parker. So I simply going to link to that post.

It's an interesting post because in addition to talking about how great it has been to work with Andrew, I explain a bit about how we think about staffing our firm. If you have any comments, please leave them on the USV post.

While everyone was on the holiday break at the end of last year, Twilio wrote a blog post that very few people noticed. They announced that our firm, Union Square Ventures, had become an investor in Twilio.

Twilio is not a services for the masses. Yet. 

It's a service that web developers can use to build telephony apps or build telephony into their app. This image on Twilio's home page says it all.

In the "Areas of Interest" post that I wrote at the start of the year, I wrote:

Developers are the new power users. If you cater to them, you can build a large user base with significant network effects.

We believe that one way to build a large network of web users is to build something that makes developers' lives easier. And Twilio does exactly that. It masks all the complexity of telephony into a finite number of API calls that web developers can use to build apps quickly and easily.

When we first met Twilio, the founder Jeff Lawson blew me away when he told me that the entire service was built on five API calls; <say>, <play>, <gather>, <record>, and <dial>. Clearly they've added a few more, like <conference> highlighted above.

Today, Twilio is announcing they've added SMS to the service, with <sms>. Now you can easily allow users to access your web app via SMS without having to set up shortcodes, dealing with aggregators, doing the configurations, etc. TechCrunch has the details.

My partner Albert led this investment for us. He's a web developer himself and has already saved himself countless hours with Twilio. Albert wrote a post about Twilio on the USV blog today. If you are a developer of web apps and are interested in adding telephony, you should check out Twilio.

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• Twilio Raises $3.7 Million For Powerful Telephony API (techcrunch.com)

One of the questions facing venture capitalists in the internet/web sector is how big a portfolio is optimal. The economics of internet/web startups means the capital requirements for each investment are often lower and the best ones get profitable on one or two rounds of investment. That leads many venture capital firms participating in this sector to conclude that they need to build larger portfolios because the investments per portfolio company will be smaller.

When my partner Brad and I started Union Square Ventures back in 2003, we constructed a model portfolio for a $100mm fund. We assumed we'd start with an average investment of $1.5mm to $3mm and that our average investment would be $6-8mm. We thought we would make 12-14 investments. We raised $125mm so the numbers are 25% larger, but we ended up making 21 investments. If we had raised $100mm, we'd have made 17 investments. So over the course of the four year investment period of our first fund, we increased the number of investments we decided was optimal by 30%.

When we planned for our second fund in 2007, we modeled a $150mm fund with 30 investments, an average of $5mm per company, reflecting a further 20% increase in the investments/fund ratio.

There's another factor at work here. All early stage VCs understand that there will be losses/churn in the portfolio. Longtime readers of this blog know that I like to talk about the 1/3, 1/3, 1/3 model in which 1/3 of the investments are wipeouts, 1/3 return capital but are underperformers, and 1/3 are winners that produce all of the returns. When you have an investment flow dynamic where the early rounds require very small amounts of capital but the later rounds in the winners can require a lot of capital (which is very much the case in the internet/web sector), then it behooves you to make lots of small investments, see which ones become the big winners, and then go "all in" on the winners.

There are quite a few experienced VCs making early stage investments in the internet/web sector now. And many of them have developed models that allow them to build and manage larger portfolios. Probably the best example of this is First Round Capital, which got started a year or two after Union Square Ventures but now has over 70 portfolio companies. But there are plenty of other venture capital firms, large and small, new and established, that have figured out that they need to make more smaller earlier investments in the internet/web sector.

The challenge all of this presents is how a VC should allocate his/her time. You can spend the majority of time hunting for deals (planting seeds) or you can spend the majority of your time working with the portfolio companies (tending the crop). Not all of the portfolio companies need a VC's help. Many entrepreneurs are highly self sufficient. That's a good thing. But every entrepreneur can use some help now and then and some need a lot. And the best VCs make it a point to be there when the entrepreneur needs you. And that is time consuming. It's very time consuming if you have ten or more portfolio companies and you make it a point to be a "valued added" VC.

I am "old school" in some things related to the venture business. It's probably because I got my apprenticeship in the mid 80s and have a hard time giving up old habits. One of them is "the portfolio comes first." I was talking to my partners the other day about the best use of our time. We have a great portfolio of companies that have created a lot of value and are poised to create a lot more. If we can spend time helping these great companies become more valuable, will that result in greater returns to us and our investors than doing more deals? Hard to say, but my initial instinct is yes. Again, that's my "old school" training coming into play.

So that's the never ending debate inside the head of a VC. And it is certainly the debate inside my head these days. This doesn't mean that USV is going to do less investing in 2010. And it doesn't mean I am going to do less investing. I spent a fair bit of time recently laying out exactly what I want to invest in this coming year. We generally make 6-8 new investments per year, roughly 2-3 per partner and I expect we'll do that again in 2010.

But it does mean that we will be working a lot with our existing investments this year and we may not be the most aggressive firm out there chasing new deals. That bugs me at times. But I think it's the right choice for us, our investors, and our portfolio companies.

I've been interested in the hyperlocal blogging movement since I started blogging. Once you have your own printing press, you start thinking about what you might write about the place you live. And I've written about school sports, little league heroics, contentious local issues, and a host of other hyperlocal news over the years.

My unwavering belief is that we will cover ourselves when it comes to local news. We are at the PTA meetings, the little league games, and the rallies to save our local institutions, so who better to cover them than us? This is what hyperlocal blogging is all about and it is slowly but surely it is gaining steam.

Today, our portfolio company Outside.in, which aggregates up all this hyperlocal blogging and makes it available and discoverable, announced a partnership with CNN which, among other things, means that hyperlocal bloggers will start seeing their posts on CNN. That's a big deal. This is the mainstreaming of hyperlocal blogging and its about time.

Outside.in powered neighborhood, town, city, and place pages are already hosted on more than one hundred media partners around the country, including the New York Post, Dow
Jones Local, Media General  and Chicago Tribune. Here's an Outside.in powered page on the New York Post about the Flatiron district in NYC, where our firm Union Square Ventures is located.

If you operate a local media business, big or small, and you want to add the voices of hyperlocal bloggers to your pages, then click here an learn more about Outside.in for Publishers and get started. If you are a blogger and want your stories on CNN and media partners like the New York Post and others, then make sure your feed is in Outside.in's index. You can do that here.

It's taken a long time for this vision to become a reality, but it's happening now. We are covering ourselves and big media is leveraging our voices to cover the local news that they can't get to. It is very gratifying to watch it happen.

Update: Outside.in's founder Steven Johnson's post on the news is here. And here are the engineering hires that Outside.in will make with the new cash. If you are an engineer looking for a new challenge, please take a look.

As the venture business has grown and matured, many firms have developed specific areas of focus. Our firm, Union Square Ventures, for example only invests in web services. I believe this is a good thing for both the investors in venture funds, called LPs, and the entrepreneurs.

But there are a number of ways that firms can execute their focus on a particular area. Two of the most popular are "thematic investing" and "thesis driven investing".

They are very different.

Thematic investing involves identifying big themes and going after them. Examples from the world of web services would be "social networking", "online video", "ad networks", "social media", "real time", "mobile". I know many VCs who go about it this way. They identify the themes and then get busy filling out their portfolio with companies that fit those themes.

Thesis driven investing involves drawing a picture of where your particular area of focus is going. I like to take a five to ten year view. And once you have mapped out that picture, it becomes your thesis. And you evaluate every investment you make in the context of that thesis.

The two venture firms I've been involved in founding are good examples of these two approaches. Flatiron Partners was largely a thematic oriented firm. We identified the web as a big theme and within it we identified content, commerce, and community. And we made big bets in those themes. It worked out pretty well but we didn't see the web changing at the end of the decade as much as we should have.

Union Square Ventures is a thesis driven firm. I owe that to my founding partner, Brad Burnham, who has the discipline to force everyone to do the work to develop our thesis and the discipline to make sure we put each and every investment through the thesis test.

Just last week, we were meeting with one of our LPs and I was talking about the mobile web in that meeting. Later that afternoon, Brad walked into my office and put our thesis on web vs mobile web on the table and we made sure we were seeing the mobile sector play out the same way. An important factor in thesis driven investing is everyone in the firm needs to buy into the thesis or it won't work.

Thematic investing is good for bigger firms. It allows each partner to pick a couple themes and go after them. Thesis driven investing is good for smaller firms. It requires a tight team that works to keep themselves on the same page executing after a singular vision.

I believe thesis driven investing produces the best returns when the thesis is directionally correct and probably also the worst returns when the thesis is wrong. I believe thematic investing works less well because it can lead to "bucket filling" where the firm just runs around filling the themes with deals without much thought to why and how they will work. It also leads to a lot of "me too" investing which is a scourge that the venture industry can't seem to figure out how to rid itself of.

But both thematic investing and thesis driven investing are better than a generalist approach because they both promote domain expertise which is critical to building a sustainable investment advantage. I think "generalist" or "opportunistic" investing is likely to underperform domain expert driven investing in all but the most turbulent markets.

It would be good to talk more about how one goes about building a five to ten year map of where an industry is headed. That's a longer conversation than I have time for this morning. But I'll leave you with the thought that this blog is a part of how I build mine.