Rebecca Kaden – Thesis Driven Investing - [Invest Like the Best, EP.155]

My guest today is Rebecca Kaden, a partner at famed venture firm union square ventures. USV is known for thesis-driven investing, which is the topic of our conversation. Rebecca walks us through the evolution of USV’s thesis into its third generation, and from there we explore many of the most interesting and exciting areas of business, technology, and learning. Please enjoy our conversation For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag Show Notes 1:11 – (First Question) – An overview of Union Square Ventures Thesis 3.0 7:49 – Core changes that can help any community 9:59 – Ways to fix the broken education system 13:41 – Gap between job preparedness and the education system 14:44 – Companies creating education systems to prepare people for careers in their field 18:49 – Most unique technological solution for people to educate themselves 22:00 – Ways to improve access to capital 26:49 – The distribution problem in capital markets 28:19 – How does she assess an early-stage company and its team’s ability to assess their ability to maximize distribution 30:56 – Digital marketing and why it could be broken 34:22 – Examples of masterful marketing 36:07 – How they are focused on improving wellbeing, their first focus on healthcare 39:35 – Wellbeing on their focus on community 41:29– The Art of Community: Seven Principles for Belonging 45:30 – Her thoughts on mentorship 48:23 – What she has learned in her time at USV 51:50 – Kindest thing anyone has done for Rebecca Learn More For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on Twitter at @patrick_oshag

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Patrick O'Shaughnessy?

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• 0:36Patrick O'Shaughnessy?

  Hello and welcome, everyone. I'm Patrick O'Neal and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

• 0:56Speaker 02

  Patrick O'Neal is the CEO of O'Neal Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Neal Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Neal Asset Management may maintain positions in the securities discussed in this podcast.

• 1:22Patrick O'Shaughnessy?

  My guest today is Rebecca Kaden, a partner at famed venture firm Union Square Ventures. USV is known for their thesis-driven investing, which is the topic of our conversation. Rebecca walks us through the evolution of USV's thesis into its third generation. And from there, we explore many of the most interesting and exciting areas of business, technology, and learning. Please enjoy our conversation.

• 1:43Patrick O'Shaughnessy?

  So Rebecca, this is going to be really fun. I think because you guys are a thesis-driven investment firm, which is different from a lot of the firms kind of your peer group that I've talked to recently. We could start at the very top with, because you penned it, Union Square Ventures' third iteration of its broad investment thesis. And then we're going to go down each of the little rabbit holes beneath that. But let's start at the top.

• 2:06Speaker 03

  Awesome. Well, thank you for having me. This is so fun. So USV is a thesis-driven firm, which really just means that rather than think of venture as a coverage-driven model of how many companies are out there and how many we can see, how can the partnership come together and think about? Ideas and things we believe in and aggregate that into a thesis that we think can shape our investing strategy. The firm started with that in 2003 and it's worked well, both because I think it produces good results, but one thing that I like to point out is it works well, I think, because also it's a group of people that likes it. It's thinkers and they think it's fun and we enjoy coming up with these thesis ideas together. So to talk about thesis 3.0, it actually helps a lot to start with 1.0.

• 2:50Speaker 03

  So 1.0, which was published towards the beginning of the firm, but just as all the others, when we publish it, it's as much a reflection of the ideas that we've already been investing in for some time as it is about where we're going. Because what happens is the thesis kind of comes together organically or through a series of conversations, we realize it's guiding our thinking and investing. And then we publish it out to the world because we believe that putting ideas out there can only help everyone, including ourselves. So 1.0 was about large networks of engaged users, network effects. Now, network effects is a pretty obvious thesis.

• 3:27Patrick O'Shaughnessy?

  Quaint term, yeah.

• 3:28Speaker 03

  That's been largely adopted by many investors, entrepreneurs and the internet at large. But in 2003 and 2004, it was less obvious. And the belief was that equity value would amass towards where there were large networks of engaged users and that platforms would grow off of that. That turned out to be true and led to great investments that USV made at the time, long before I was here, in businesses like Twitter and Indeed and Etsy. But what happened was two things. One, the team realized that there was opportunity to see that same kind of network effect in vertical networks that they were seeing in horizontal networks. But also that the opportunity got less and less with every horizontal network built

• 4:13Speaker 03

  because these network effects are very strong and they were creating an internet of centralized platforms that were very hard to compete with.

• 4:23Patrick O'Shaughnessy?

  Can you just define horizontal versus vertical? Just so I'm sure that I have it right.

• 4:26Speaker 03

  Sure. Yeah. So horizontal is something like Facebook, where the core network effect is the business. Vertical is something like a financial services platform or an education platform that has a network effect to it. I think about Duolingo as an example there. Duolingo has a core network effect, meaning with every additional user, the platform gets stronger in various ways. But it's an education business. The network isn't the thing. So that's how I think about vertical versus horizontal. So because those centralized platforms were growing so quickly and becoming such a dominant force on the internet, thesis 2.0 emerged, which was, could you see those same tendencies in vertical networks? As well as the underlying infrastructure to build and create those networks.

• 5:11Speaker 03

  And by that, that led to investments in things like Twilio, MongoDB, Stripe, Cloudflare. You're seeing the kind of infrastructure of the internet be built on both the consumer and the SaaS side, both horizontally and vertically. So it's broad, but it's specific because it covers a lot of categories, but it's looking for something specific in the mechanic that creates scale. That's kind of how I think about that. Thesis 2.0 has another element to it as well, which is a decentralized thesis. And it's kind of its own beast and it's kind of not. The decentralized thesis really stemmed out of the idea that centralization was exciting, but also dangerous. These mass platforms that network effects created were very dominant, but at the same

• 5:54Speaker 03

  time, they were dangerous for consumers because it meant that all of your activity online, all of your data were controlled by a very few number of players. At the time, probably they couldn't articulate exactly how that would become dangerous. Now we know more about that, but we knew it could be problematic. The team at the time knew it could be problematic. The other thing was, there was a belief that it stifled innovation, that if you had horizontal platforms that exhibited relative monopolistic tendencies, it was going to be really hard to compete with them. And this is a team that really deeply believes in. The need for continuous innovation and you don't want to put a cap on that. So out comes the decentralization thesis and the belief is that blockchain is the first

• 6:38Speaker 03

  technology that really has a shot at decentralizing the internet, crypto being probably the first application of a blockchain technology. So in some ways blockchain for USV is its own thing. In some ways, it's actually quite integrated into the rest of it.

• 6:52Patrick O'Shaughnessy?

  And that's a thesis two level.

• 6:53Speaker 03

  This is thesis two. I know we're getting there. I'm sorry.

• 6:55Patrick O'Shaughnessy?

  I love the history.

• 6:56Speaker 03

  So thesis 3.0, it's important to go through one and two because 3.0 is definitely one where by the time we published it, which I penned it, but is a full representation of what all the partners were talking about and what we were really thinking about. It was already very much in action from an investing point of view. And the idea was now you have all these platforms and protocols, both on the horizontal platform side and these verticals, as well as this infrastructure layer. What does that allow for? What does the internet now able to create that it wasn't before? And what can you build on top? And we think there's this opportunity to broaden access using those platforms and protocols. How can you systematically drive up value and down cost around major buckets of customer

• 7:38Speaker 03

  spend, either by building consumer applications or by building the SaaS applications that support it? And that's really what we've been focused on now, particularly in three categories. So access to knowledge, which we think about education, which is something that we think is systematically broken and needs to be changed, but also how information flows around. One is access to capital, both in traditional financial services systems and emerging. And one is access to wellbeing, which is healthcare, which desperately needs innovation and to be fixed, but also what is the next form of community and belonging and fun? And how does that interact with wellbeing? And that's something that I've been really interested in.

• 8:20Patrick O'Shaughnessy?

  It strikes me, you have to talk to this really interesting charitable group called Glimmer, just based on the topics you just mentioned. For 20 some odd years, they've been lifting communities, 100,000 person communities in Ethiopia out of poverty. And sure enough, the three ways that they found to be effective is access to water, access to education, and access to finance. So they drop perfectly in your three buckets.

• 8:41Speaker 03

  Well, this is what interests us because these things aren't surprising. They've been repeated throughout history as the core unlocks of Of economic movement and success, but they haven't really been where technology has focused. We've been very obsessed recently with this graph, which I'm sure you've seen, which is the kind of inflation graph of the last couple of decades.

• 9:02Patrick O'Shaughnessy?

  The bifurcation.

• 9:02Speaker 03

  Yeah, it's hard to explain graphs on podcasts, but we'll try, which is all of these lines that trend downward. So all of the prices.

• 9:10Patrick O'Shaughnessy?

  Samsung TVs.

• 9:11Speaker 03

  Yeah, Samsung TVs, toys, certainly software, all this kind of stuff that has gotten systematically cheaper over time. And then housing has gotten more expensive, but actually not as more expensive as you might expect, kind of hobbles around the middle. And then education and healthcare are by far the outliers, and they exponentially shoot up. They've gotten way more expensive over time. And we're obsessed with this because venture capital and technology has almost exclusively focused on the bottom half of the graph. And so is it that they haven't focused on the top half of the graph, so those things haven't gotten cheaper? Or what is the correlation and the causation of that?

• 9:51Speaker 03

  And if we could focus innovation and technology, now that we have these platforms and protocols, on things like education and healthcare, which we're certainly seeing in the market, is it actually the right time where you're going to change the trajectory of that graph and drive those major buckets of customer spend down?

• 10:09Patrick O'Shaughnessy?

  It reminds me very much of a conversation with Sarah Tavell about, yeah, 10x better, but also cheaper. That piece of it is such a key part of the innovation.

• 10:17Speaker 03

  Yeah, we really only want to invest in things that we think technology can make better, and we define better by better quality and less money. And that is what we think unlocks kind of new opportunity in those categories.

• 10:30Patrick O'Shaughnessy?

  So let's spend some time on each of these ideas. We'll start with education. So you mentioned that it's broken. So let's first start about what's wrong with it, in what ways is it broken? And then we'll talk about technology being applied.

• 10:40Speaker 03

  The way I think about education is if you think about all of the buckets of spend in our life, technology has changed fundamentally so much of what we do, how we get around, how we communicate, how we talk to our friends, and yet how we learn structurally in America has basically not been touched for 50 years, maybe more. And that seems nuts because we know that that's such a key driver of our future success. Teacher salaries are flat. The success rates and the appreciation rates of public schools are flat. It just hasn't changed. But innovation is so accessible, we know it can change. And the thing that makes us think the time is now is the gap between your education

• 11:25Speaker 03

  and your job readiness is so much bigger than it's ever been. And so eventually, the system's got to break. If you believe in an education system that's supposed to get you somewhere, and over time, again and again, it's not getting people there, eventually it will break the system. It's just really hard to break a really old and institutionalized system. So we've been thinking a lot about that and how to do it. And basically, what we believe is, is you want to do it from the outside in. So what interests us in education is the opportunity of products and services that can drive that value, so can be better quality and less money. And in this one, we actually mean better quality in that the delivery mechanism can make the education itself better.

• 12:06Speaker 03

  So where can what you learn, if you learn it online, you actually learn it better. It's not only more convenient, it's not only breaks down geographical barriers, there's something about that modality that makes it easier and better to learn, and it can be offered to much broader population for cheaper. And it does it from the outside in, meaning we're not focused on products and services that are selling through school districts, or traditional schooling, or school boards. We're thinking, where can you get mass customer demand that creates behavior that will penetrate the system?

• 12:39Patrick O'Shaughnessy?

  What are some examples of a unique modality that would

• 12:43Speaker 03

  Sure.

• 12:43Patrick O'Shaughnessy?

  make learning more effective or better?

• 12:44Speaker 03

  So we have a couple of them. So one is Duolingo. Right? That's kind of one we point to in our portfolio. Learning languages for free on your phone has made it way easier to learn languages, and is actually a great way to do it, because it integrates into your life, it's bite-sized, it's fun, it can be a little bit addicting. These are things that are hard when you're learning languages in a classroom setting. That's one example. Another is Quizlet, which is a San Francisco-based company that's been a great portfolio company for us, learning tools. They're great learning tools. They're crowdsourced, so you get the information of a mass body of customers that you're able to use yourself. One that I really love, that I work closely with, is Outschool, which is live online K-12 learning.

• 13:26Speaker 03

  So synchronous learning, teachers post classes, it's a marketplace, so they teach Spanish through Taylor Swift songs and negotiation through Dungeon and Dragons and all these kind of things. Teachers post it, kids sign up around the country and around the world, and they're learning together. And that unlocks for kids access to talk to people and learn with people that aren't in their town or their district and teachers that they may not have access to. And also modes of learning that they may not be exposed to, because as we know, people's styles are really different and what's being taught to one kid one way may not work for another. And so you need to broaden the scope of what they have access to.

• 14:07Speaker 03

  So those are examples that excite us, but we would like to do many, many more here.

• 14:12Patrick O'Shaughnessy?

  Can you say more about this gap between job preparedness and the education system? Why do you think that's widening?

• 14:19Speaker 03

  I think it's widening because education has not produced candidates who are necessarily ready for a workforce as it is today. Education, when you go through college, what you learn is effectively what you learned decades ago. And it's good stuff to learn, but the jobs that people want to go into have changed. And so they're not prepared for those jobs. And so there's this gap between what X company needs to hire and what X college is spitting out. A big piece of that also is that student debt has been rising so exponentially. And so the cost of going through that program and its impact on the rest of your life is getting hard to manage.

• 15:05Speaker 03

  And so these pressures are combining here where you're not ready for a job and you're burdened by a huge amount of debt. It's becoming easier to think about alternative solutions.

• 15:16Patrick O'Shaughnessy?

  Have you ever seen a big company, I'm just going to throw Google out there as an example. Obviously, Google probably has a pretty good sense of the quality of job candidates entering the workforce that would be valuable to them. Have you ever seen a big company like that try to create its own education system or universities to prepare people?

• 15:34Speaker 03

  Yeah, so there have been different attempts at this. So at my previous Mavron, we were investors in General Assembly. And General Assembly sold a year and a half ago to a DECO, but its primary offering was a consumer boot camp. It has a significant line of business in the enterprise and one of them is basically that. Can you run programs inside of companies that take applicants that wouldn't be ready and try to get them ready? There are several others too, and there are, I am not a, I will talk out of turn because I'm not an expert on this, but I do think programs like Google, Google's an interesting one because over the last 15 years, I think partly because of Laszlo, who was there running

• 16:17Speaker 03

  people ops and then left, they relaxed a lot of rules that they once had. So they took out their kind of preferred colleges list. They took out college graduation as a requirement. You're seeing other companies follow suit and I do think they have a bunch of internal training programs to do this. But businesses will be built that do this on very large scale. But one thing that interests us in this is technology jobs is interesting because they're growing and there are a lot of them and they're well paid. And we know Google hires lots of engineers a year and Facebook hires lots of engineers a year. But we also think there's a lot of opportunity for this outside of technology jobs.

• 16:59Speaker 03

  The shortage in nursing in America, a whole bunch of categories that don't look like people who want to be engineers, but are also really valuable and where solutions that are targeted to them and made accessible and affordable through technology can really change the trajectory of their income and their lives.

• 17:18Patrick O'Shaughnessy?

  It seems like such a huge opportunity where, let's say, Google, you came out, or take your large healthcare company, you came out. That if you wanted to be in that field, that seems like a land grab for a credential that could actually rival Harvard or Stanford.

• 17:30Speaker 03

  I'm so interested in this. I went to Harvard and Stanford. I am the benefit of branded education, and I had great experiences, all of them. So I'm hesitant to represent myself as something I'm not. But traditional education is built on long-term brands. We're obsessed here. Part of our thesis is around building trusted brands. And we've spent a lot of time thinking about what a trusted brand is and what that means, which we can talk about. But Harvard, Stanford, Princeton are trusted brands. But Google is a trusted brand. We could argue whether it should or shouldn't be because of privacy of data and things like that. But overall, for a lot of consumers, as these things penetrate deeply into our lives,

• 18:15Speaker 03

  you could see traditional education getting a run for its money by new brands that enter the space.

• 18:21Patrick O'Shaughnessy?

  Totally. I have this dream of structuring one of these things just because you know, as the company sponsoring it, the emerging candidates would be, it's like a free look at them. You get paid to look at them, basically.

• 18:31Speaker 03

  Yeah, and so that has complexity to it because you could get into a situation where people felt like the school and the student weren't completely aligned in their future. But that's not all that different than what you have today, anyway. So all of these things have complexities. I think education is a field with a lot of opportunity and a lot of complexity. But there's just no lack of shortage of stuff to build here. And it's not super in favor with VCs all the time. But especially when you're looking at this gap between education and the workforce, there's a lot of dollars going into that gap. Companies are willing to pay for that gap. Students are willing to pay for that gap. Parents are often willing to pay for that gap. Even universities are willing to pay for that gap because they don't want their students leaving and not being ready for the job.

• 19:16Speaker 03

  So it's a tremendous business opportunity for companies that can crack it.

• 19:20Patrick O'Shaughnessy?

  It seems like the opportunity to learn for self-starting people couldn't be higher today with the internet, right? You can access down to the most granular possible modules and lessons. What's the most unique technology you've seen that people are learning from?

• 19:35Speaker 03

  Well, so I agree and don't agree with that statement. So on one hand, yes, there's very little information that you can't find on the internet. There's very little information you can't find on YouTube if you looked hard enough for it, right? YouTube has fundamentally transformed how we learn. It's absolutely incredible. But similar to how everything else is built on the internet, the internet's never built top-down. It's built bottom-up, which is kind of this beautiful thing and also complicated. So it's hard to navigate. The quality is uncertain. It's challenging in a lot of ways, and what it's done is taken an offline mode of education and just put it online. Film stuff, put it on the internet. What I'm interested in is how can the internet work to change what learning means?

• 20:18Speaker 03

  So you're not just taking offline learning and putting it on the internet. But how you learn a language on Duolingo is not like how you learn a language offline. So one of the biggest technologies I think really helps us here is Zoom. I'm really interested, education and otherwise. I think Zoom is an unlock for really interesting business opportunities. And we have at least three in our portfolio built on top of Zoom.

• 20:41Patrick O'Shaughnessy?

  Can you talk about one of them?

• 20:42Speaker 03

  Outschool is one of them, where Outschool synchronous learning for children across the country and the world to learn together online. That's not possible without a technology like Zoom. And no, Zoom is not the only one. There are other ones that are out there. But Zoom made it very easy to build on top of it. And it's also way more affordable than it was even a couple of years ago to do that. So the cost structure and accessibility of synchronous video really transforms how we learn and is a kind of a why now for this category. I think it's similar in healthcare. We have a healthcare company built on top of Zoom too in addiction recovery and Medicaid-assisted treatment. And that is something where sometimes our thesis can sound broad.

• 21:26Speaker 03

  But our construct of what we're looking for in these categories is really similar, which is where can the mode of operation improve the quality of the product? So in education, that's improve how we learn. In healthcare, it's improve the care itself. We're interested in where can a technology company not only make care more convenient, but make the care itself better? And Zoom can really do that. So this company can deliver behavioral health treatment, primarily around addiction right now.

• 21:56Speaker 03

  To patients wherever they are and that saves them driving to clinics that are really inaccessible, leaving their jobs to be able to go there, all of these things, which creates an accessibility of care that doesn't exist otherwise and improves adherence. And so it's a similar construct in healthcare than how we're thinking in education.

• 22:15Patrick O'Shaughnessy?

  I love it. I love thinking about Zoom as like a new set of rails for the delivery of some of this stuff. Such a neat company.

• 22:20Speaker 03

  Yeah. Oh, my gosh. I'm very long on Zoom. We're not investors. I'm just kind of a fan, but I think lots more will be built on top of it and probably on other synchronous video platforms, too.

• 22:31Patrick O'Shaughnessy?

  Let's talk about finance. So access to capital as a second of the major three thesis buckets. What is interesting to you here?

• 22:38Speaker 03

  So what's interesting to us here is that, and definitely stuff you know well. So the banking system as a whole was built on an AUM model that really, it just has a structural model that favors fees off of the two ends of the spectrum, people who really can't afford it and so get charged fees for kind of being bad customers.

• 22:59Patrick O'Shaughnessy?

  Basic services.

• 23:00Speaker 03

  Quote unquote. And then very high net worth people who get charged fees because of AUM. Most of America falls in between that. And we have a system that really excludes them. And so one is structural and two is it hasn't been productized. It's just hard to understand. It's hard to use. It's built kind of with a fear module when you think about the emotion of a bank or a financial services. And what interests us here is the ability to turn that upside down and to build products and services that have a business model that favors that middle customer, the middle part of this scope, but also leans

• 23:41Speaker 03

  on education and product to make it more convenient, cheaper, easier to understand and a much better experience. We've done a bunch of these so far in different kinds of ways. And so one that I like to talk about is Stash, which is a financial services company based here in New York. So the business started with investing. And what it said is usually there are minimums to investing and investing is really complicated. It has a cold start problem. If you've never invested before, it's a scary thing to do. What do you invest in? How much do you invest in it? What should you expect from it? And no one really answers that question for you unless you have a lot of money to put to it. But that makes no sense because lots of Americans should be investing.

• 24:26Speaker 03

  And so how can you productize it? And also, those answers aren't that complicated. But if you've never heard them before, how would you know? And so Stash built a product that made investing really accessible to a huge part of the population. And so 80, 85% of the customers on Stash have never invested before. And now they're putting money to the things they believe in.

• 24:49Patrick O'Shaughnessy?

  What was the wedge? How did they get those people?

• 24:51Speaker 03

  So the wedge originally was to have very low minimums. So start investing with $5 and to do it on an interest-based. So rather than should you invest in X, Y company? Invest in the things you believe in. You're interested in sustainability. You're interested in technology. You're interested in food, entertainment. Investing is this very complicated field worth many trillions of dollars and a lot of smart people. But the foundation is pretty simple where usually you should invest in the things you believe in. And so taking that in a consumer productized way was a really good place to start. And so they effectively head bucketed ETFs that they didn't call that, that made it really accessible. Over time, they've grown out that suite of products a lot.

• 25:35Speaker 03

  So now there is investing, there's also banking, there's saving, there's auto-saving, there's 401Ks, custodial, all this kind of stuff. And they built it over time. So they gained the trust of a customer and they let them come in through a channel they were interested in. And then over time, gave them a really full financial services suite. That's what really interested me in that company. But the core idea of investing in what you believe in has stayed really core to the company. And they flushed out what that means. So now on their banking product, as you spend on the card, you get fractional shares of stock in what you're spending in. And that starts your portfolio. And the question of how should you flesh out your portfolio?

• 26:19Speaker 03

  You should probably flesh out the stuff that you're already now invested in because you're spending money there. And they can look at that data and say, because they have all the customer spend data, a customer that now owns shares or fractional shares of Starbucks or Walmart, spends meaningfully more money with that brand because they feel like an owner. So what I like about consumer investing, and I think financial services is such a core part of this, is financial services, all these rational models and math and investing, but it's really consumer behavior. And consumers are irrational and they're emotional. And the sooner you can understand that emotion of not only what they're doing, but why they're doing it,

• 27:03Speaker 03

  the faster you can build products that make it a lot easier for them.

• 27:07Patrick O'Shaughnessy?

  It's almost like Stash productized Peter Lynch's brain or something.

• 27:10Speaker 03

  Totally, totally. I love that. I think it's super interesting. And they've done fantastically well getting a lot of customers on board.

• 27:20Patrick O'Shaughnessy?

  Would you agree that in that part of the world, kind of the, we'll call it financial services, maybe in investing most specifically, as an investor, obviously you're trying to invest in companies that get really big. The harder problem to solve is the distribution problem, not the product problem?

• 27:33Speaker 03

  In general, I actually feel like the harder problem to solve is the distribution problem and not the product problem. I feel like when you have a entrepreneur who has an insight on a market and approach to it, there are product geniuses out there and you have to have some of that. But product, you have a bunch of shots at. Distribution is very challenging. Actually, in fintech, fintech distribution is hard because it's very competitive. And it's somewhat in some of these categories getting to be not a winner take all game at all because the market is so big, there are hundreds of multi-billion dollar banks. But a customer that uses one bank account is not that likely to use another bank account over time as these bank accounts become a broader part of my financial services platform.

• 28:17Speaker 03

  But acquisition has not been that hard here. And that's because I think customers are actually looking for this. They're eager to do better here. I think taking responsibility and interest in your financial health and believing that it's possible to do so is on the minds of customers now more than it's ever been before. They know that their local bank or these big platforms that they don't trust are not the only options anymore. And as a result, you have people with intent and that's always the best time to acquire them.

• 28:50Patrick O'Shaughnessy?

  Raises a broader question. My friend Brent and I always use this phrase, the show and the go, where the show is marketing and the go is product, basically. As you assess, because you guys are investing early in a company's lifecycle, where often, obviously, the distribution hasn't been built. And you said that's a hard problem to solve, a key one for a big business. How do you assess in a founder or a founding team, the ability to be good at distribution?

• 29:12Speaker 03

  I mean, I feel like if I knew with certainty the ability to be good at distribution, I would be literally the best investor of all time. So I don't know that I have a perfect answer to this question yet, but I think about it constantly because the moment we like to come in is what I call post-product, pre-product market fit. And so oftentimes, they know the market, they know the approach, they're iterating towards the product itself that will fit it, but they're very early on the distribution curve. And so they haven't cracked really how scale is going to happen. I think it's a couple of different things. One is, is there a thesis that makes sense on how it might happen? And is the thesis not, we're going to run Facebook ads?

• 29:54Speaker 03

  Is there something about the product itself that lends itself to distribution? And that doesn't mean word of mouth. It doesn't have to mean that something about the product means everyone in the world's going to talk about it and we're going to cross our fingers and hope for organic, quote unquote, scale. But is there a hook in the product itself that lends itself to growth? And that really interests me. And that could be in a couple of different ways. I'll give an example. Dia and Co. is a later-stage e-commerce company that we invested in. It's a commerce platform targeted to plus-size women. It's now, we led the series C. And a mechanic I really like about Dia is a natural behavior is a woman gets a box

• 30:38Speaker 03

  of the clothes and they post it for their friends to see because they're trying to figure out what they're going to keep. And their friends comment and they say, oh, I like this, or I'm not so sure about this, as they help decide what they're gonna keep and what they're gonna send back to the company. They probably post it on Facebook, but maybe they show their friends who are stopping by, but there's a natural sharing rhythm to the product. That's a distribution angle. It's not the only one they lean on. There's lots of other things they have to do, but I like things that have some kind of inherent distribution moment as part of the core experience to it. I think that's powerful.

• 31:16Patrick O'Shaughnessy?

  I love this idea of sharing rhythm. That's a cool phrase.

• 31:19Speaker 03

  I think if you don't have that as part of your product loop, it's gonna be really hard or hard slash expensive.

• 31:27Patrick O'Shaughnessy?

  You mentioned before we started recording, you've got some thoughts on this notion of digital marketing and why that may not really be a thing or be sort of fundamentally broken. And you already mentioned your strategy is selling Facebook ads, probably not a unique distribution strategy, probably pretty efficient. Can you talk about that?

• 31:41Speaker 03

  Look, I think Facebook is this giant gorilla in the room that's every company's kind of dream and nightmare right now. It's not going anywhere. I don't think Facebook is going anywhere at all. And despite a lot of criticism in the market, core areas of it continue to grow really well. And so I think it will be there. However, two things have happened. One is over the last decade, Facebook has basically aggregated eyeballs and allowed all of these new businesses that have sprung up to pick them off in a increasingly efficient way, but for a long time, not that efficient, meaning there was significant opportunity

• 32:21Speaker 03

  on the platform to acquire customers at lower prices than Facebook would optimize towards. That was a magical time. How wonderful that we had every billions of people in the world on one place and as a business, you could go there and just pick them off. That's incredible. And the platform itself had built these tools to help you do this. And so all of these companies and lots of venture firms gave billions and billions of dollars to Facebook to pay for scale of the businesses. That was, in many cases, good money spent. It fueled substantial growth. In a lot of cases, not good money spent, but in many it was. But over time, the platform itself has become more efficient. Facebook's job is to maximize its own margin.

• 33:06Speaker 03

  And so the customers have gotten more expensive. There are turning points for the businesses built on top of it where that customer is no longer efficient anymore. And you gotta look elsewhere. And also, engagement of these core demos is starting to fragment. Not everyone's eyeballs are there with the same intensity that they were before. And so I think marketing itself is evolving from being this core skill of how do you optimize this one platform to a core skill of how do you quickly iterate and test around lots of channels, including new ones popping up, including offline and online, and product marketing, and how brand marketing interacts with spend.

• 33:48Speaker 03

  And the best digital marketers of the next 10 years are gonna look like the fastest testers, where they see opportunity in a new channel and quickly lean into it versus how good they are at optimizing certain platforms.

• 34:02Patrick O'Shaughnessy?

  I'm sure obsessed with places that quickly find and experiment in these new platforms, like the Star Wars trailer thing in Fortnite.

• 34:08Speaker 03

  Totally.

• 34:09Patrick O'Shaughnessy?

  Couple days ago, I love that stuff.

• 34:10Speaker 03

  And also, some of these businesses that are now of huge scale are becoming significant acquisition channels. So something like a Fortnite, like a Roblox.

• 34:19Patrick O'Shaughnessy?

  What's that?

• 34:19Speaker 03

  Roblox is this kid's game platform, but it's a platform. So other brands are integrating with it in these kind of cool, creative ways. Twitch, different stuff. But by definition, those are more fragmented. Not everyone is on a Roblox. Not everyone's on a Twitch. And so you're gonna need a much broader set of strategies. And the arbitrage moment probably happens faster. So you're gonna have to lean into them, see what works, go fast there, and then quickly pull back and move elsewhere as the opportunity moves around. And so you need a lot of agility, I think, to do that really well.

• 34:54Patrick O'Shaughnessy?

  Does a specific company come to mind when I say just masterful marketing that you've invested in? Or I guess any company?

• 35:03Speaker 03

  The thing that I think about masterful marketing is some of the best ones are old school. Disney. Disney is a masterful marketer. It is a product marketer, as well as a brand marketer, as well as a digital marketer. That's the goal. We don't think about Disney in tech, but that's the answer. And so who do I think of that points to that? Yeah, I actually think Stash is a great example here. They've done a really, really good job on building a consumer brand that's really trusted, but also being very agile across channels. So they don't lean too heavily on any individual spot, and they iterate really quickly on what kind of message is going to work for each customer. Because one thing we also know that wasn't true before is the faster you change creative and copy on Facebook,

• 35:47Speaker 03

  the better it works. That's something that's emerged. And so products that lend itself to that, we know, work better.

• 35:55Patrick O'Shaughnessy?

  It's interesting, because it's at odds with some of the Ogilvy-style advertisers that said, "The worst mistake you can make is interrupt a campaign that's working." The Geico thing is one that comes to mind, like, let it run.

• 36:05Speaker 03

  On a brand marketing way, I think marketing's so interesting to me. I really like consumer businesses, partly because this challenge of how do you get scale and distribution is so fun and hard. But tendencies of brand marketing and digital marketing, I think, are actually really different from each other. Brand marketing, I think that's true. You need a lot of consistency. Digital marketing on platforms, like a Facebook, you actually, I think, need a lot of speed, but the two have to talk to each other, have the same voice, have the same consistency. And so it's this puzzle that really skilled marketers put together.

• 36:38Patrick O'Shaughnessy?

  Let's turn to the third of the major categories, which is this idea of well-being. So that can mean a lot of things. What does it mean to you guys here at USP?

• 36:44Speaker 03

  So I bucket it into kind of two things. The first is how healthcare is evolving, and this idea that consumers are taking a lot more interest and wallet share in their own well-being. And we've called it well-being because we think wellness and healthcare are increasingly blended together. That as healthcare becomes more consumerized, a customer doesn't think, "Is this healthcare or is this wellness?" They think of, "How do I feel? So how should I make myself feel better?" And that could be solved in lots of different kinds of ways. And so that's one thing we're really interested on. We've been focused on it on the consumer side. So businesses like a Nurx or a Modern Fertility

• 37:23Speaker 03

  that allow customers more control, a more autonomy, more access to their own information and do it at a cheaper price point than what would be accessible through a healthcare system. So you don't have to go and pay for a doctor. You can do this on an app and it's private. It's fast and it's cheaper. That's Nurx. Modern Fertility, this is a test that a doctor would tell you how long you had to wait before you took a Modern Fertility test. But with Modern Fertility, you can buy it yourself. You can have that information upfront and it's a fraction of the cost of what it would be through a doctor. And so these are kind of things on the consumer side that interest us. Increasingly, though, I'm spending a lot of time thinking about the B to B opportunity here

• 38:08Speaker 03

  because I think there've been really interesting and kind of amazing innovations in healthcare in the last, call it, four or five years that have changed or are changing how consumers interact with the system. Nurx is one or Modern Fertility, but there's lots of others from all these telemedicine applications and vertical pharmacies and all these kinds of things. But they're all still built on old rails and are missing fundamental elements of speed, convenience and value that would make the system better. And so I'm interested in where there may be opportunity there. An example is a company we're non-investors in, but I really like called Ribbon Health. So what Ribbon Health is, is a referral network. So you're a telemedicine company

• 38:53Speaker 03

  and you try to help the patient that you're on the phone with and you do in some ways, but they need to see a doctor where they are. How do you get them to that doctor? How do you tell them where to go? You right now have to rely on a static database that you bought, that information, any information that's static, we know is not very high quality at all. The information changes too quickly. So you need somewhere to look to get that information. Right now, there is no answer to that. Ribbon Health is trying to solve that. That's one example of many that are in that kind of bucket of how do you build SaaS products that might support the consumer applications that digital health are coming up with? You can only invest in those if you believe that digital health is a market that can

• 39:37Speaker 03

  support that, but we definitely do. And when you look at fintech companies like Plaid or Stripe, started by this idea of supporting an emerging ecosystem of companies. And as those companies scale, the underlying infrastructure scales and benefits along with them. We think that's a great model when you can get in early with startups that are emerging in interesting categories and be a support system of their scale. And we think in healthcare, there's a big opportunity for that.

• 40:06Patrick O'Shaughnessy?

  What about well-being outside of pure health, like biological health?

• 40:10Speaker 03

  So that's the second bucket. So the first is what's going on in healthcare and how it interfaces with technology and how we may be able to play. The second bucket, and this is one that I've spent a lot of time in, what does community and belonging mean? I think that there may be nothing more core to our well-being than community and belonging. Loneliness is an epidemic. These two buckets of healthcare and non-healthcare definitions certainly bleed into each other. And technology has created connectivity, more connectivity than ever before, networks and webs, but it hasn't cracked belonging, for the most part. And it may not really have cracked community. What I think a lot about is what is the difference between networks and community?

• 40:54Speaker 03

  And the more I think about it, I think networks may be top of funnel, right? A network effect is how do you scale? How do you have structural growth? And how does the network get better with every user that joins it? But real engagement? I think that's belonging. How does it become important to you? How does it change how you interact with others on it? And I think there's tons of opportunity there. And similar to horizontal and vertical platforms, some of the opportunity may look horizontal, where there are new social networks that focus on belonging and community over just connectivity. But some of it may look much more vertical. And we're seeing this in our portfolio companies, where something transactional, something

• 41:39Speaker 03

  that's a really sharp tip of the spear, like a stash or a modern fertility, has a product that they're selling, but to become a long-term Valuable company, they are going to build a community on the back of it, where people take a modern fertility test, but then talk to each other and engage with each other. And that makes it into a sticky, long-term brand.

• 41:59Patrick O'Shaughnessy?

  I've always wished that there's this book called The Art of Community that I just think is fascinating. It's eight or nine principles, something like that.

• 42:05Speaker 03

  Who wrote it?

• 42:06Patrick O'Shaughnessy?

  I think the author's last name is Vogel. I'll send it to you, put it in the show notes. And what I've always wished was that someone would build effectively like a nested tech platform that enabled these different levels and key features of community building. And it doesn't exist today. We're trying to do something that's, what I've noticed is a lot of my interaction has gone off of public platforms, other than as a sharing mechanism, basically. The conversation function has gone into private groups and it's like a mishmash of

• 42:33Speaker 03

  WhatsApp and iMessage.

• 42:34Patrick O'Shaughnessy?

  Telegram, Slack, iMessage, group message. And there's no good end-to-end, multi-tool platform that facilitates like private community.

• 42:43Speaker 03

  Yeah, so an example I love is DIA. So DIA is a functional product. So you buy clothes on it, but the reason women like it is because it introduces them to this really valuable community that they have lacked in their lives, that they have not been, they feel like they're a customer that hasn't been prioritized. And now, not only do they get these clothes that they love, but they get access to others who have felt the same way. And as we know, the idea of connecting with others who have a commonality to you is one of the most key things in the world to do. And it's something that technology should really make possible in new ways. And so they join this Facebook group. Right now, it's on Facebook. And one thing that interests me is a lot of these things are on Facebook or on this mishmash of other channels.

• 43:27Speaker 03

  And what will allow companies to own that in new ways? But for now, it's on Facebook. Okay. So they join the Facebook group and you see this behavioral pattern emerge, where the first thing they do is they start liking other people's posts, maybe commenting on other people's posts. Then they post about the box they got and they say, "Hey, I've never posted a selfie of myself to the internet, but I've been reading everyone else's and now I have this kind of confidence in doing so. So here is me in this dress I got from DIA." And they get this affirmation. And it's not affirmation of everyone being like, "Every piece you got is amazing. You look great." It's honest, but it's supportive and it's welcoming. So then they start posting about their jobs and the job interview they're going to,

• 44:11Speaker 03

  or what they bought on other platforms besides DIA. And I remember when I first saw that, I said to Nadia, the CEO, is that good or bad? Do we want people posting on DIA's Facebook group about what they're buying on competitors? And she's like, I think it's great. Let this be their home where they feel comfortable. So they do that. Then this year was maybe the third or fourth year where groups of women from the platform who had never met planned vacations together. And there were these photos posted that I said to Nadia were so amazing because there were these women on a beach vacation and they're posting these photos of themselves. And they're like, we would have never felt confident doing this if we hadn't met each other through DIA and had the support of community. That takes a brand to a whole other level. And not every one of your customers is going to feel that way.

• 44:56Speaker 03

  But if you can create that for some fraction of your customers, you go from a transactional brand to a trusted brand that might really have a shot to really stand the test of time. And that mechanic of community is something that I think will be applicable to a really large swath of consumer companies and the best ones will crack.

• 45:16Patrick O'Shaughnessy?

  I think it's such an interesting idea. I've never thought about before where a product can lead to a community versus typically the other way around, that you would sell product into a pre-existing community. That's really neat.

• 45:26Speaker 03

  Yeah, I think it may look more and more like that because we have, if we want to find someone these days, there's a lot of ways we can find them. But that's not solving 100% of the puzzle here.

• 45:38Patrick O'Shaughnessy?

  And maybe there's, like you said earlier, there's a, I've heard a lot of venture capitalists talk about unbundling LinkedIn, verticalizing LinkedIn because there's LinkedIn for asset managers or something. It would just probably be more relevant for those in that field. Seems like that's an opportunity across this kind of community idea that you could verticalize community tools and do really well.

• 45:57Speaker 03

  Totally. We're interested in all of that and spending time looking at all those emerging businesses.

• 46:02Patrick O'Shaughnessy?

  So I'd love to talk a little bit about the idea of mentorship for you personally. I heard somewhere that you had a pretty intimate relationship with Bill Campbell, who's an extremely well-known mentor, maybe the most well-known mentor in the technology world. And also just had the good fortune of working with a ton of. Interesting CEOs, founders, other investors.

• 46:20Speaker 03

  That's an understatement.

• 46:21Patrick O'Shaughnessy?

  And I'd love to just hear some of the most interesting lessons that you've gleaned from these either traditional or peer style mentors. So maybe we'll start with Bill, but we can go a lot of directions.

• 46:30Speaker 03

  Yeah, mentor has gotten to be kind of a loaded word because it has this formality to it, but people who I've leaned on and have kind of granted me time and energy, particularly when the relationships at least started where I had more to take than to give, have been really fundamental for me and I feel like I've been lucky that I've had a bunch of them, Bill being one of them. So I, you know, when I was at Stanford, he was involved with the GSB and most of his time was spent coaching, as you said, these kind of wildly successful, big name people, Steve Jobs and Eric Schmidt. But I got to know him and spent some time with him when I was in Palo Alto. And I remember going to him and saying, I was a first year business school student.

• 47:13Speaker 03

  I'd been a journalist before and saying, I want to go to a tech company. And I was like, oh, you know, I'm thinking about Google or Facebook. And he basically told me, not only do I not know why you would do that, I don't know why they would do that. And it was this honest feedback, which I needed and was very true. But he said, I think you should think about venture capital. I think that would be a good fit for you. And even more so, I think you should go to Mavron, that the combination of their focus and their ability to mentor and the people there would be the right kind of place. And what I think about when I think about that story and how I channel it to how I can try hopefully in the future to help people emerging in their careers is he had

• 47:58Speaker 03

  tons going on, way more big fish to fry than the GSB person who wanted a summer internship. But he was just, he was honest, he was thoughtful and he followed through. And I think about the follow through a lot. So he introduced me to the team at Mavron. And I remember he called me before the interview, he called me after the interview, he called them, and I think of all the times where I just make an email intro. Do you know what I mean? And you're like, check the box. I was asked to do something and I did it. Good for me. Good luck. And maybe you'll send a text and follow up. And it was just a different level of engagement and follow up. Because when he decided he was going to do something, he did it. And he followed through.

• 48:39Speaker 03

  And I think we're all operating really fast and there's so much going on. But I admire that level of focus when you decide it's something you're going to take on. And only taking on the things that you feel like you could do that for.

• 48:54Patrick O'Shaughnessy?

  The next obvious one to ask about is, since it's so recent and probably fresh, is what you've learned from your new partners here at USV. Obviously, some very famous and successful investors here. What stands out across the first two years? Maybe things that you've changed that you believe as a result of being with this group.

• 49:08Speaker 03

  Yeah. They're an amazing group of people. They are extremely thoughtful, very smart, very good investors. I think the thing that I've learned the most is that following your interests and passions in investing is a good enough reason or as good as any. Meaning, there are good people that you can send a business to and say, oh, this is the hottest deal in Silicon Valley right now. Everyone thinks this SaaS analytics tool is the thing of the future. And they'll just be like, that doesn't interest me.

• 49:38Speaker 03

  And that we've designed a fund in terms of size and focus where that's an okay answer. Where you can say, if we spend a lot of time in a room talking to each other and we come up with the things that we're interested in and we stick to those, this will work. Or we have a good shot of it working. And it's the best way, not only to block out the noise, but to have a lot of fun doing this. And I think my partners, they love investing and they love new products. And they invest in things that they can't imagine the world not having. And I love that. I admire that passion. And I think I've drank a lot of that Kool-Aid. Over the summer, I had this moment where I felt really overwhelmed by the market.

• 50:21Speaker 03

  I'm sure other investors maybe have felt the same, where... Series As that maybe used to be five to seven were coming in and were saying they're raising 20 and we don't really do that and there were just too many things going on. It was going so fast and I was having trouble kind of focusing my energy, I feel like. And I remember talking to Albert and he was like, don't look at companies for a couple of weeks, just think about your ideas, think about what you believe in. And if you do that, you'll get to the right place. And that's counter to a lot of the kind of investing culture that certainly in Silicon Valley, but even in New York and elsewhere. And it says, we're going to miss stuff and that's okay. But if we focus our energy and do the right stuff for us, it'll be really interesting

• 51:06Speaker 03

  and we'll have a good shot at it working. And so I really admire that about the approach at USV and I think it's kind of infiltrated my thinking here.

• 51:15Patrick O'Shaughnessy?

  I love the idea of kind of just following your compulsion, your natural compulsions and interests as an investor. I mean, it sounds so silly and simple, but I bet a lot of huge percentage of professional investors are not doing that.

• 51:26Speaker 03

  Yeah, we don't do any, how big is the X market top down analysis back into, is there a kind of structured business opportunity around it? I guess my overall takeaway on investing is, I actually think there's a lot of ways. There's certainly a lot of ways to be not a good investor, because it's such a risky asset class, but there are a lot of ways to be a good investor and a lot of ways to build a really interesting, strong venture capital firm. The ones I admire most are the ones that have a strategy and stick to it and have a point of view. And I think what I've learned from USV is there's a point of view here about how we should manage this firm and how we should approach investing and that if we come to

• 52:09Speaker 03

  things with a prepared mind and a commitment to the thesis, it's a good way for us. I think what I've learned about it is it takes a lot of commitment to your own ideas.

• 52:20Patrick O'Shaughnessy?

  So my closing question for everybody is to ask for what the kindest thing that anyone's ever done for you is?

• 52:25Speaker 03

  So many people do so many kind things for me. Bill Campbell, taking the time with me when I was a 24-year-old who had been a journalist, and showing interest and being thoughtful, not only about what intros he could make, but really thinking what would be best for me. And the follow-through on it, I think, is as kind as any professionally that I can think about, and really mattered to me and is a model that I subscribe to. But I think that level of interest in helping others' careers is something that I've been shown a lot and tried to show a lot. The female venture community has been monumentally meaningful to me. You brought up Sarah.

• 53:09Speaker 03

  Sarah is a very close friend and an investor I really admire. We had a total genius. We had babies almost exactly at the same time. And I remember she was my first call around moving firms and how to navigate that, and also how to deal with lots of things with an infant. And so those kind of relationships, or Jenny Leford, Emily Melton, Randy Katavy, all these people that were navigating their own careers and had things that I could learn from, and were able to talk to me not only about quality of company, or the kind of facts and nuts and bolts of investing, but how it would integrate into my life and how be really thoughtful as both friends and mentors and co-investors, has been one of the biggest catalysts, I think, of my venture career, but also something that I've just

• 53:54Speaker 03

  taken so much joy from. And I just think that whole community has a ton of kindness behind it.

• 54:00Patrick O'Shaughnessy?

  Well, I've learned a lot in this conversation. I really appreciate it. The thing that will definitely stick with me is this kind of new definition of kindness by Bill Campbell, which is be honest, be thoughtful, and follow through.

• 54:10Speaker 03

  Yeah, I like that.

• 54:10Patrick O'Shaughnessy?

  It's a very clarifying definition. So I appreciate that, but also just a ton of new insight for me. So thank you for your time.

• 54:16Speaker 03

  Thank you. So fun.

• 54:19Speaker 04

  Hey, everyone. Patrick here again. To find more episodes of Invest Like the Best, go to investorfieldguide.com/podcast. If you're a book lover, you can also sign up for my book club at investorfieldguide.com/bookclub. After you sign up, you'll receive a full investor curriculum right away, and then three to four suggestions of new books every month. You can also follow me on Twitter, @Patrick_OShag, O-S-H-A-G.

• 54:47Speaker 04

  If you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover Invest Like the Best. Thanks so much for listening.

• 55:10Speaker 04

  You