Fred Wilson's blog. Union Square Ventures (USV) has invested in some amazing ventures that were far from obvious (i.e. they took risks), and they have invested in my friend Alex Iskold's venture. So, I am a fan. Hopefully, I was able to be a good journalist, restrain my enthusiasm, and ask Albert Wenger some good, probing questions. Read on and judge for yourself.Disclosure: I love
Apologies and Introductions
First off, sorry there is no MP3 audio. All of our other interviews have been recorded via Skype. But because both Albert and I are in New York, it didn't make sense to do the interview via Skype, so we met in USV's offices in Manhattan. I bought a FlipVideo for the occasion and recorded a great interview, but there was a snafu connecting the FlipVideo to my Mac, which is part of a boring tech-support saga.
Albert Wenger is one of three partners at USV. Fred Wilson is the well-known one because of his blog, and Brad Burnham is Fred's original partner from when USV was founded. Albert Wenger became a partner in June 2007, having worked with USV in his role as President of Delicious, and is on the Board of Etsy.
One venture that Albert led for USV was 10Gen, and we'll look at that later in the post.
Early-Stage Investing in this Downturn?
We started by asking a question we have been asking of all investors:
"How is early-stage financing doing during this downturn compared to the last one in 2001/2002?"
Albert started by pointing out that he had worked through that period as an entrepreneur -- but resisted the temptation to show the scars. :-)
Like all the investors we have spoken with, Albert said there is no comparison and that early-stage investing is alive and well. The numbers recently reported by MoneyTree indicate something different, which is why we dug a bit deeper into the numbers. Fred Wilson dug a bit deeper, too, because the headline numbers did not correlate with what he was seeing in the market.
Albert gave two main reasons why early-stage investing is holding up well in this cycle:
- Less triage. In the post-dot-com nuclear winter, time rather than money was the gating factor. VCs were totally absorbed by trying to figure out which of their high-burn-rate ventures to put more money into and which to shut down. New ventures were a distraction from that existential threat. Every VC that lived through that era has vowed to avoid those massive burn rates this time. This has been relatively easy to do because the cost of building a startup has gone down dramatically. Albert cited a study that compared the cost of building a Web venture in 2000 to building one in 2007 and found it was 10 times different -- that is, massive. Because USV's current portfolio is not in crisis, the partners have time to look at new deals.
- Professional angels. Conventional wisdom says that angels lock up their wallets in a downturn. That's logical: angels invest their own money. Unlike VCs, they feel no pressure to "put their money to work." If their personal net worth has been decimated by market crashes and/or Madoff, then they switch to cash and T-Bonds. Albert pointed out why that conventional wisdom is wrong this time around. The kind of "professional angels" (my term, not his) who generated their wealth as Internet entrepreneurs mostly stayed clear of banking and auto stocks, and their investments in stocks like Google and Amazon held up comparatively well. They also know first-hand that downturns are a great time to invest.
The Changing VC Model
The next question is also one we have been asking other investors:
"How is the VC model changing, if at all, and how does the global financial crisis impact this change?"
Albert's response was very similar to what Phil Black from True Ventures told us in the first interview in this series. Essentially, the point comes down to this: if you could build a venture for 10 times less money, would you be satisfied with an end result that was smaller in scale? The VC model has always tolerated massive failures in the interest of reaping a few mega successes. Perhaps we are moving from a model in which everybody tries to hit the ball out of the park to one where some steady singles are fine.
Albert agreed that this is happening. He also pointed out that with Web ventures needing less capital now (because costs are 10 times less), VC funds don't need to be big. He told me that USV made a deliberate decision to keep its 2008 fund about the same size as its 2004 fund, even though it could have raised more.
This strategy allows USV to invest at an early stage, with angels, and with only a few hundred thousand dollars. As Albert pointed out, though, this is not ideal: USV wants to invest bigger sums. But it also wants to be there from the first round, so that if the venture hits network-effect pay dirt and needs to scale fast, the capital that it would need would come from USV.
We got the same message from Dave McClure, too. The message is a great one for entrepreneurs.
Where Is the Value in the Cloud Stack?
Albert enjoyed the next question because it relates to USV's investment in 10Gen:
"As more IT applications move to SaaS and the cloud, what layers of the stack show the most promise for value creation? Historically, lower down has been better. Is it different this time?"
Albert pointed out that most of USV's investments are at the top of the stack, as end-user-facing services. When USV looks at ventures operating on lower levels of the stack, it seeks the same kind of network-effect scalability that it gets with consumer services.
Its hope with 10Gen in particular is that the open-source community will create that network effect. 10Gen operates in the market that we began exploring in Tony Bain's post on whether the relational database was doomed. As Tony put it:
"If you want vast, on-demand scalability, you need a non-relational database."
Albert described all the post-relational models as falling into one of two categories:
He describes these as "key/value stores." Tony Bain did a good job of explaining the pros and cons of key/value stores. As Albert put it to me, key/value stores are great at scalability but weak at delivering the functionality of a traditional RDBMS. He positions 10Gen in that magical quadrant: both scalable and capable of functional complexity. I can hear the RDBMS crowd snorting cynically. It is a big and bold target, for sure.
Here is how Tony describes Mongo, the open-source technology that 10Gen is based on:
"Mongo is the database system being developed at 10Gen by Geir Magnusson and Dwight Merriman (whom you may remember from DoubleClick). Like CouchDB, Mongo is a document-oriented JSON database, except that it is designed to be a true object database, rather than a pure key/value store. Originally, 10Gen focused on putting together a complete web services stack; more recently, though, it has refocused mainly on the Mongo database."
Scale First, Monetize Later?
This is where your humble reporter tries to get Twitter's investors (USV was an early one) to reveal their magic revenue model. Actually, I assumed Albert would stay quiet on that front, but I did ask him the more general question that we have been asking of other investors:
"Scaling first and monetizing later is okay, but should you know the monetization model before you build the service?"
Albert pointed out that this is not just about Twitter. USV has invested in other ventures that are scaling fast without a monetization strategy, such as Tumblr.
The topic of Twitter's monetization has perhaps been hacked to death. But it remains fascinating because it still looks as if nobody knows the answer. We have looked at Twitter's revenue model a couple of times here on ReadWriteWeb, here and here.
Albert quoted his partner Brad Burnham in saying that a novel service needs a "native revenue model," the classic example being AdWords for Google. This is how we explained the issue in our earlier post on Twitter's monetization:
"These are the two things that Twitter's Magic Revenue Model has to achieve that AdWords did so brilliantly:
- Do not irritate/interrupt the user, and even occasionally add value to the user.
- Provide a value proposition that is so compelling that even conservative buyers give it a try."
That is not easy. We know that a lot of people have a lot of ideas about how Twitter should be monetized. Today, the interesting question is either, (1) Does Twitter know how it is going to monetize but is keeping quiet until launch, or (2) Does it still not have a compelling native revenue model?
Tell Us What You Think
Why Union Square Ventures Is the Hot Web-Tech VC
In the headline, I described USV as being "the best of the Valley in New York." As a New Yorker who thinks that New York is the official center of the universe, I think it's great to have a VC here that is best in class. In the old days, a New York web-tech entrepreneur would have been foolish not to move to the Valley. But a lot of people have plenty of good personal reasons why they prefer to stay in New York.
Success breeds success. USV's success makes other New York-based VCs and angels more successful. The VC game is mostly win/win, with plenty of deals to go around, but all of them needing a supporting eco-system.
Why do I describe USV in these high terms? Here's why:
- Check out its portfolio.
- It attracts entrepreneurs from everywhere, including the Valley, and it works with the best angel investors from everywhere, including the Valley. USV is not a New York-centric VC; it just happens to be in New York. It used to be that entrepreneurs and VCs from the Valley only flew to New York to discuss IPOs with investment bankers. Now, some come early on to meet USV.
- It gets out there and engages in transparent conversations. Fred Wilson's blog has changed how people think about VC and web-tech innovation.
- It takes risks on unproven models and entrepreneurs, and enough of them seem to be paying off.