union square ventures Investment thesis

VC investment Thesis: Union Square Ventures

Tl;dr: The four USV investment thesis’ shared from 2012 to 2021 to guide their investment decisions for this venture capital firm. 

Investment thesis’ are a great way to learn about a VC firm, but more so it is a super way to impact your thinking about the world and the lens through which others view it. Since 2012, four investment thesis’ have been shared by Union Square Ventures.

Click to scroll to the one you want (note it will jump just after the title)

  1. Union Square Ventures Investment Thesis 1.0 (2012) – Posted by Andy Weissman
  2. Union Square Ventures Investment Thesis 2.0 (2015) – Posted by Andy Weissman
  3. Union Square Ventures Investment Thesis 3.0 (2018) – Posted by Rebecca Kaden
  4. USV Climate Fund (2021) – Posted by Albert Wenger

Other reading from USV

 

Union Square Ventures Investment Thesis 1.0 (2012)

Venture firms operate a bunch of different ways. Some have a geographical focus, others have a sector focus, still others have a stage focus. Union Square Ventures’ focus has evolved into what we call a “thesis” but is probably better described as a macro level view about the world – the Internet world – that we then (attempt) to structure investment activities around. In short, as described by Brad last year in 140 characters, USV invests in:

Large networks of engaged users, differentiated through user experience, and defensible through network effects.

When we are organizing our activities and thinking about investment decisions then, we parse that a little finer, we unpack some of the components. Large” obviously requires scaleTwitter is a great example. But it can also mean large relative to a specific problem set or community. Stack Exchange is comprised of over 80 question and answer sites. Some of those sites, like Server Fault, are designed for very specific communities, but aim to have most of the potential members of that community as active participants. Similarly, Behance is designed for the world’s creative professionals.

Networks” are of course interconnected groups or systems, but they also come in a few flavors. For example, networks can be centered around person-to-person sharing of an activity (foursquare, Soundcloud), facilitating a transaction (Dwolla), enabling creativity (Tumblr, Wattpad), person-to-person marketplaces (Etsy,Kickstarter), or business and personal finance marketplaces (Lending Club,Funding Circle). Marketplaces have some of the more interesting network components and use the efficient exchange of information to produce superior economics and create new economies in their area of focus. Examples include the creative projects that wouldn’t otherwise come to fruition if the Kickstarter marketplace was not active, the individuals finding work through Workmarket’s labor resource market, or the active secondary market in small business loans (and pieces thereof) being traded through Funding Circle. Finally, networks can also be networks of data, such as what DuckDuckGo (search), Indeed (jobs) and Flurry (mobile apps) are doing that then provide aggregate data-level benefits to users from that data network aggregation.

We will also look closely at the “user experience” of these networks, being most interested in novel (“differentiated”) web and mobile native interface ways to engage users around a solution to the particular problem, one that is consistent with the fabric of the users’ experiences. The foursquare check-in is a good illustration of a native behavior designed in the context of exploring a city, as is Codecademy’s method of teaching people to program by writing code inside a browser window. Similarly, Canvas provides a unique set of tools to play with images, thereby encouraging the remix and sharing of them, turntable’s entire experience is designed to play music with other people, and tumblr’s dashboard is a method of following and reacting to and with creativity. Unique user experience also extends beyond the user interface – it’s the design of the entire system: how it functions, what is allowed; what isn’t allowed; what values are inherent in the prospective functioning of the service. Kickstarter’s incentive/pledge system, with minimum goals and rewards, is an example of a unique experience that is well-aligned with the goals of the service itself (participating in creativity). As Albert recently wrote about Etsy: “the best long term steward of a network will be a company that focuses on value creation for all participants in the network instead of solely for its shareholders.”

The last component of this thesis relates to businesses that create barriers to entry through “network effects“, in which the value of a service to a user increases as others use it. This can potentially arise in a number of ways: for example a proprietary data asset; the marketplace dynamics of having a robust set of sellers and buyers; or through the development of a community that openly shares and exchanges information. In an era where the initial cost to develop the prototype of a product has been dramatically reduced, where there are mature and scalable open source tools and services to utilize for that development, and where cloud infrastructure is available on demand and at a variable cost, defensibility may no longer be found in the technology underpinnings – the code or IP – of a service. Defensibility may however arise through the growth of service that gets more valuable, and more interesting, with each new participant. One nice example of this is Twitter, which is so potentially valuable because, put simply, that’s where the Tweets as well as the personal follower/following relationships reside. The value of these businesses tends to be composed of the very networks they have created.

Taken together, these components comprise how USV looks at the Internet at large to find places where we should invest and where we can be good partners. Of course, the components are not monolithic and are subject to nuance and interpretation (see for example “Do Network Effects Span Geographies“; “How Strong Are Network Effects Online, REALLY“), but again, of course, that’s what makes them most interesting.

 

Union Square Ventures Investment Thesis 2.0 (2015)

Union Square Ventures has always been a “thesis” driven firm. We maintain specific principles about the internet that guide our investment decisions. While other things like stage and to a lesser extent geography, also matter, our thesis or point of view is the primary thing that guides our decision making.

We last wrote about this a few years ago, in Investment [email protected], where we attempted to describe this view of the world. There, we also tried to describe how dynamic the thesis is, or can be. A few years later, we have a better idea of how our thesis has evolved and now presents, circa 2015.

Since USV was founded, we have focused 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.

Initially, the investments related to that applications layer were what we called “large networks” – that is – broad based, mostly consumer-oriented networks that could, or at least aspired to, touch many many people (hundreds of millions or more).

Brad reduced this to 140 characters a number of years ago:

This thesis brought us to companies like TwitterTumblrEtsy and Soundcloud – large networks that, to this day, have proven defensible through network effects.

Over time, it became harder – and it’s still hard – for newer entrants, newer broad consumer networks – to gain scale because to do so requires them to displace the time users devote and spend on the new incumbent networks, such as Facebook.

As a result we turned our attention and applied the thesis to those services that support the larger networks – so called “enabling technologies” – that were horizontal in nature, yet also broad with respect to the numbers of networks they could potentially support.

These enabling technologies are basically businesses that provide essential services to the new crop of web companies.

These are investments such as Twilio (a communications service), MongoDB (a database service), Cloudflare (a network and security service), SiftScience (fraud protection), and Firebase (a synchronization service). And a more recent investment – Clarifai (image and visual recognition service).

Then, roughly in the 2012 time frame, we also turned our attention to thinking about market-specific networks: networks in high-value niches that are differentiated and defensible, partially because they are domain-specific. These networks generally have more subtle or less obvious network effects, precisely because they involve something more specific and tight.

These often fall into specific categories – like education or learning (EdmodoCodecademySkillshareDuolingoQuizletStack Exchange), financial marketplaces (Lending ClubFunding CircleCircle UpC2FO) healthcare and medicine (Figure 1Human DXClue), science and engineering (Science ExchangeSimScale), the law (Casetext) and company ownership management (eShares).

These more subtle network effects also include platform shifts, such as mobile (AminoFigure 1 or Duolingo), venue shifts (enterprise security delivered in the cloud, such as Cloudflare), and data networks like SiftScience, which delivers fraud protection by aggregating data points across thousands of domains.

Finally, and more recently we have been thinking and talking about the blockchain and bitcoin. When we analyze the network effects of the large internet platforms, it appears that part of their defensibility is through the centralization of data – user data, interaction data and transaction data.

We started to see that blockchains – by basically being a decentralized data layer – could over time erode those advantages.

So we turned the thesis to the exploration of services that could undermine larger networks by decentralizing the data asset that the large networks have. While this area is obviously early, we have made a handful investments in this decentralized layer including Coinbase (banking and brokerage), OB1 (buy and sell marketplaces) and Onename (identity).

Finally, as infrastructure providers gravitate towards the applications layer, they are underinvesting in connectivity itself at a time when the demand is growing and new technologies are available. Inasmuch as the internet itself is an enabler of creation and creativity, we believe that businesses like Veniam (the “internet of moving things”) and one other unannounced investment we have made will be foundational layers for future generations of technology. So, we have also made a few investments in those telecommunications infrastructure companies with innovative technologies or business models (Access 2.0).

Importantly, the way in which we invest against this thesis is also cumulative – we don’t simply stop investing in any one area as we uncover other ones. It looks something like this, a chart of our active investments over time from 2004-present:

usv investment thesis

To capture this image into a current version of our investment thesis, we’ve reduced it again today to 140 characters.

This is USV, 2015:

 

Union Square Ventures Investment Thesis 3.0 (2018)

The commitment to a thesis is part of the fiber of USV–a shared set of ideas creates a framework that allows us to operate with focus and work on what matters most to our team. But what that thesis is has evolved over time and will continue to evolve. It reflects both a changing world as well as the shifting interests of our partnership. Recently, we have been working on its third iteration.

In its earliest days, USV started with a focus on the application layer of the web. The team quickly realized that network effects play a central role in all of these applications and Thesis 1.0 emerged: Invest in large networks of engaged users, differentiated by user experience, and defensible through network effects. This post breaks down the components, but the crux of this thesis involved primarily consumer focused businesses where the value of the service to a user increases as others use it, too. These network effects create defensibility and lead to scale.

This thesis drove USV’s investments in businesses such as Twitter, Etsy, Tumblr, Foursquare, Behance, and Kickstarter. It proved to be a productive filter and guidepost. But the success of businesses that benefited from network effects dominated consumer internet to a point where it became extremely difficult for new networks to emerge, which remains true today. As a result, USV revised the thesis to include 3 new buckets which Andy broke down in this post. 1) Vertical networks and marketplaces such as those in financial services (e.g. Lending ClubFunding CircleCircleUpStash); health and healthcare (NurxFigure1Science ExchangeClue); education (DuolingoQuizletTophatSkillshare);  and ownership management (Carta.) 2) The underlying technology of networks and emerging businesses (e.g. MongoDBTwilioCloudflareSift ScienceShippo) 3) enablers of open and decentralized data which have the potential to counteract the centralizing force of the large internet networks. The last one is the root of USV’s blockchain portfolio  (e.g. CoinbaseBlockstackAlgorandCryptoKitties.)

Throughout these categories, a focus on companies that broaden access emerged as a common thread. This theme has become a driving force across the business models and sectors our portfolio covers. In education, for example, Duolingo allows users to learn new languages around the world, on their phones and from their couches, for free. In healthcare, Nurx creates new ability for consumers to access medical care at dramatically reduced cost. Coinbase makes an emerging asset class accessible to mass markets. Twilio allows developers anywhere to easily access the world’s voice and text communications infrastructure.

We believe we are still at the beginning of the opportunity to broaden access with the most critical implications ahead of us. As a result, we decided to revise our thesis into a third version:

USV backs trusted brands that broaden access to knowledge, capital, and well-being by leveraging networks, platforms, and protocols.

We think of knowledge, capital, and well-being as each encompassing multiple components. Knowledge includes education and learning, but also data driven insights and access to new ideas. With capital, we include financial capital from financial services innovation, whether in the current system or emerging financial platforms like crypto, but also human capital and technology infrastructure. And with well-being, we think about health and wellness, but also entertainment, connection, community, and fun.

The goal of these businesses is to build trusted brands–products and services that not only serve a purpose, but integrate into the hearts and minds of their customer in a way that is durable and important. Trust comes from true alignment and convincing the customer that their values and priorities are shared. The bar for this is higher than ever but the best businesses will continually meet it.

Many of our most recent investments fit in this thesis already, including Stash, which is opening up high quality financial services products to new markets; Algorand, which is creating a new scalable, decentralized currency and transaction platform; and Flip, which is allowing users the freedom to move around without worrying about long leases by creating an open marketplace. But the new articulation will help us continue to use our thesis as a guide for our team in shaping our portfolio.

If you are an entrepreneur building a trusted brand that will broaden access in a new way, we would love to talk to you.

 

USV Climate Fund (2021)

At USV we describe ourselves as a “thesis-driven venture capital firm.” For our core fund, we have been investing against Thesis 3.0 for some time. Over the last couple of years, we have been developing a separate Climate Thesis, including making investments in companies such as Leap and Wren.  We are excited to announce that we now have a $162 million Climate Fund specifically for that. Like our Opportunity Fund, this new Climate Fund will be managed by all the existing USV partners.

At the highest level, the Climate Thesis can be summarized as follows: The USV Climate Fund invests in companies and projects that provide mitigation for or adaptation to the climate crisis.

Mitigation is working on the causes of the climate crisis through either emissions reduction or drawdown of existing greenhouse gases from the atmosphere. Adaptation is working on the consequences of the climate crisis, such as increased risk of crop failure. Adaptation is part of the thesis in recognition that the climate crisis is not some distant future event but rather playing out in the here and now.

We will be breaking down this high-level thesis into specific ideas, much as we have done for Thesis 3.0. We will be publishing these as a series of blog posts going forward. The first such idea is using satellite imaging to enable high powered incentives for maintaining and improving forests (and eventually starting new ones). This idea has already resulted in an investment in SilviaTerra, which we are also announcing today.

The USV Climate Fund is a straight-up venture fund. We believe that decarbonizing the economy and dealing with past emissions (and their consequences), offers many opportunities for building important new companies that can produce venture type returns. The transformation of all aspects of the physical world over the coming decades will be on par with the changes brought about by digital technology. Unlike other USV funds which have focused primarily on bits, the Climate Fund will invest in both bits and atoms. Like our core funds, we will be targeting primarily Series A opportunities, which for us means something has been built that we can kick the tires on. That something can be as little as an early prototype and companies can definitely be pre-revenue.

We thank the limited partners who are trusting us with capital for this new thesis. And we are looking forward to backing entrepreneurs and teams working to help address the climate crisis.

 

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