20VC USV's Brad Burnham on CoFounding USV with Fred Wilson, What They Look For In Potential Partners & Whether We Are Entering a Period of Consolidation or Expansion

In this episode of the 20 minutes VC, host Harry Stebbings interviews Brad Burnham, co-founder and managing partner at Union Square Ventures (USV). Burnham recounts his accidental entry into venture capital in 1995 and his journey to co-founding USV with Fred Wilson in 2003, emphasizing their complementary skills and shared investment ethos. He reflects on the importance of a focused thesis in venture capital, particularly when investing in the application layer of technology, and how this has facilitated the formation of a collaborative, knowledge-sharing environment among portfolio companies. Burnham also discusses the challenges and dynamics of the current venture landscape, including market consolidation, the trend of companies staying private longer, and the potential unhealthy dislocations caused by inflated private market valuations. He concludes by sharing his personal challenges in communicating complex ideas and USV's recent investment in OB1, highlighting its alignment with the core principles of an open internet.

• Brad Burnham co-founded Union Square Ventures (USV) with Fred Wilson in 2003.
• Both founders had over a decade of experience in venture capital and were eager to prove themselves further.
• Brad is recognized as the strategist and principled investor within USV.
• He initiated the concept of writing a treatise on venture capital and the Internet, which became a foundational guide for USV.
• Brad is credited with coining key phrases like "the application layer of the technology stack" and "large networks of engaged users."
• Fred Wilson acknowledges Brad as the source of many ideas he is often credited for.

"Brad and I founded USV together in the summer of 2003. We'd both been in the venture game for more than a decade. We'd made a fair bit of money, but were hungry to prove ourselves."

This quote sets the stage for the introduction of Brad Burnham, highlighting his experience, ambition, and partnership with Fred Wilson in founding USV.

"Brad is the strategist and the most principled investor in our firm."

The quote emphasizes Brad's role as a strategist and his reputation for principled investing within USV.

"It was Brad's idea to write a treatise on venture capital and the Internet before we set off to raise our first fund, and that exercise we did together continues to be our guiding light."

This quote explains Brad's forward-thinking approach to establishing a strong intellectual foundation for USV.

• Brad Burnham entered the venture capital industry by transitioning from AT&T, where he spun out companies from Bell Labs.
• He became an executive in residence at AT&T's venture capital group and was quickly promoted to manage the East Coast portfolio in 1995.
• His success in venture capital during the late 90s was partially due to favorable market conditions ("wind-aided track record").

"I kind of backed into the venture business... ultimately spun two different companies out of Bell Labs."

This quote describes Brad's unconventional entry into venture capital through corporate innovation and entrepreneurship.

"Tadai, you're now a venture capitalist."

The quote humorously captures the unexpected moment when Brad was thrust into the role of a venture capitalist.

• AT&T's decision to internalize its venture capital operations led to the dissolution of the partnership managing its fund.
• While managing the remaining portfolio, Brad helped start Takota Systems and recruited Fred Wilson as an angel investor.
• Brad and Fred's collaborative experience on Takota Systems' board led to the decision to raise a fund together.
• After approximately 80 meetings and extensive travel, they successfully raised the first USV fund in early 2004.

"In the 99 time frame, AT&T decided that they no longer wanted to have an independent venture capital partnership... That led to, ultimately to the dissolution of the partnership that was running that fund."

This quote provides context for the dissolution of AT&T's venture partnership, setting the stage for Brad's future endeavors.

"Fred and I enjoyed working with each other enough on that board that we said, gosh, we should go do more of this."

The quote reflects the strong working relationship and mutual respect between Brad and Fred, which was a catalyst for founding USV.

• Brad and Fred prioritized maintaining a collegial partnership while building the USV team.
• They sought partners who were not only known to them but also shared their vision and work ethic.
• Complementary skills and a common set of ideas were crucial in the early days of USV.

"We were certainly not interested in adding somebody that we didn't know. We wanted to preserve the very collegial feel of the partnership."

This quote highlights the importance of familiarity and a cohesive partnership in USV's team-building philosophy.## Venture Capital Partnership Dynamics

• The partnership values being in a single location for collaboration.
• Meetings every Monday to discuss portfolio, opportunities, and market conditions.
• Albert, a technology expert, joined the partnership after proving himself in various roles.
• Albert's involvement included interim CTO at Dakota and president at Delicious.
• Albert brought Etsy to the partnership and was compensated with a venture partner role.
• The partnership grows slowly and deliberately, valuing the dynamics of the team.
• New partners like John and Andy were well-known to the partnership before joining full-time.

We liked the idea that we were together every Monday and talking about the portfolio and thinking about new opportunities and thinking about the market.

This quote emphasizes the importance of regular collaboration and strategic discussions within the partnership.

And so it's been a very slow process. It'll always be a slow process for us. We think these partnerships are, the dynamics of the partnerships are very important.

The quote reflects the partnership's philosophy of slow and careful growth, prioritizing team dynamics.

• A great board member combines pragmatism, market knowledge, connections, and commitment.
• Dedication to managing portfolios, especially during tough times, is crucial.
• The willingness to invest time in less successful ventures is essential.
• Commitment to the entrepreneurs and the venture is key to being invited to future opportunities.

I think it's a combination of pragmatism, market knowledge, connections, willingness to invest time and energy.

This quote lists the essential qualities that make up a great board member according to Brad Burnham.

It's not about. I mean, it turns out that this is probably a truism in the business, that you end up investing more time in your losers than your winners. And the willingness to do that is what gets you invited into the next winner.

Brad Burnham highlights the counterintuitive aspect of venture capital, where more time is often invested in less successful companies, which is part of the commitment that defines a great board member.

• History in venture capital does not repeat, but it does rhyme, reflecting changing market dynamics.
• Venture capital's failure mode can be assuming the past will dictate the future.
• The investment focus has shifted from Internet infrastructure in the 90s to applications layer.
• Understanding both the recurring elements and the new dynamics is crucial.
• Adapting to new circumstances is necessary rather than sticking to old models.

I think it's a very good lesson, and I think that the key part of that is recognizing that it doesn't repeat itself.

Brad Burnham emphasizes the importance of recognizing that while patterns exist, history does not exactly repeat itself in venture capital.

The right move was to recognize that the fundamentals had changed so that, yes, there were a bunch of elements that repeated themselves, and we could talk about the way market consolidation happened, in the way it happened again more recently, and understanding those dynamics.

The quote explains the importance of understanding the changing fundamentals of the market and adapting investment strategies accordingly.

• The trend of companies staying private longer is noted.
• Concerns about the increasing time before companies go public are discussed.
• The evolution of later-stage funding may influence this trend.
• The venture capital industry's response to these changes is considered.

Fred's written a lot about kicking the can down the road, so to speak.

Harry Stebings references Fred's writing on the trend of companies delaying going public, which is a topic of interest in the venture capital community.

(Note: The transcript provided was incomplete, so the notes for the last theme could not be fully developed.)## Late-Stage Funding Environment

• The access to private capital is at an all-time high.
• Companies like Uber have raised unprecedented amounts in private markets.
• There is concern about the sustainability of high valuations in private markets not being matched in public markets.
• The scarcity of equity in private capital markets for dominant players leads to inflated prices.
• An adjustment in the market is anticipated due to these dislocations.

"Obviously, the access to private capital has been greater than it's ever been, and the ability for a company to raise the amount of money that someone like Uber has raised in the private markets is unprecedented."

This quote highlights the current state of the private capital market, where access to funds is abundant, allowing companies to raise significant amounts of money, exemplified by Uber's fundraising success.

"And so will that continue, should it continue? I'd argue it's probably not that healthy and that you're actually seeing some very weird dislocations when the scarcity of equity in the private capital markets for the real dominant market players, you end up bidding up the price for that to a price level that isn't sustained in the public markets."

The speaker expresses concern about the future sustainability of the current funding environment, noting that the limited availability of equity for dominant market players leads to inflated valuations that are not supported when companies go public.

• The mid-2000s was a period of expansion with the emergence of companies that leveraged the internet's native opportunities.
• Companies like Google, Facebook, and LinkedIn are examples of services that only made sense in a connected world.
• Currently, there is a shift toward consolidation with dominant market powers like Google, Apple, Facebook, and Amazon.
• It is becoming increasingly difficult for new unicorns to emerge, especially in consumer-facing web services.

"Are we in an era of expansion or are we in an era of consolidation? And I'd argue that in the 2006 seven time frame, when we were really beginning to discover for the first time what I would think of as the native opportunities for the web, these are opportunities that could not have existed prior to the Internet."

The quote contrasts the previous era of expansion, characterized by the rise of internet-based companies, with the current trend of consolidation.

"Creating a new set of unicorns in the face of that market power is going to be very difficult, certainly in the consumer-facing web services space."

This quote discusses the challenges new companies face in achieving high valuations due to the dominance of established tech giants, making it hard for new "unicorns" to emerge.

• The venture capital industry's investment approach changes in response to dominant companies like Google, Apple, Facebook, and Amazon.
• Questions about survival in a sector targeted by these giants are common in pitch meetings.

"I do think it changes the way that venture capital industry is investing."

The speaker acknowledges that the presence of dominant tech companies influences venture capital investment strategies.

• Union Square Ventures (USV) has found success with a thesis-driven investing approach.
• Investing at the infrastructure layer was driven by technical differentiation and intellectual property.
• At the applications layer, having a thesis helps organize investment activity and brings discipline and focus.
• Publicizing the thesis attracts entrepreneurs working in targeted areas.
• A thesis-driven portfolio allows for pattern recognition and peer support among portfolio companies without direct competition.
• USV's approach helps manage a larger portfolio efficiently.

"Having a thesis for why you think humans are going to interact with a certain set of services in a certain way, and how those services are ultimately going to be defensible and scalable, I think helps organize your investing activity."

The quote explains the importance of having a clear thesis to guide investment decisions, especially at the applications layer, where understanding human interaction with services is key.

"It's also turned out to be really helpful in the end as we've built a portfolio because we have a bunch of companies, have a bunch of similar characteristics and similar problems, similar opportunities, but because we make an effort not to invest in direct competitors, they're perfectly comfortable sharing ideas with each other."

This quote emphasizes the benefits of a thesis-driven approach in building a cohesive portfolio where companies can share ideas and support each other due to the absence of direct competition.

• USV's stature in the ecosystem increased significantly around 2007.
• Investments in Zynga, Twitter, Indeed, and Etsy returned significant value to the 2004 fund.
• The venture capital industry tends to give enduring credit for past successes.
• The speaker is surprised by the sustained interest in USV despite the time that has passed since their notable investments.

"We made investments in Zynga, Twitter, indeed, and Etsy within about a six month period in our 2004 fund. Each of those returned the fund."

The quote highlights a period of successful investments that significantly enhanced USV's reputation in the venture capital ecosystem.

"So that's the moment that I think about in terms of the learnings, I."

This incomplete quote suggests the speaker is reflecting on past experiences that contributed to the learning and growth of USV, though the specific learnings are not detailed in the transcript provided.## Venture Capital as a Learning Platform

• Venture capital offers a unique opportunity for continuous learning through engagement with innovative entrepreneurs.
• In venture capital, each conversation with an entrepreneur is enlightening, contributing to a broader understanding of various business areas.
• The process of learning in venture capital is ongoing and not confined to a single revelatory moment.
• Organizing conversations around a thesis helps to contextualize and deepen the learning experience.

"The fantastic thing about being in this business is you have this opportunity to become interested in an area. Some initial forays into that area, begin to identify companies in that area, and then these really smart people will come in and talk to you and explain how the world's going to be different as a result of these things that they're working on."

This quote emphasizes the dynamic and educational nature of venture capital, where conversations with entrepreneurs serve as a foundation for understanding emerging business landscapes.

• Entrepreneurs are the source of inspiration in the venture capital business.
• Venture capitalists may facilitate the creation process but acknowledge the entrepreneurs as the actual creators.
• The privilege of working with innovative entrepreneurs is a constant source of awe and inspiration.

"And so I am constantly in awe of the people that we work with, the entrepreneurs that we meet and that we talk to, and that we have the privilege of working with. They're the people that inspire me."

Brad Burnham expresses his admiration for entrepreneurs, highlighting their role as the true innovators who inspire his work in venture capital.

• Success for USV is defined by its ability to influence positive social change through market evolution.
• USV aims to make a contribution to the development of markets in a way that catalyzes societal improvements.

"I think that we have fantastic opportunity to participate in the evolution of markets in ways that can help to be a catalyst for positive social change and making some small contribution to that would be success."

Brad Burnham defines success for USV as having a meaningful impact on markets that leads to positive social outcomes.

• Brad Burnham faces the challenge of organizing and communicating big ideas effectively in the marketplace.
• He admires his partners' ability to blog daily and edit after publishing, while he prefers to resolve any internal contradictions before sharing his thoughts.
• The challenge lies in becoming more open and comfortable with communicating ideas, even when they are not fully refined.

"A challenge for me is becoming a little bit more open about communicating."

This quote reflects Brad Burnham's personal struggle with the communication aspect of his work, indicating a desire to improve his openness in sharing ideas.

• OB1 is an open marketplace that operates without a central authority, facilitating exchanges between users with a common protocol stack.
• The investment in OB1 aligns with the principles of the internet, emphasizing decentralization and open commerce.
• Brad Burnham sees OB1 as an extension of the internet's underlying principles to the layer of commerce.

"It's an open marketplace that allows anybody who runs a protocol stack to exchange goods and services with anybody else who runs that protocol stack with no central authority that arbitrates that marketplace."

The quote explains the rationale behind USV's investment in OB1, highlighting the company's innovative approach to decentralized commerce.