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A Conversation With One Of The World's Leading Venture Capitalists

Summary

Union Square Ventures is, by at least one ranking, the top-performing venture capital fund in the world. Last week, we interviewed one of its partners, Albert Wenger.

In a broad-ranging discussion, Dr. Wenger compared the current ferment of digital disruption to previous industrial revolutions and sketched out where he sees it heading from here.

He also discussed his approach to investing in publicly traded stocks in his own account, and what lessons individual investors can take from venture capital.

Interview with Albert Wenger of Union Square Ventures

According to at least one ranking, Union Square Ventures is the top-performing venture capital fund in the world. Last week, we sat down with one of the firm's partners, Albert Wenger (pictured below).

Photo of Albert Wenger via Union Square Ventures website.

Among the topics we discussed were the future of work in a world of increasing automation and 'Uberization', the thesis driving Union Square Ventures' approach to investing, current USV investments in digital approaches to health care and mechanical engineering, and how Albert applies lessons from venture capital to his personal investing in publicly traded companies.

The transcript of the interview below has been lightly edited to include links and images related to topics discussed.

David Pinsen: Thanks for taking the time to speak with us, Albert.

Albert Wenger: My pleasure, David.

DP: You studied economics and computer science at Harvard, went on to a PhD in Information Technology at MIT, and then you were a serial entrepreneur, and angel investor. Talk about how you went from that to getting into venture capital.

AW: Well, it actually started when I had my own startup at the end of '96, beginning of '97 in kind of first go-round of the Internet. And I did something in health; it was a company called W3Health. And I made a ton of mistakes along the way but got the company eventually funded, had a product in market, had customers -

DP: I thought you were going to say ton of money.

AW: Sorry?

DP: I thought you were going to say ton of money.

AW: No, no, no. And one of the things I realized is that I loved the startup process but that I wasn't a really great operator nor that I thought I was particularly going to want to be good at what it takes to be a great operator.

DP: Okay.

AW: And then I really thought that the investing side was absolutely fascinating. And from that insight it took me quite some time to get to be at VC. And I took some detours; I started an incubator here in New York City with two partners, was called LC39, started that at the height of the bubble in '99. We were at $25 million in a couple of weeks and then it took me sort of two and a half years to kind of unwind the whole thing.

DP: So, sort of a Y Combinator type of thing.

AW: No, it was much more of a - it was more along the lines of like what later LA Corp. did and what Bill Gross is doing with Idealab, he's been doing it very successfully for a long time; it was the idea that we would incubate businesses. And I think what the accelerators got right later on was that they had just much more formulaic approach. So, I think the accelerators, especially Y Combinator and they've got that cut down to an art and I've since learnt that there're really only two places that you can go. You can either do an accelerator model or you can truly incubate your own ideas, the way Idealab and LA Corp. have done it. We were trying kind of a mix which was kind of a no man's land between the two.

DP: Okay. So, let's talk a bit about where we are now. Union Square Ventures, which describes itself as a thesis-driven venture capital firm, investing in networks and infrastructure for the new economy. That evolution from the initial focus, just on the large networks like Twitter (NYSE:TWTR) and Tumblr [which was acquired by Yahoo (NASDAQ:YHOO)] and that sort of thing, could you just kind of elaborate how that evolution worked?

AW: Yes. So, fundamentally, the thing that we are big believers in is the idea of network effects. So, historically, if you think of the industrial economy, the industrial economy is all about economies of scale, growing and reducing your cost per unit basically. We think what's unique about the information age is that if you grow you can actually increase the value per unit to all of your customers. And, so that part, that network effect part is still central to our investing. It's just that we've shifted more towards doing that on the B2B side. So for instance, one of our portfolio companies, a company called Sift Science, they do fraud detection. And they use machine learning to do that and they do machine learning across the data from all of their customers. So, every customer gets a benefit of this fraud detected at one customer, that benefit accrues to all the customers. And that's an example of a network effect on the B2B side.

Home page image from Sift Science

Now, we've also added some other areas, so we've said, okay, everybody is building these new companies, they need certain infrastructure component. And so we invested in companies like MongoDB that provides the database, Twilio that provides connectivity to telecom. And those are core components that everybody needs. More recently, we invested in a company called Clarifai here that does machine vision. And so, that's become another part of our investment thesis.

DP: Okay.

AW: And then more recently, what we've done is we've also made a bunch of seed investment in blockchain technology, which we believe has the potential to maybe do away with some of these network effects. Most of the network effects really are the result of somebody having more data than anybody else. That's really at the heart of the network effects. And to the extent that over time you could use blockchain technology to have a consistent view into a dataset, so consistent but not controlled by one corporate entity that could help undermine some of those network effects. We think that is kind of a long-term play, and we've made a bunch of seed investments in companies in that space.

DP: So, it's kind of a hedge for you in the event that networks get broken down?

AW: I wouldn't say it's a hedge for us as much as we actually believe that - one of the core beliefs of the firm is innovation. And we think that if the world were to wind up being dominated by a few very large networks, we think that would not be very good for innovation. Over time, whenever somebody becomes very large and dominates the market, the rate of innovation in that market slows down. And so, to the extent that we believe in innovation and we want to invest in innovation, we think we should invest in things that allow for decentralized and what we call permissionless innovation where the beauty of the Web was you want to publish something, you didn't have to ask anybody for permission, you could just put it up on your website and there it was. And that gave us a huge amount of content innovation. And so, we're thinking that the same ought to be true for data.

DP: Just to drill down a little bit because I think the word blockchain, most people are thinking of Bitcoin, but it seems like that's sort of the tip of the iceberg.

AW: Yes. So, when we use the word blockchain, we're talking about all the systems that are currently being created to essentially allow for decentralized but yet consistent data stores. So, you can think of it this way. If you have an Excel Spreadsheet and I send a copy of the Excel Spreadsheet to you, well, if you changed some cells, your Spreadsheet is now different from mine. And if those are rows with let's say entries as to how many items have been sold in a marketplace, well, you can now have different entries of how many items have been sold from what I have; who now has the true list of items sold, well neither one of us does, right?

So, one way to solve this problem is to create something like Google Docs where there is one version that is constantly being synchronized. But now you put a central corporate entity in charge of that synchronization. And the beauty of blockchain technology is that it gives you both, it gives you synchronization but without an entity in charge of that synchronization. And so, the data is - so if for instance, to give an example of a company that we've invested in, we've invested in a company called OB1. They are publishing protocol…

DP: Like the Star Wars character?

AW: It's called OB1, yes, but it's O B and then the number 1. But it's a…

DP: A play on that.

AW: Play on that, absolutely. And the protocol that they are working on is the protocol called OpenBazaar; that's where the OB comes from. And OpenBazaar is a protocol for buying and selling things, but without a centralized marketplace operator. And yet, if I say I've sold you this unit, it is now registered that I've sold you this unit and I can't say, no, no, I actually didn't sell you this unit, right? That's partially what eBay (NASDAQ:EBAY) does, like if you and I are on eBay and I am selling something, eBay takes care of the thing where I say I sold this thing to you, right? And so OB1, the OpenBazaar protocol does the same thing, except that nobody - actually not OB1, no single entity controls that ledger where the 'I sold you the thing' is being recorded, that ledger is in the so called blockchain; in this case, it's in the Bitcoin blockchain.

DP: Okay, interesting. Now, in a previous article - and this ties in with some of the things you've been working on - we speculated about the rise of populism, exemplified by Donald Trump and Bernie Sanders currently in the campaigns. How that might be problematic for gig economy startups such as Uber (Private:UBER) where the employees don't have the benefits and the pay and protections of traditional employees. A question we asked a previous interview subject, angel investor Tyler Willis (Interview with an Angel Investor): is the solution going to come from the technology sector or is it going to come from government? And from your writing and speaking on it, it sounds like you envision a combination of both.

AW: Yes, absolutely. And I think historically, we've always made real progress with technology when we figured out that we needed both, the technology and the regulation. I always use the car as a good example, right? When the very first people started building cars, the very initial reaction by regulators was, oh! These are not allowed to be faster than horse drawn carriage that's because they were like how we're going to protect the horse drawn carriage industry. And then they were also like - and these things are dangerous, so, they have to have somebody walking in front of them, waving a red flag, right [see image below, via Amazon (NASDAQ:AMZN)]? And so, all the initial regulatory reaction was sort of bad, the kind of anti-innovation. But it's also a wrong narrative to say that we got the car innovation without regulation. What eventually we had is we had rules of the road, right, and we had government building road networks, and that gave us a car innovation. And so, we needed both the technology as to push the car forward, make the car safer, better, and faster, cheaper and we needed the regulation that was like okay, here's the rule of the road, here's the highway network, and it was those two things coming together.

And I think the same is going to be true for all these digital technologies, right? So, the idea that I have a phone, the driver has a phone, I'm mobile, the car's mobile, there ought to be a way to put the two together like that makes all the sense in the world. And so, if we wind up with regulation that makes that not possible, that would be a really bad outcome. But conversely, we can't just say, oh! Market is just going to take care of it because you know instead of these you have such things as congestion. That's the real problem, right? You have this question of okay, are these people really like making enough money and how do we make sure that they make enough money. There are some cities where Uber (UBER) now pays so little that it's not clear that you can even maintain your car. So, we can't just say the market's going to take care of that, when there are structural problems in the market that may prevent the market from taking care of that.

February 2016 Driver Protest against Uber in NYC, via Gothamist

So, I think we want to wind up with regulation that makes it possible for lots of people to freely act in these systems. So, I'm a big fan of the idea, for instance, which we may get to on the universal basic income, if people had some base level of income then it really becomes a free choice to drive, right? It's not, I have to drive because otherwise I don't know where to pay my rent or how to feed my kid. So, we want people to be free and make this as a free choice. We want to blow up these old and artificial distinctions between employee and contract worker. We created those distinctions at a time when it was very hard to gather data. It was very costly to gather data, so we put employers who had employees for long periods of time, we put them in charge of collecting their own data and contractors who bunched around we put them in charge of collecting their own data. Now, we have all these systems collecting data all the time. So, the distinction makes no sense anymore. But we've created a system where we tied all these other things to the distinction, while if you're an employee, you get your benefits from the employer but if you're contracting it, you have to figure out how to get your own benefits. So for instance, I'm a big fan of this idea of portable benefit. You should just...


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