Union Square Ventures

Quick Chat with USV’s Andy Weissman

By Semil Shah

Roughly five years ago, Andy Weissman was recruited from the startup studio that he’d cofounded — Betaworks — to join the influential, New York-based venture firm Union Square Ventures as a partner. Just last month, Weissman was officially named one of its key men, too.

We caught up with him last week to ask whether and how that changes USV going forward.

Your firm, USV, recently pulled off a “changing of the guard” in terms of leadership, with you and Albert Wenger now leading. Has any part of the transition changed your point of view or style in investing and, if so, how so?

Because USV is thesis driven, the transition has resulted in only a few changes at the firm, and those are management wise, not investing-wise. [We have the] same five investing partners, the same emphasis on creating a peer network out of the people and companies in the portfolio, and, to answer your question directly, the same point of view and investing styles [as before].

When I think of contrarian concepts in VC, Bitcoin and blockchain come to mind. After the first few years of fervor die down, how does the USV team and network maintain conviction and a long-term view, particularly given the 24-hour nature of VC today?

The way we really maintain conviction is by creating and constantly working on a framework for investing. That framework has a few components. One is a focus on stage. Another is [maintaining the same-size] funds and one office location. A third is our style of making decisions, which is conversational/consensus driven. And the last is by publishing and constantly refining our thesis.

USV is known to invest regardless of location, especially in Europe. Besides Berlin and Sweden, what other emerging pockets of entrepreneurship do you see bubbling up in Europe? Will USV ever invest in Asia?

The last couple of years, we’ve invested in companies founded in Helsinki, Tallin/Estonia and Paris. We’d probably have a harder time investing in Asia given the relatively small nature of USV.

What’s more important over the next 10 years, technology or networks and why?

Come on dude, this is USV, you know the answer. All joking aside, we continue to focus on the applications layer of the internet — the layer that sits on top of the relatively open and robust infrastructure of the internet, the infrastructure that allows for permissionless connectivity. And we continue to believe there are numerous additional opportunities to create new kinds of networks.

In the context of early-stage investing, what’s something that you believe that isn’t necessarily a widely embraced point of view?

That in the context of growing your business, who you choose as an investor is a lot less important that otherwise might be popularly held.

Big-League LP: “It’s a Good Time to Be Asking Questions”

Roughly one year ago, FLAG Capital Management, the limited partnership, revealed that after 20 years, Diana Frazier would step down from her role as co-head of U.S. venture capital, and that Peter Denious, who formerly headed the firm’s emerging markets efforts, would assume her role.

Denious has been fairly quiet since then, possibly because the move came about as FLAG – which has backed Accel Partners, Andreessen Horowitz, Redpoint Ventures, Spark Capital and Union Square Ventures, among others — was beginning to raise its ninth fund of funds.

Denious still declines to discuss that effort, but he did talk with us this week about his observations – and concerns – about the current state of the venture industry. Here’s part of that conversation, edited for length.

You recently created a presentation called “Venture Portfolio Management in the Age of the Unicorn,” stating that FLAG has exposure to 56 so-called unicorns across 100 positions but suggesting that you have concerns about whether investors are taking enough money out of those deals. Are you talking with them about it?

We talk with them pretty openly and actively about it. We’ve always been big believers that you have to be both a great investor who can attract world-class entrepreneurs, as well as be a world-class portfolio manager.

It’s easy for VCs operating inside partnerships to get involved in their 10 or so investments, but it’s important for somebody to be thinking about the dynamics of generating returns, too. It’s a piece that we think is relevant in a time when things are up and to the right.

Given the number of secondary shops to descend on Silicon Valley in the last couple of years, I’d guess that plenty of firms are selling portions of their stakes. What are you seeing?

These are case by case situations. Obviously, we’ve looked into our portfolio and across those exposures, and where the VC has an embedded return of at least 10x, we’ve been seeing them take chips off the table. We think as long as managers are having the discussion, they’ll arrive at the right answer.

Are you concerned by how few companies are going public, relative to the number of richly funded late-stage companies we’re seeing?

I don’t think that each of whatever the number of agreed-upon unicorns that we’re seeing will do well. Some will be severely tested when the capital runs dry, and anyone who says otherwise must be wearing a pretty strong pair of rose-colored glasses.

By the same token, the amount of transformation and disruption in these companies’ respective industries is truly amazing. I do think there’s a subset of these companies that deserve to be very big. Do they deserve to be $50 billion, $100 billion [in value]? That’s subject to debate, but many will be very profitable if they aren’t already.

So you’re more troubled by valuations than underlying business models.

In most cases, we don’t have a business model problem. We don’t see a lot of nonsense, as with the last [late ‘90s] cycle. What’s debatable is valuation and are people paying too much for growth as these businesses scale, and I think that’s all to be determined. Who are we to say that this company at that valuation is too low or too high?

We’re typically early-stage and not growth or late-stage investors and part of the reason we don’t invest there is because as you move later and later on the continuum, you’re taking more of the valuation risk. I don’t think anyone would question the 10 most highly valued unicorns. The question is whether the premiums being paid for their growth is justified, and again, only time will tell. I do think that late-stage and crossover ventures are the most at risk, but that’s what they get paid to do.

But you anticipate a day of reckoning?

With respect to the pool of these late-stage companies, one can argue that so much late-stage capital has allowed for more unicorns to be created than would otherwise be the case. When that capital goes away, you’ll see more exits at the sub-$1 billion level.

Some [may go public.] I think it’s too early to draw too many conclusions about IPOs, which were down in the first quarter; we’ll know more in the next few quarters. But it’s a good time to be asking questions. I do think there will be a day of reckoning.

CircleUp Carves Out a Niche, as the AngelList of Private Equity

CircleUp isn’t a household name. But the three-year-old, San Francisco-based crowdfunding site has become well-known to consumer and retail companies that are too small to interest private equity firms yet growing too fast for a bank loan. So far, 70 businesses with yearly revenue of between $1 million and $10 million have raised an average of $1 million from CircleUp investors, all of whom are “accredited,” and who, on average, write checks in the neighborhood of $30,000.

Many of those backers — and there are more than 10,000 of them — are high-net-worth entrepreneurs or executives who’ve been in or around the consumer space, says CircleUp cofounder Rory Eakin. But the next largest group isn’t wealthy dentists looking to play venture capitalist, he says. It’s financial services pros. “We’re seeing hedge fund [investors], VCs, and other investment professionals who like making direct investments without the typical fund structure,” he says. “More family offices and [registered investment advisors] are coming on to the platform, too.”

It’s a little like AngelList — though less risky, suggests Eakin, citing Kauffman Foundation findings that smaller consumer and retail product companies return 3.5x within four-and-a-half years on average. Eakin, whose company now employs 40 people, told us more last week in a conversation that’s been edited for length.

You work with companies with at least $1 million in revenue. Why is that threshold meaningful?

It means these companies have an established product in the market, with suppliers, distribution and customers — data [that] can help put CircleUp’s investors in a position to succeed.

The companies offer investors equity in return for their capital. How much, typically?

A company typically sells 10 to 30 percent in a round on CircleUp. Investors can own all or a portion of that amount based on how much they invest.

How do you assess the companies that are applying for funding on your platform?

We [pore over] proprietary data about the more than 6,000 companies that have applied, as well as look at third party data, to score a company on how it has performed relative to its category. For example, if your natural shampoo is growing at 100 percent a year, that’s interesting, but if the category is growing at 200 percent per year, you’re losing market share.

If more than 6,000 companies have applied for funding on the platform, yet 70 have completed a round, you must be turning away most applicants. Why?

We’ll pass for two or three reasons. The first is valuation. Consumer goods tend to be valued off revenue multiples, so it’s a cleaner metric than you see in tech, and it gives us [information] to pass on to companies that aren’t priced appropriately based on risk. We also look at the experience and background of the management team, as well as the brand itself. Assessing the latter is more art than science, but we’re doing things with data now that helps us screen for it more efficiently.

Are you actively seeking out companies or is your deal flow mostly inbound?

A lot of great companies apply, but we’ve also done a lot of work to expand our partnerships. We get a lot of companies from PE firms with nowhere to send smaller companies. We’re also networking actively with bankers, brokers, and lawyers to ensure that we have quality companies.

We’ve also announced partnerships with General Mills, Proctor & Gamble, and Johnson & Johnson that are designed to help companies thrive after they raise money.

How so?

Largely, they meet with founders in an informal mentorship program where they talk about distribution and key functions of helping companies scale. It’s a win-win, because these strategics get to see what’s happening in the early stage of the market and they get exposure to these new products, while the [smaller] companies form relationships with [these potential investors, who might also acquire them].

CircleUp is a broker-dealer, meaning you accept a commission for facilitating the transactions on your platform. Do you share publicly what that percentage is?

It’s a small amount that’s competitively priced.

What about fundraising? CircleUp announced its last round nearly a year ago. Are you talking with investors again?

A [new round] isn’t on the roadmap. Our focus right now is on continuing to see opportunities and to reduce friction in the market. We knew the market wasn’t functioning as well as it could, but we didn’t appreciate just how painful things had been for these companies and investors.

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Albert Wenger Takes the Long View

Earlier this week, Albert Wenger, a managing partner at Union Square Ventures, departed from the standard VC script of promoting his own startups to discourse about the future of mankind. He shared his views on stage at the DLD (for Digital Life Design) conference in Munich. More specifically, he talked about where we are in the Information Age and what the past can tell us about the future.

It’s a 15-minute long chat that you can watch for yourself, but here were some of Wenger’s most interesting observations:

Innovations often come in disruptive, complementary pairs, though it isn’t always obvious at the time. As examples, Wenger pointed to agriculture and the domestication of animals, including horses. The two are seemingly nonlinear, but horses “become more valuable to you if you’ve got agriculture, and vice versa,” he noted. Wenger also pointed to power and manufacturing (steam and electric power enabled the latter); chemistry and deep mining (“We didn’t find out what the air was made of until the late 1700s; we didn’t figure out how to isolate a lot of elements until the early 1800s”); and computers and networks.

Recent examples include machine learning and robotics, imaging and 3D printing, and big data and cell biology.

These disruptions have had significant social implications. In the Stone Age, he noted, “there was no property or communal property.” Then, we “moved to the Agrarian Age, and people who had property had power, and those who didn’t, [didn’t].” It was only in the Industrial Age that people began to have “this really strong notion of personal, individual property that’s truly yours,” including intellectual property, he said.

Indeed, “a lot of what we take for granted are relatively new” developments, and what may seem immutable today is, in fact, highly variable. Take government. “We’ve gone from tribes to fiefdoms to kingdoms to empires to nation states. What do we want the [next] unit of governance to be?” It’s “up for grabs,” said Wenger, and “we should be thinking about what it should be.”

Privacy is “another very modern construct,” observed Wenger. “Foragers didn’t have privacy; they were living in caves. Early agrarian societies lived in very tiny villages. I think we need to question … exactly what we mean when we [say] we want to protect data.”

How we make a living has also changed time and again. In the Stone Age, it was “a communal thing.” In the Agrarian Age, “people sold what they made.” It was “only in the Industrial Age where we switched to a model where we’re paid for our time — and that turned out not to be a very good model for a lot of people,” making “that, too, up for grabs again.”

Ultimately, argued Wenger, “Because we’ve come from long periods where scarcity was the dominant paradigm, it’s led to a lot of things we may be able to replace.”

The question, he concluded, is “what we want it to look like. And I don’t think we know yet,” he said.

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