The Venture World

Our Model

AVC - Musings of a VC in NYC -

This past week our portfolio company MongoDB went public. I think that occasion presents an opportunity to talk about USV’s model.

We are a small firm. We raise modest sized funds (by modern VC standards). Our first fund was $125mm, our second fund was $150mm, and we have now settled on $175mm as a good number and our past three funds have been that size.

Our typical entry point is Seed or Series A although we have an Opportunity Fund that allows us to enter later when that is appropriate. We do that once or twice a year on average.

We make between twenty and twenty five investments per fund and we expect, hope, and work hard to make sure that two or three of those investments turn into high impact companies that can each return the fund.

Although our entry point is typically Seed or Series A, we continue to invest round after round to both protect and add to our ownership. We have no requirements on ownership, but we typically end up owning between 15% and 20% of our high impact portfolio companies.

If you do the math around our goal of returning the fund with our high impact companies, you will notice that we need these companies to exit at a billion dollars or more. Exit is the important word. Getting valued at a billion or more does nothing for our model. We need these high impact companies to exit at a billion dollars or more.

Because we invest early, it generally takes seven or eight years for an investment to exit. We closed our first fund, USV 2004, in November 2004, and our first high impact exit came almost exactly seven years later when Zynga went public in late 2011.

Mongo DB represents the eighth high impact exit that USV has had. They are:

Zynga – IPO – 2011

Indeed – Sale to Recruit – 2012

Twitter – IPO – 2013

Tumblr – Sale to Yahoo -2013

Lending Club – IPO – 2014

Etsy – IPO – 2015

Twilio – IPO – 2016

MongoDB – IPO – 2017

Although MongoDB won’t be an exit until the lockup comes off and we are truly liquid, every other one of these impact investments has returned the fund it was in (or much more in the case of Twitter, Lending Club, and Twilio).

We were the lead investor in the Seed or Series A round in seven of these eight high impact companies and three of them came from seed investments. It’s easier to identify high impact companies in the late rounds, but not so easy to do that in the early rounds. That’s where our thesis based investing comes into play.

It is also important that all of our partners participate in this model. It takes seven or eight years before we can expect a new partner to contribute and Albert, who joined us in 2008, has produced the last two high impact exits with Twilio and MongoDB. John, who joined us in 2010, has already contributed one in Lending Club. I have no doubt that Andy, who joined us in 2012, and Rebecca, who joined us this week, will produce their share of high impact exits. Andy already has several in the pipeline.

So this is our model. Keep the fund sizes small. Make investments early so we can buy meaningful ownership for not a lot of money. Keep investing round after round to maintain and/or grow our ownership. And have enough high impact portfolio companies that we can get two or three of them per fund.

We have a good pipeline of high impact companies in our various portfolios that we expect this model will keep working for the foreseeable future.

This model has more or less been the model of all three venture funds I have worked in over my thirty year period. It is time tested and it works when applied with focus and discipline and a strong investment thesis.

But with a new model, tokens, in its infancy, it begs the question of how it will impact our approach. We already have four portfolio companies that either have done or have announced intentions to do token offerings; Protocol Labs/Filecoin, Kik/Kin, Blockstack/Stack, and YouNow/Props. So we are going to figure this out in a few years. I expect the hold periods will come down as token offerings come early in a company’s life, not later. So we should know more about how this new model works in three to five years.

There are a bunch of questions that come to mind. Here are a few of them:

  1. Can a token based investment return a fund with more or less frequency than an equity based model?
  2. How long are the hold periods going to be in a token based model?
  3. Will the 10-15% high impact percentage that we see in our equity based portfolios be similar in a token based model?
  4. What are the appropriate ownership levels for a token based investment vs an equity investment?

We are going to continue to execute our equity based model in parallel with our token investments, at least for as long as that seems like the right approach. We have a good thing going with the equity based model but we understand that we have to adapt and react to changes in the market and we are doing that, fairly aggressively, with tokens.

It is an interesting time to be in the venture capital business. The decade that came after the internet bubble burst turned out to be a fantastic time to make early stage venture capital investments and we have been fortunate to participate in those good times. But the market has changed a lot with large incumbents taking up more and more white space in the internet sector as we have known it. At the same time, an exciting new sector and model, crypto/tokens, has emerged which gives us a lot of optimism about the opportunities ahead of us.

We will see how our model needs to evolve over time to make sure we can continue to deliver the results we want to deliver to the entrepreneurs and companies we back and the to the investors whose capital we manage.

Rebecca Kaden

AVC - Musings of a VC in NYC -

USV added a new partner today. Her name is Rebecca Kaden and she introduced herself to our world on the USV blog just now. Rebecca joins a team of fifteen people; our network team, our analysts, and our fantastic administrative team. We are all excited to have her join us.

It took us a year to find the right person to add to our partnership. We have only added three people to our partnership in the fourteen-year history of USV. Albert joined USV in 2008, after doing a two-year stint as a Venture Partner at USV, and after spending almost a decade doing early-stage investing in a number of firms. John joined USV in 2010 to help us with the newly formed Opportunity Fund after spending about a decade in private equity and public market and angel investing. And Andy joined USV in 2012 with thirteen years of VC experience at Dawntreader and as a founding partner of Betaworks.

Albert and Andy took over running USV a year and a half ago and led this search. They did a great job. With Rebecca, we now have the start of the next generation after Andy and Albert.

A venture capital firm, at least our venture capital firm, is at its core, a group of like-mindedĀ investors who come together around a shared investment thesis to work collaboratively to help entrepreneurs build companies. When you get the people right, as we have over the last fourteen years, it is magic. When you get the people wrong. it sucks for everyone, including the entrepreneurs. So we took this search very seriously and I am confident that we found the right person in Rebecca. She is experienced, loved by the entrepreneurs she works with, curious, funny, and has the personality and temperament to fit into our partnership. I am excited to work with her every day.

Rebecca grew up in a venture capital firm as did I. She spent almost six years at Maveron, a firm we deeply respect. Maveron, like USV, has stayed small, continued to focus on seed and Series A investments, and has stuck to its thesis around consumer investing. Everyone knows what a Maveron deal is and what it isn’t. That is my favorite kind of venture capital firm. Venture capital is an apprenticeship business and Rebecca is very fortunate to have learned the business from her partners at Maveron.

I would be remiss if I did not address the diversity issue. A number of us have been public about the fact that we wanted to add some diversity into our partnership and that is what we have done. And we are not done. We will continue to look for diversity across our organization and that means diversity of all kinds. We are not doing this for optics or public pressure. We believe that different perspectives, life experiences, and orientations in a partnership will lead to better decisions. But that said, this will take time. We don’t add partners very often and when we do, we are very careful about who we add. We probably won’t look very different a year from now but we will probably look very different a decade from now.

Each partner who has joined USV has done two things very well. First they have figured how to operate inside of our shared investment thesis. And second they have figured out how to stretch it. Albert taught us that developer platforms like MongoDB, Twilio, and Stripe could be networks and that stretching of our thesis has worked out exceptionally well. John taught us that financial services like Lending Club and C2FO and eShares were networks and that stretching of our thesis has worked out equally well. Andy has helped us understand how networks like Figure1, Nurx, and Science Exchange are impacting health care and that is turning out to be extremely promising. Rebecca will stretch our thesis some more and we are excited to work with her and support her as she does that.

If you didn’t click over to the USV blog and read Rebecca’s introduction of herself already, I would encourage to you do that now. She ends it with her email address and a call out to entrepreneurs to come work with her at USV. As it should be.


USV TEAM POSTS:

Rebecca Kaden — October 20, 2017
New Adventures: Joining Union Square Ventures in NYC

Albert Wenger — October 20, 2017
MongoDB IPO and New York Tech

Nick Grossman — October 18, 2017
Service

You Make Money With Wins, You Make Friends With Losses

AVC - Musings of a VC in NYC -

Brad Feld has a great post about the emotional toll of the collapse of the internet bubble.

Near the end, he writes:

When I reflect on my relationship with Seth, Jason, and Ryan much of the intense loyalty between us was forged in the period during and after the debacle that was the collapse of the Internet bubble. Some of my lifelong friendships, with people like Len Fassler, Dave Jilk, Jenny Lawton, Will Herman, Ilana Katz, and Warren Katz were solidified by the intensity of this time frame.

There really isn’t anything like going through a painful process with someone or a group of people to forge the bonds of friendship, loyalty, and trust that make for great professional and personal relationships.

When I look for partners in a business deal, I always start with the folks who I’ve been through tough times with. Because I know that they will hang with me again, just like they did the last time.

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