20VC USV's Rebecca Kaden on Whether Venture Returns Can Be Made At Scale In Consumer Today & How To Navigate Consumer Investing In A World of Amazon

In this installment of the 20 minutes VC podcast, host Harry Stebbings interviews Rebecca Caden, a respected general partner at Union Square Ventures (USV), renowned for her investments in consumer-focused startups. Caden shares her journey from journalism to venture capital, emphasizing the importance of investing in people and the potential of technology to revolutionize traditional industries. She discusses the challenges and opportunities in consumer investing, particularly in the face of giants like Amazon, and highlights the necessity for startups to foster organic growth through passionate communities. Caden also touches on the complexities of investing in the early blockchain ecosystem, noting the need for regulatory clarity. The episode concludes with a quick-fire round where Caden offers insights on the future of retail, the effectiveness of direct-to-consumer strategies, and her excitement about her investment in modern fertility, a company innovating in women's health.

• Rebecca Caden is a general partner at USV, a successful venture fund.
• USV's portfolio includes major companies like Twitter, Twilio, and Tumblr.
• Rebecca's background includes journalism and a partnership at Mavron.
• She transitioned from journalism to venture capital, starting as an intern and rising to general partner.

"And our guest is probably one of the most loved in the venture community. She's the guest that's been most referred by founders and VCs alike, which is why I thought it was so crucial to have her back on the show for round two."

This quote highlights Rebecca Caden's reputation and popularity in the venture capital community, emphasizing the value of her insights for the audience.

• Rebecca started as a journalist and shifted to business to help a startup publication.
• Her journey led her to business school at Stanford and then to venture capital.
• She was mentored by Bill Campbell, who encouraged her to pursue a career in VC.
• Rebecca started her VC career at Mavron and eventually became a general partner.

"I was a journalist out of college, which was something I really loved and found incredibly interesting and thought it would be what I did."

This quote explains Rebecca's initial career aspirations and her unexpected shift from journalism to venture capital, which was influenced by the need she saw in the business side of the media.

"He was largely known for mentoring the big know Eric Schmidt and Steve Jobs and these kind of big legends and on the side had this kind of side practice of mentoring."

The quote refers to Bill Campbell's influence as a mentor to prominent figures in the tech industry and his role in guiding Rebecca's career path.

• Consumer investing is divided into two categories: platform shifts and reinvention of old industries.
• Platform shifts involve new technology and mass consumer adoption, leading to significant venture returns.
• The current market is challenging for platform shifts, with technologies like voice and VR not yet at consumer adoption tipping points.
• The acquisition landscape is dominated by third-party platforms, raising concerns about the equity value of acquired companies.
• There is opportunity in using technology to reinvent industries with outdated practices and poor consumer trust.

"Look, I think Peter Fenton and Jeremy Levine are probably two of the best consumer investors of all time. And I take everything they say I read up on and take to heart and I don't think they're wrong. I just think it's complicated."

Rebecca acknowledges the expertise of Peter Fenton and Jeremy Levine while highlighting the complexity of the consumer market and the different opportunities it presents.

"That's really where, you know, increasingly focused and where USV is increasingly focused. And that's this opportunity to kind of use technology to reinvent old industries."

This quote explains USV's strategic focus on leveraging technology to transform traditional industries and create new consumer opportunities, despite the challenges in the platform shift category.## Technology's Impact on Access

• Technology is providing access to services in areas that were previously inaccessible.
• Consumer finance, health, and education are sectors that are benefiting from technological advancements.
• These sectors are often messy, regulated, and challenging, but offer significant opportunities for innovation and the emergence of new consumer brands.

"Technology can change that and provide access where there previously wasn't. That's where I think about consumer finance, consumer health, pieces of education."

This quote emphasizes the transformative role of technology in democratizing access to essential services, particularly in industries that have been traditionally difficult to penetrate due to regulations or complexity.

• Regulated industries can provide defensibility and a competitive moat for startups that successfully navigate them.
• Regulatory hurdles are both exciting and concerning, as they can be challenging but also offer opportunities for change, especially in financial services.
• Startups like Stash are indicative of the shift in banking services towards serving the underserved middle and lower economic segments.
• Regulatory challenges require a careful approach with the right team and timeline, and the "move fast and break things" strategy may not be suitable for these industries.

"I get excited and concerned at the same time. It's not insurmountable, but you need to make sure your eyes wide open with the right team and the right timeline to go after that."

This quote captures the dual nature of regulatory environments as both a source of opportunity and a potential obstacle, highlighting the importance of strategic planning and awareness in regulated industries.

• High customer acquisition costs can be challenging for startups competing against large incumbents in consumer fintech.
• Successful businesses should not rely solely on paid acquisition but should also develop alternative strategies.
• Passionate communities, word of mouth, and organic systems are crucial for sustainable growth and indicate customer love and retention.
• Companies that can find organic growth channels through impassioned consumers have a significant advantage.

"I think a core belief I have developed and my team shares... is we don't believe that businesses that are going to pay to acquire customer after customer are great venture businesses."

This quote reflects the belief that businesses overly reliant on paid customer acquisition are not ideal for venture capital investment due to unsustainable unit economics and the lack of organic growth potential.

• Successful consumer startups often have organic growth channels and a passionate user base.
• Early signs of customer love, such as referrals and retention, are critical indicators of a startup's potential success.
• Emotional engagement with the product and brand is a common trait among successful companies.
• Startups like Stash, Dia&Co, and Glossier have transcended their product offerings to form emotional connections with their customers.

"The companies that find organic growth channels through impassioned consumers are hugely advantaged."

This quote underscores the importance of organic growth and an engaged customer base as key drivers of success for consumer startups.

• Amazon is viewed with a mix of fear, awe, and respect due to its executional advantage and success in various domains.
• Startups should be cautious about competing directly with Amazon due to its scale, capital, data, and speed of innovation.
• Amazon excels in the functional aspects of commerce, but there are opportunities in the emotional, experiential, and discovery aspects of shopping that Amazon may not dominate.
• Investors are cautious about backing companies that aim to compete with Amazon, focusing instead on areas where Amazon is less likely to excel.

"I think we should all look at Amazon with basically like a healthy dose of fear and awe and respect."

This quote conveys the formidable presence of Amazon in the market and the need for startups to respect and carefully consider their strategy when entering spaces where Amazon operates.

• The speed of innovation at large companies like Amazon has accelerated, challenging the notion that startups have a few years' advantage in lower-priority areas.
• Amazon's ability to quickly spin up new initiatives makes it difficult for startups to find safe niches.
• USV focuses on investments that do not directly compete with Amazon's core strengths but instead target the emotional and experiential aspects of consumer behavior.

"I think the speed of innovation has really accelerated to the point where it's going very fast."

This quote suggests that the rapid pace of innovation at companies like Amazon reduces the window of opportunity for startups to operate without facing competition from these giants.## Shopshops and Cross Border Commerce Platform

• Shopshops is creating a live streaming-based cross-border commerce platform.
• Hosts are sent into retail stores to live stream themselves trying on clothes and accessories.
• The platform allows viewers to watch like TV or YouTube and engage by commenting and transacting in real time.
• Viewers form emotional connections with the hosts, leading to followings based on shared sizes and styles.
• The platform is more of a distributed QVC than a marketplace or Amazon competitor, focusing on entertainment and emotional connections over transactions.

"And so what they do is they send hosts into retail stores, a long tail of retail stores that are largely, if not empty, then definitely underpenetrated. And these hosts, who are women who are fashion forward and passionate about clothes and apparel and accessories, live stream of themselves, trying stuff on, talking about the clothes, figuring out what they like."

This quote explains the operational model of Shopshops, highlighting the use of live streaming to engage potential customers and the targeting of underpenetrated retail stores.

• The potential for considerable venture capital returns in the consumer space exists, as evidenced by successes like Dollar Shave Club.
• Investing in consumer brands is challenging due to fragmented markets, expensive acquisitions, and the need for community growth and alternative scaling channels.
• Acquisitions can happen during different growth stages, making it unpredictable as an investment strategy.
• Entrepreneurs and investors should aim for powerful standalone brands that could also be acquisition targets.

"Can considerable venture dollars today be in bade investing in consumer? Yes. Right. Because we have the examples of that being true."

Rebecca Caden confirms the potential for significant returns in consumer investments, referencing successful examples.

• The market is currently experiencing fragmentation, making it easier to start standalone brands.
• This fragmentation may lead to future consolidation as current methods of starting and running brands may not be the most efficient.

"I actually think we're right now in a moment of fragmentation where it's just easier than ever to start standalone brands because the channels to speak directly to customers as well as to create a supply chain, manage logistics, build your platform, are easier and cheaper than ever."

Rebecca Caden describes the current market trend as a phase of fragmentation, emphasizing the ease of launching new brands due to accessible channels and resources.

• Both Mavron and USV have similarly sized funds and a focused approach to Series C and A investing.
• They resist raising massive amounts of capital, unlike some other firms.
• USV employs a thesis-driven investment approach, seeking alignment with collective beliefs about market opportunities.
• The focused fund strategy is preferred for its potential to yield returns and support a team-oriented partnership.

"And so that depth of approach and attitude towards the market is one that I've really enjoyed learning about and learning from my partners and taking on as we've iterated our thesis, and I've become a part of the team."

Rebecca Caden discusses the strategic and philosophical alignment between Mavron and USV, particularly USV's thesis-driven approach.

• The most critical aspect of investing is surrounding oneself with talented, high-integrity people.
• This applies to both investment partners and the entrepreneurs backed by the firm.
• Focusing on people is paramount, even over markets and products.

"But I think the biggest one is just the importance of people, and that there's nothing more important than surrounding yourself with the most advantaged and talented and highest integrity people."

Rebecca Caden stresses the significance of prioritizing people in the investment process.

• Blockchain is an early ecosystem with potential but also carries significant risks and uncertainties.
• Investing in blockchain companies and building crypto portfolios are seen as different activities.
• Regulatory uncertainties pose a risk to investors in the blockchain space.
• Non-institutional investors should approach blockchain investments with caution and awareness of the ecosystem's nascent stage.

"But blockchain companies outside of institutional investors, I think you have to be pretty careful and eyes wide open and just really know how early this ecosystem is."

Rebecca Caden advises caution for non-institutional investors considering blockchain companies due to the early and uncertain stage of the ecosystem.

• The blockchain ecosystem faces challenges from both incremental regulatory changes and the potential embrace by governments with nefarious objectives.
• The situation is complex, with multiple concerns to consider regarding regulation and government involvement in the blockchain space.

"I kind of think it's all of the above."

Rebecca Caden acknowledges the multifaceted nature of regulatory concerns in the blockchain industry, indicating that various issues must be considered simultaneously.## Regulatory Landscape in Finance and Crypto

• The finance industry is heavily regulated by the government, especially in the United States.
• Public markets have clear definitions and regulations, while crypto markets lack clarity.
• There is an ongoing process to define and understand crypto in relation to existing regulations.
• The speaker advocates for regulation in the crypto market but acknowledges the risks involved due to the current lack of rules.

"The finance industry is regulated, and it's regulated by the government, particularly in the US, which is where we're focused on now."

This quote emphasizes the significant role of government regulation in the finance industry, specifically pointing out the focus on the U.S. market.

"And then you think about the crypto markets, and there's very unclear definitions of all those things."

The speaker contrasts the clarity in public market regulations with the ambiguity in the crypto market, highlighting the need for clearer definitions.

"We just think until some of those rules are in place, you just take a fair amount of risk getting involved, for sure."

The speaker acknowledges the inherent risks of engaging in the crypto market due to the absence of established regulations.

• Rebecca Caden's favorite book is "Pale Fire" by Vladimir Nabokov, which she values for its exploration of the importance of stories and narratives.
• The biggest challenge for Rebecca was moving away from colleagues she respected, while the delight was discovering the genuine team orientation and talent at USV.
• Rebecca sees the retail industry undergoing rapid changes, with increasing demand for personalized products and experiences, presenting both challenges and opportunities for businesses.

"My favorite book is Pale Fire by Vladimir Nabokov, which is a novel... it's all about the importance of stories and narratives in our lives."

Rebecca Caden explains her favorite book and its relevance, emphasizing the universal applicability of stories and narratives beyond just business.

"Challenge, it's hard to move on from working with people you deeply respect and love."

Rebecca shares her personal challenge of transitioning from a previous work environment, highlighting the emotional aspect of professional changes.

"We want more personalized stories and brands and products and experiences than ever before."

This quote reflects Rebecca's observation on the evolving consumer preferences in the retail industry, pointing to a shift towards personalization.

• Direct-to-consumer (DTC) brands should focus on customer-centricity rather than channel-centricity.
• Opening physical stores can be smart if it aligns with customer desires for in-person interactions.
• Entrepreneurs should seek a balance between efficiency and effectiveness in reaching customers.

"So if customers are asking for in person interaction in own retail, they should probably open physical stores."

Rebecca argues that customer preferences should dictate whether DTC brands open physical stores, emphasizing a customer-first approach.

• Rebecca disagrees with the notion that New York lacks conviction-based early-stage investors.
• She acknowledges that while Silicon Valley may be more crowded, New York has high-quality investors and is growing rapidly.
• The geographical location of investors is becoming less important as the goal is to find the best companies and entrepreneurs regardless of where they are based.

"I work with, I would say, five of the most conviction based investors I've ever met."

Rebecca defends her experience with conviction-based investors in New York, countering the generalization about the city's investment landscape.

"I think geography is becoming in some ways less important."

This quote suggests a trend towards a more distributed and less location-dependent investment approach, highlighting the focus on company quality over geographic location.

• Modern Fertility was chosen for investment due to the significant potential in the fertility category and the strengths of the founding team.
• The fertility industry is characterized by high customer emotion and intent, but lacks a dominant brand and clear guidance.
• Modern Fertility offers at-home testing, providing valuable information at a lower cost, which aligns with the qualities of successful consumer brands.

"Fertility is a category marked by fear and confusion and lack of direction and extremely high emotion."

Rebecca describes the fertility category's challenges and the emotional engagement of its customers, indicating a market ripe for innovation and leadership.

"I think that provides a real opportunity for a brand to emerge."

The quote highlights the investment rationale, which is based on the opportunity for a brand to establish itself as a leader in a market with high customer need and lack of clear options.

• The podcast promotes Brex, a corporate card for startups, and Terminal, a service for setting up remote technical teams.
• Lattice, a people management solution, is also endorsed for its ability to help companies build strong cultures and manage employee performance.

"Brex founders Enrique M. Pedro built a payments business in Brazil, but found themselves rejected for a corporate card when they were in Y combinator."

Harry Stebings provides a backstory on the founding of Brex, illustrating the founders' motivation to create a solution based on their personal experience with the problem.

"Lattice is the number one people management solution for growing companies."

Harry endorses Lattice, positioning it as a top solution for companies looking to improve their people management practices, implying its value for listeners involved in company operations.