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

Brad Burnham is the Co-Founder & Managing Partner @ Union Square Ventures. I feel Brad is far better described by his partner Fred Wilson, than I ever could so this is Fred's words on Brad. "Brad and I founded USV together in 2003. We had both been in the venture business for more than a decade, had made a fair bit of money, but were still hungry to prove ourselves. Brad is the strategist and the most principled investor in our firm. 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. Brad is the person behind phrases like "the application layer of the technology stack" and "large networks of engaged users" that I use all the time. He gives me most of my good stuff which I often get credit for." In Today’s Episode You Will Learn: 1.) How Brad made his way into VC? How did he come to co-found USV with Fred in 2003? 2.) How did Brad approach team building with USV? What does he look for in his partners? 3.) Brad has previously stated his belief that 'history does not repeat itself but it does rhyme. How does this affect Brad's view toward market cycles, the way tech is adopted and ultimately replaced? 4.) What does Brad make of the extension of the private market? Are we entering a period of consolidation? What makes Brad believe this? 5.) Looking back at the history of USV, what have been the inflection points in both the stature of the firm and then Brad's learnings as a VC? Items Mentioned In Today’s Show: Brad’s Fave Book: The Irrational Optimist Brad’s Most Recent Investment: OB1 As always you can follow The Twenty Minute VC, Harry and Brad on Twitter here! If you would like to see a more colourful side to Harry with many a mojito session, you can follow him on Snapchat here! This episode was brought to you by DesignCrowd, the online marketplace for custom graphic, logo and web design that helps startups, entrepreneurs, web developers and agencies outsource design projects to designers from around the world. How Does It Work? Once you have launched your brief, designers will begin submitting quality designs for you to review. With some constructive feedback, you can quickly generate a large gallery of designs that really do fit your needs. You can have exactly what you need within just three days. Once you have selected your favourite design, you will be sent all the files you require to update your branding. If you don’t like any of the submitted designs, then DesignCrowd offers a money back guarantee. So checkout designcrowd.com/VC and enter the promo code VC100 to get an astonishing $100 off your next project.

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

• 0:00Harry Stebbings?

  Welcome back to the 20 Minute VC with your host Harry Stebbings at H Stebbings on Snapchat. And today we return to our feature of the one and only Union Square Ventures. And following from our episode with Albert Wenger on Monday, I'm so thrilled to welcome Brad Burnham. And I was thinking, how can I introduce this incredible figure of our industry and really do him justice? And then I saw Brad's partner Fred Wilson write about him. And so this intro is from the perspective of Fred and very aptly covers the amazing abilities of Brad. 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. Brad is the strategist and the most principled investor in our firm.

• 0:43Harry Stebbings?

  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. Brad is the person behind phrases like the application layer of the technology stack and large networks of engaged users that I use all the time. He gives me most of my good stuff, which I often get credited for. I told you that intro was much better than I would have ever been able to do. I also want to say a huge thank you to Kieran O'Leary at Blue Yard in Berlin for making the intro to Brad, without which the interview would never have been able to take place. So a huge thank you again to Kieran for that. And with regards to doing something better than I can in another area, another area that's not my strong suit is design, which is why I was so thrilled when I was recommended Design Crowd,

• 1:28Harry Stebbings?

  the online marketplace for designers from around the world to help entrepreneurs, small businesses and agencies with their logo, business card, site design, or even t-shirts and print designs. They can do it all. Two things I love about Design Crowd are simply price and time. With no formal agency red tape to go through, you can go from start to completion in just three days. Likewise, if you head over to designcrowd.com/VC and enter the promo code VC100, they'll give you an incredible $100 off your next project. So join the likes of Deloitte, Virgin Active and HTC and get your design done right with Design Crowd. However, it's now time for me to hand over the mic to the main man,

• 2:10Harry Stebbings?

  Brad Burnham, co-founder and managing partner at Union Square Ventures.

• 2:20Speaker 01

  You have now arrived at your destination.

• 2:23Harry Stebbings?

  Brad, it's so fantastic to have you on the show, having met in Berlin only a couple of weeks ago, so thank you so much for joining me today.

• 2:30Speaker 02

  My pleasure to be here.

• 2:31Harry Stebbings?

  Now, now, talk to me, I want to find out how you made your way first into venture, and then how you came to found USV.

• 2:38Speaker 02

  So, I kind of backed into the venture business, I was working at AT&T, I did a number of different things for them, but ultimately spun two different companies out of Bell Labs, the second of those was the catalyst for creating a venture capital group at AT&T, and then when that company was sold, I was invited to join the venture capital group as what they call an executive in residence, and the idea was I was just going to spend a little time there and then go off and run another portfolio company, but while I was there, the guy who ran the East Coast portfolio left, and they said, "Tada, you're now a venture capitalist", and so that's how, that was 1995, I took over that portfolio and

• 3:20Speaker 02

  made a number of investments in sort of the late 90s, and built what I would describe as a wind aided track record in the late 90s, ended up in the venture capital business.

• 3:32Harry Stebbings?

  And then, talk to me about the founding of USV, how did you make the transition from there to deciding you want to go out on your own?

• 3:39Speaker 02

  The, the history of AT&T Ventures was actually kind of interesting, in the 99 timeframe, AT&T decided that they no longer wanted to have an independent venture capital partnership that was running money for them, so they brought that activity back in-house, that led to, ultimately, to the dissolution of the partnership that was running that fund, so we continued to manage out that portfolio, but during that time that I was managing out the portfolio, I also ended up helping a friend, Dave Morgan, get a company called Takota Systems started, as a part of that process, I recruited another friend, Fred Wilson, to be an angel investor alongside me in the first angel round that funded that

• 4:19Speaker 02

  company, very quickly, it became clear that Dave did not need me on that founding team, and so Fred and I enjoyed Working with each other enough on that board that we said, gosh, we should go do more of this. And so in, I think it was 2003, we sat down to figure out whether or not we could raise a fund. We decided to go make an effort to do that. Took us about 80 meetings and a heck of a lot of air travel to get that done. But we finally got the fund done in the early part of, I guess, 2004. And that was the beginning of Union Square Ventures.

• 4:58Harry Stebbings?

  And I'm really intrigued then to ask how you kind of approached the aspect of team building with USV. And you've built a world-class team, obviously with Fred and with Albert and with Andy. And so what did you look for in your partners that would help you change the world as you wanted to with USV? What were those character traits?

• 5:14Speaker 02

  Well, so we had a couple of things in mind, Fred and I, when we began to build the team. We, first of all, enjoyed working with each other very much. I think we complemented each other very much. Fred is one of the best investors I've ever known. He's one of the best board members I've ever known. Obviously, a very good thinker about the business. I think that I added some value to that early, those early days by really trying to narrow the thesis and refine our thinking and get us, you know, working on a common set of ideas. And those two things, I think, worked really well for us.

• 5:53Speaker 02

  When we started to think about adding somebody, we were certainly not interested in adding somebody that we didn't know. We wanted to preserve the very collegial feel of the partnership. We wanted that partnership to exist in a single location. 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. We had already been working for some time with Albert. I had known Albert since 1999 when he created an incubator and I was involved in helping there. And I got to watch him take that incubator through a very tough time. So I watched his behavior in the down market after 2000 and I was very impressed with.

• 6:37Speaker 02

  His integrity. I also knew that he knew a heck of a lot more about technology than either Fred or I did. We saw that on display because we asked him to to help out with Dakota early on and he helped come in and sort of played an interim CTO role for a few months and helped reorganize the technology platform there. And then, you know, after that, recruited him to uh help build one of our first portfolio companies, a company called Delicious. Uh where he took over as the president to Joshua Schacter, his founder and and sort of chief product officer. You know, we watched his him there and then he also had been very actively involved in Etsy early on and brought Etsy to the partnership.

• 7:20Speaker 02

  And uh we created a venture partner role for Albert to, you know, to sort of compensate him for having brought Etsy to the partnership. And so we saw him in all of those contexts over a long period of time before he came into the partnership. And and obviously it was a very smooth transition. We've tried to do the same thing uh with subsequent funds. So, you know, and John came in, it's somebody we've known very well. Uh Andy again is somebody we knew very well. And each time they came in working with us, you know, in some basis that that allowed us to get to know each other uh in a really, you know, meaningful way before we brought them in full time.

• 8:01Speaker 02

  And so it's it's been a very slow process. It'll always be a slow process for us. We think these partnerships are, you know, the dynamics of the partnerships are very, very important and um we'll continue to, you know, as we add people, we'll do it very slowly and we'll do it in a in a single office and we'll do it in the same sort of collaborative collegial way that we've done it so far.

• 8:24Harry Stebbings?

  And and a lot to unpack there. But one of the things I want to touch on is you said you said Fred's a great board member and you've sat on many boards yourself. So I'm intrigued to hear what you think makes a great board member. What are the commonalities amongst them?

• 8:37Speaker 02

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

• 8:48Speaker 02

  All of those things are important. Thing about Fred, most impressive things I've ever seen anybody do is the amount of effort that he put into managing out the Flatiron portfolio after the crash in 2000, which I got to watch, you know, up close and personal because he was very much still doing it in the early days of Tocota and then in the early days of Union Square Ventures. And it's that kind of, you know, dedication to the entrepreneur's willingness to, you know, it's not about, you know, 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.

• 9:29Speaker 02

  And, you know, I just think that it's that commitment that, you know, that I've seen in Fred before we started Union Square Ventures and certainly afterwards that I think makes a great board member.

• 9:40Harry Stebbings?

  And I want to talk about some of, some of your learnings now. And in a recent series and talking about growing the team there, in the recent analyst series that you did at USV, Joel Menegro stated that you very much adopt the quote by Twain, that history doesn't repeat itself, but it does rhyme. So how does this affect your views on market cycles and the way tech's adopted and then ultimately replaced?

• 10:03Speaker 02

  I think it's a very good lesson, you know, and I think that the key part of that is recognizing that it doesn't repeat itself. I think one of the failure modes of venture capital is to assume that the past is the future and that you'll continue to see in the same models. I think that in the 90s, for instance, there was a lot of money made in the venture capital business, investing in switches and routers and chips and sort of internet infrastructure. And the model for investing was very much around the technologist. You'd find an academic out of Berkeley or Stanford and you'd surround them with 15 good engineers and you would build a product, a router.

• 10:45Speaker 02

  And then you, you know, after that first prototype was built, you'd recruit your first business team and ultimately, you know, you'd raise your Series B around that business team and then, you know, before you raised the Series C, you'd flip it to Cisco. You know, there was a kind of a rinse and repeat attitude to technology differentiation, intellectual property protection, recycling the teams, that was a model that worked really well. When the action shifted to the applications layer in the 2000s, a lot of the people who had built a business in, you know, over the 90s sort of looked for other sectors, material science, energy, green tech, places where they could use that same model because it

• 11:26Speaker 02

  no longer made sense in information technology because you weren't doing chips and routers. I think that that was the wrong move. 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 90s and the way it happened again in more recently, and understanding those dynamics. But the key is step back and look at, understand it from first principles to really understand not just what's the same, but what's different, what's rhyming and how to adapt to that new circumstance. A lot of people have a difficult time doing that.

• 12:08Harry Stebbings?

  I'm really intrigued, you said there about market consolidation, and on the kind of other end in terms of the IPO market, Fred's written a lot about kicking the can down the road, so to speak. So I'm intrigued to hear about the kind of increasing time for companies staying private and whether that concerns you, whether you think we'll see a continuation of this trend with the kind of evolution in later-stage funding and what you kind of predict for this later-stage funding environment.

• 12:32Speaker 02

  I don't know how to think about degree to which that environment will continue. 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. 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, you know, the scarcity of equity in the private Capital markets for the real dominant market players, you know, you end up bidding up the in the price for that to a price level that isn't sustained in the public markets.

• 13:16Speaker 02

  And that's a weird dislocation that I don't think can continue for too long. I think we will find an adjustment, but I think there's a bigger, larger problem that you touched on, this question of consolidation, you know, are we in an era of expansion or are we in an era of consolidation? And I'd argue that in the 2006, 7 timeframe, 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. And so I think Google's in that category, Facebook's in that category, LinkedIn's in that category. There's a lot of services that would not have made sense, except that we were now in a world where everyone was connected to everyone else.

• 13:58Speaker 02

  And that was a very, you know, expansive period when a lot of value was created. We're now in a world where, you know, we're seeing really dominant market power, Google, Apple, Facebook, Amazon, you know, 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. And so I think the ability to continue to finance these in the private capital markets based on the assumption that they will get to those valuations that we saw in the 2006, 7, 8 timeframe is going to be difficult.

• 14:35Harry Stebbings?

  So do you join me in agreeing that we are in and will continue to be in a continued phase of consolidation in the tech environment?

• 14:41Speaker 02

  I do think we're in it. You know, when I was starting out in this business in the mid 90s, you know, every pitch meeting ended with a, you know, question about, well, if Microsoft decides to enter your business, how are you going to survive? You know, we see the same conversations now about Google, Apple, Facebook, Amazon, you know, if any of these companies decide they want to be in the sector that you're targeting, how do you plan to, you know, survive that? I do think it changes the way that venture capital industry is investing.

• 15:12Harry Stebbings?

  And you mentioned the application layer earlier, and I want to dive on this and the thesis at USV. So first off, why do you think having such a kind of predefined thesis is optimal to investing in early-stage startups?

• 15:24Speaker 02

  You know, I don't know if it's optimal. It has worked for us. I think that it's worked for us for a number of reasons. When you move from the infrastructure layer, where I think investing is really defined by technical differentiation and intellectual property defensibility, you know, there, I think, being more opportunistic, more deal flow-driven, made perfect sense. When you move up into the applications layer, having a thesis for why you think, you know, 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

• 16:03Speaker 02

  scalable, I think helps organize your investing activity. Putting that thesis out there and being open about it, and being open about all of our thinking about markets, has proven to be very helpful. Introducing us to entrepreneurs who are working in the areas that we have been thinking about, I think it's helped us by bringing some discipline to our conversations and focus that has enabled us to go a little bit deeper in understanding why certain things happen in these markets. It's also turned out to be really helpful in the end, as we've built a portfolio, because, you know, we have a bunch of companies, have a bunch of similar characteristics and similar problems, similar opportunities, but because we make

• 16:47Speaker 02

  an effort not to invest in direct competitors, they're perfectly comfortable sharing ideas with each other. So we've been able to organize, you know, because we don't do biotech, for instance, you know, we can have a CEO summit where everybody has something in common, and, you know, can share ideas. It also helps us manage a larger portfolio, because we see patterns across multiple companies, and we can help them in ways that if there was a lot more diversity in the portfolio, it would be hard for us to do. So I think it helps in a lot of ways.

• 17:19Harry Stebbings?

  And then, kind of, final question before we go into a quick fire round, is a reflective one. And it's looking back at the USV journey. What do you think have been the inflection points, both in the stature that's increased in the ecosystem of USV, and then in yours and the team's personal learnings? What moments have really changed the stature and the personal learnings, do you think, for you?

• 17:39Speaker 02

  Well, I think that, you know, the stature changed in the 2007 timeframe. 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. That was a pretty exceptional run. It turns out that we've had a number of other good investments in the 2004 fund that have since returned the fund again, so that fund in general, it was a great fund. One of the things that's a little embarrassing about the venture capital industry is I think we're still getting a lot of credit for that fund and that moment, which is now almost 10 years ago. I do think we're thinking deeply about the market and the opportunity, and I think we

• 18:24Speaker 02

  continue to make good investments. But I'm frankly a little bit surprised at how much interest there has been in Union Square Ventures since then and how long that interest has been sustained, even though that moment was 10 years ago. So that's the moment that I think about. Terms of the learnings?

• 18:43Harry Stebbings?

  I guess when you look at your approach to investing and your approach to patent recognition, how have you seen that evolve over the, what is it, 14, no, 12 years now with USP?

• 18:53Speaker 02

  Sounds about right. This is such an unbelievable privilege to be in the position that we're in. It's hard for me to, in a way, isolate a moment when I felt like I was learning more than any other moment. The fantastic thing about being in this business is you have this opportunity to become interested in an area, you know, some initial forays into that area, you know, 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. And you can ask all the dumb questions you want, and they politely answer them. And, you know, you can call them back a week later and say, "I still don't understand," and they'll answer that question.

• 19:38Speaker 02

  And so as a platform for learning, this is the single greatest job in the world. And if you're a curious person... I don't think, you know, I can point to a single moment and say, well, that was, that was a real revelation, but I can say that every conversation I've had with an entrepreneur has been enlightening and because we've tried to organize those conversations around a thesis, I think, you know, I've felt, you know, enlightened by all of those conversations.

• 20:06Harry Stebbings?

  And I'd love to, I'd love to finish now with a quick fire answer. I say a short statement and you give me your immediate thoughts. Sound good?

• 20:12Speaker 02

  Okay.

• 20:13Harry Stebbings?

  So your favorite book and why?

• 20:15Speaker 02

  There's a book called The Irrational Optimist. It's by a guy named Matt Ridley. I think it's a really interesting book. He's more recently written a book called The Evolution of Everything. Both of those books talk about how the world evolves and, and why. And I think they're, they're, they've been really helpful to me.

• 20:32Harry Stebbings?

  Now, you're an inspiration to many, but who inspires you and why?

• 20:36Speaker 02

  You know, there's, the, the thing about the venture capital business is you're kind of there at the creation, but you're not the creator. 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.

• 20:53Harry Stebbings?

  And from now, what does success look like for USV?

• 20:56Speaker 02

  I, 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 an increment, you know, making some small contribution to that would be success.

• 21:14Harry Stebbings?

  Favorite blog or newsletter? What are your must reads?

• 21:16Speaker 02

  Uh, other than my partners?

• 21:18Harry Stebbings?

  Go for your partners as well. You could choose between your partners. Way to make friends.

• 21:23Speaker 02

  The funny thing is I actually don't read a lot of blogs and I'm not sure I have a good rationale for that. Of the partners here, I tend to read a bunch of academic papers and they make fun of me for that. I, I get some privilege out of that level of abstraction. I don't know why, or some, some. Some benefit out of that level of distraction.

• 21:45Harry Stebbings?

  And then what challenges you most to this day?

• 21:47Speaker 02

  Personal challenge for me is, you know, trying to organize big ideas in a way that are easily communicated in the marketplace. I'm in awe of my partners who blog every day and who, they sort of put things out there and edit after the fact and they're perfectly comfortable with that. I personally struggle, you know, it takes me a lot longer to write something because if I see an internal contradiction in what I'm saying, I can't just put it out there and wait for somebody to point it out. And so it takes me a lot longer to work through that. So a challenge for me is becoming a little bit more open about communicating.

• 22:25Harry Stebbings?

  And then the final question, your most recent public investment and why you said yes?

• 22:30Speaker 02

  So I think the most recent one that is announced was a company called OB1. It's a 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. I think it's a really interesting extension of the underlying principles of the internet. I mean, the thing that's made the internet so fantastically great is that each of us comes to it with our own bandwidth and with our own CPU. And because we share a common protocol stack, we can communicate with anyone else who shares that protocol stack. I mean, taking that up to the layer of commerce is a really interesting idea.

• 23:12Harry Stebbings?

  Well, Brad, thank you so much for coming on the show today. It's been an absolute pleasure hearing the USV journey.

• 23:17Speaker 02

  Well, it's been my pleasure chatting with you.

• 23:21Harry Stebbings?

  Absolutely incredible to hear the founding journey and thesis of Union Square there from Brad and so grateful to him for giving up his time today to come on the show. Really was a personal highlight for me, being the complete VC nerd that I so clearly am. And if you're a VC nerd like me and want to stay in the land of the 20 minute VC, then you can follow me on Snapchat at H Stubbings or you can sign up to the newsletter on the 20minutevc.com for all updates and so you never have to miss an episode from us. And talking of missing an episode, do you ever get the feeling your design is missing something? For me, it's probably creativity, which is why I'm so pleased that DesignCrowd is there to help. DesignCrowd is the online marketplace of over 500,000 registered designers,

• 24:02Harry Stebbings?

  who are there to provide the creative flair to your logo, business card, site design. Hey, they even do t-shirt prints. All you have to do is launch a project, watch as the designs come in from top designers around the world, and then choose your favourite designs. It really is as simple as that, and the whole process can be done in just three days. And if you head over to designcrowd.com/vc and enter the promo code VC100, you can get a phenomenal $100 off your project. As always, I have to say a huge thank you for all your support. I really couldn't do this without you, and I'm so, so grateful. And I look very forward to bringing you Friday's episode.