The Biography Of Union Square Ventures – with Fred Wilson

Posted on Apr 12, 2010 - 1:59 PM PST

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When Fred Wilson looked at the previous venture capital firm that he co-founded, he said, “we screwed up a bunch of things.” This is the story of how he took the lessons from that experience and launched Union Square Ventures, whose portfolio of notable tech companies includes Twitter, Zynga, FourSquare, and Etsy.

In this program:
- You’ll hear how he researched the thesis that Union Square was built on.f
- You’ll see why he “dumbed down” his ideas when he raised money.
- You’ll learn how he found his partners.
- You’ll see how he finds the companies he backs.
- And more.

The FULL program


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About Fred Wilson

Fred Wilson is the Managing Partner of two venture capital firms, Flatiron Partners and Union Square Ventures. He’s based in New York and writes a popular blog, AVC.com. When he’s not working, on his blog’s about page he says, “I also love music, art, yoga, biking, skiing, and golf. That’s a lot of interests for a guy who works 70 hours a week and loves his family. But I manage to make it work.”

You should say hi to him on Twitter.

*Raw* transcript


This is a raw, mechanical transcript. Readers (like you) are editing a better version here.

Andrew: Before we get started, I should tell you that this is an audio-only interview because as you’ll hear in my voice during the beginning of this interview, I was having some trouble with the video. It wasn’t just coming through. So, we gave up on it, we continue the conversation, and that’s the way I’m going to present it, it’s an audio-only interview since audio, I think, is what came out well, not video.

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All right, here’s the program.

Hey, everyone, it’s Andrew Warner, founder of Mixergy.com, home of the ambitious upstart. Today, I’ve got with me, Fred Wilson. Fred, first of all, before I even give you the introduction, thanks for sticking with us on the video. We’re doing a video Skype-based interview and we’d had a little bit of trouble getting started and I appreciate all the work you’ve put into coming on here.

Interviewee: No problem, I’m happy to do it.

Andrew: If we end up with just an audio interview, I guess, we’ll just have to go with that. Fred, as most of you know, is the co-founder of Union Square Ventures, the investment firm that back notable tech companies like Twitter, Xanga, Foursquare, Etsy. He’s got a lot of fans, I can see here in the chat. I invited him to Mixergy to ask about the biography of his business, to learn the investment decision making process along the way. Fred, the first thing I’m wondering about is your previous company. Before we get in to this company, there’s a quote from you that I read about that previous company. You said, “Yes, boy, we really screwed up a bunch of things.” What did you mean by that? What did you, guys, screw up?

Interviewee: We really had a good thing going from ’96, ’97, ’98. The company selection was good and we were making excellent returns. There were a number of very good businesses that came out of that, purely investing. In ’99 and 2000, I think, we, like everybody in the business, got bit carried away with ourselves and started funding things that were not as logical businesses, overfunded things. We funded things that prices that made no sense. At the same time, our firm had gone from two people to 25 people and it became a little bit institutionalized. We end up spending bunch of time managing the firm as opposed to making investments. The top and most experienced investors became managers, and the people who were investing the capital were younger and less experienced people. That whole combination just really didn’t work very well. In 2001, we decided to, essentially, shut things down and wind things down, which we’re still in the process of doing, actually. It takes a long time to wind down a venture portfolio, but that’s what I meant by it.

Andrew: How did you get to that place? When you started out with the plan in mind, it wasn’t to get where you ended up. How did you end up there?

Interviewee: In that situation, it was just simply a matter of being too successful too quickly. We made a bunch of investments in ’96 and ’97 that by ’98 and ’99 had gone public. We’re sold and we were generating a lot of returns for ourselves and our partners. When that happens, I think, you’d want to start replicating that and doing more. You get caught up in the idea that, “Well, if we could turn $150 million into $750 million, we could turn a billion and a half into seven and a half billion.” But the numbers don’t work that way.

Andrew: Why did you decide to get back in the business with a new company?

Interviewee: I’d never really intend to get out of the venture business. I just felt that the structure that we had at the end, Flatiron was not the right structure and winding it down was easier than trying to turn the whole business upside down and start it over again.
Interviewee: Winding it down was easier than trying to turn the whole business upside down and start it over again. And so we, you know, we put that business on…into wind down mode and then a couple years later I started the Unit Square venture business with a new partner, Brad Burnam, and that has worked out well. We didn’t fall into some of the same traps with this business that we fell into with the last one.

Interviewer: You say that… you never intended to get out. Your partner did. He’s now a business coach and a life coach. Why didn’t you? Why did you want to stay with it?

Interviewee: Well…Jerry is the kind of person that’s very intellectually curious. By the time that I met him, he was already on his third career and was, you know, 32 or 33. The venture business was his third career and then he became a consultant which was his fourth career and now he’s a CEO coach which is his fifth career. So… Jerry’s a…Jerry’s capable of doing many different things. I always saw myself as a venture capitalist, and nothing else. I’ve never really been interested in doing anything else with my professional career so I think it’s just a situation where he had other things he wanted to do with his life and…I didn’t…

Interviewer: What is it about venture capital that drew you in the first place?

Interviewee: I always liked the intersection between finance and technology so I spent a bunch of time in the technology business early in my career. Went to MIT, got out, wrote a bunch of software for awhile and then decided that I wanted to go to business school. While I was at business school, I got into finance and i think alot of the… Alot of the fundamental skills that you need to be a good engineer are not that different than you need to be a good finance person. It’s very math oriented and strong…requires strong quantitative skills and so I was really attracted to a business that would allow me to continue to be deeply in the technology business but also do alot with the finance, education and interests that I had.

Interviewer: How did you pick your partner?

Interviewee: Which partner?

Interviewer: How about Brad? Brad Burnam?

Interviewee: Brad was somebody that I had known and respected for a long time. I don’t really ever want to be partners with somebody who I haven’t worked with previously. I just think that the risk is too high of not getting along.. and that’s a really bad situation to be in… To be partners with someone you don’t really enjoy working with so Brad is somebody I had known since the mid 90′s. We had done some deals together and specifically we were working on the Dakota deal as angel investors at the time…really enjoying that company and that project and the board. Brad and I were really the two leading… independent outside board members and so I felt pretty strongly as did Brad that we would be compatible. We both were, you know, had been in the venture business for over a decade and had been through the ups and downs of it. And had similar experiences and so he seemed like a very good choice and he has been a very good choice.

Interviewer: I asked Jerry Colono what it was about you that he wanted to partner up with and he gave me a story about… he told me how you guys had a meeting once and he had to cancel it because… you had to cancel it because you wanted to spend some time with your daughter and he said “Ahh that’s the kind of person that I’d want to be in business with. I like his priorities.” Do you have a similar example for… or story of what made you think that Brad would make a good partner?

Interviewee: Well, I think Brad and I….I don’t have…I don’t have anything quite as colorful that…The story Jerry told you but Brad and I were at a similar stage in our lives. He has two kids who are in middle school. I’ve got a son in middle school and a daughter in high school and a daughter in college. You know, he lives in Manhattan. I live in Manhattan. I know his wife very well. He knows my wife very well.

I thought that we were at a very similar point in our careers and in our lives and wanted, more or less, the same things. So, that’s kind of what Jerry was talking about in his story. But, you know, my compatible with Brad, I think, came more from knowing each other over a decade and knowing each other’s families. I was pretty confident it was going to work.

Andrew: Albert, how did you decide to partner up with him?

Interviewee: The funny thing is that Brad and Albert had been working together. When Brad and I decided to start Union Square Ventures, Brad had already been working with Albert on a couple of projects including Tacoda where Albert was recruited and to be a sort of crisis interim CTO early on in the beginning of that company. We actually talked briefly about the idea of recruiting Albert to start Union Square with us. I felt that it was more important to just have two partners in the beginning and make sure that we get our partnership right. Once we got that worked out, we could start having third partners. I thought starting right away with three was kind of a risky idea. So, instead, we worked with Albert on a couple of projects. He was the President of del.icio.us, he found Etsy, and was the first board member for us on Etsy. Then, he founded a couple of other companies with us and that led to us asking him to join the firm in a permanent capacity when we raise our second fund.

Andrew: What’s the responsibility break down between the three of you?

Interviewee: We all do the same job. So, the whole architecture of our business is it’s a very small business, there’s a total of six people in the business, and that includes our administrative people. We’re not generalists in terms of what we invest in because we were very specific investment thesis and a certain style of company that we invest in. q We’re generalists in the sense that we all do sourcing, we all do managing our portfolio companies. We take turns handling the relationship with our investors and the administrative staff. So, everybody does everything in our firm.

Andrew: 2003 is when you launched the business. What was the first thing that you did? Am I right about that?

Interviewee: Yes. The first thing we did was we wrote, I would call it, probably a 15- or 20-page white paper on the information technology venture business. What was right with it and what was wrong with it, and where we thought it was headed. We did that largely to build an investment thesis that we’re actually still executing today. We developed about probably four or five core principles in terms of what we would look for in an investment and what we believed the future of information technology was going to be. Then, once we completed that, we started talking to people about that, and then we quickly realized that even though we thought it was a [xx] analysis, we realized it was going to be hard to sell that to our financial investors. To understand what was going on in the information technology that time required an understanding of the business and technology that, frankly, these large financial investors didn’t have and we couldn’t expect them to have. So, we had to dumb down that story significantly and put something together that was much more simplistic in order to raise our fund.

Andrew: I want to dig in to some of what you said so far. The first is, what did you think the future would be when you were writing that white paper?

Interviewee: We thought that software was moving to the Web and that we saw the emergence of the cloud coming. We thought that the model of technology flowing from government/defense to business to consumer was flipping and that was going to flow from consumer to business to government.

We thought that the scale and the size of these Web services were going to be global and measured in the billions, and that there was enormous opportunity for large networks that had data assets to scale into sizable businesses.

And we had some examples even then with Google being a real guiding light for us back in 2003. But anyway, we thought that the value was all in the application layer and not so much in the core infrastructure layer. So those are some of the highlights of the analysis that we did back then.

Andrew: I actually tweeted out a link to an old article from 2003, when you launched the business, about what your beliefs were about the future of this space, and so much of it was dead on. Here’s a quote that I’ve got: “”It’s about one or two people building something, getting it into users hands, and iterating.”" So much of what you believed the future would be happened. What were you wrong about?

Interviewee: Well I don’t know if wrong is the right word. We should have figured out – but really didn’t when we raised our first fund – was that the initial capital requirements for these businesses were going to be in order of magnitude lower than what they had been.

So we essentially articulated the reasons for that, but we didn’t take that into our financial models. So we went out and raised a $100 million fund; and we said that we would make 10 or 12 investments with the average initial investment being $2-$3 million. In fact, that didn’t turn out to be the case.

We ended up making 21 investments in that first fund, and the average initial investment was about $1 million, and many were much smaller than that. The initial investment in Delicious was $400,000. The original investment in Etsy was $250,000. Some of our best investments, not all of them, we started with investments of less than $500,000. So we should have seen that coming, and we certainly have adapted our business to that reality. So it hasn’t hurt us in any way, but it really was a miss in that way.

Andrew: You said that once you came up with these ideas and wrote them down, you started talking to people about them. Who did you talk to about them?

Interviewee: Well mostly financial investors, the people we needed to fund the business. We also talked to colleagues in the venture business and entrepreneurs just to get sanity checks. And even among the industry insiders, VCs and entrepreneurs, we definitely got some blank stares. People didn’t necessarily agree with what we thought made sense. A number of people accused us of still buying into that “”Internet”" thing.

You have to remember in 2003, memories were still short and a lot of people had lost a lot of money in 2000-2001. So there were certainly a number of people who thought what we were doing did not make sense. But fortunately, there were enough people we talked to who thought it did make sense that we went forward with it.

Andrew: Do you have an example of somebody who helped shaped your thought, or helped changed the way you that you were thinking about the future of this space when you had those conversations?

Interviewee: Well two people I give a lot of credit to are Yochai Benkler and Carlota Perez, both of whom are academics who wrote pretty seminal academic papers that we were reading at the time. Carlota wrote a very interesting piece about technology revolutions over time, going back to the Industrial Revolution, and how technology diffuses into society over time.

And Yochai Benkler, of course, is most famously known for “”The Wealth of Networks”", a book he wrote a couple of years ago. At the time, he had written a very interesting piece called “”Coase’s Penguin”" talking about Coase’s paper, “”The Firm”", that he wrote a long time ago, and how that was becoming increasingly true. And so, those are two pretty seminal pieces of academic research that influenced our thinking. I have to give them both credit for that.

Andrew: And how much did you say that you were trying to raise at the time?

Interviewee: A $100 million.

Andrew: Why start with a 100 million and not do what you were seeing in the space? Why not start with a smaller amount and just launch something and iterate?

Interviewee: You know, by 2003 I had been in the business 17 years and I — so I — so, you know, I felt — we both felt that — the question is about fund size, we both felt that we needed to have a significant fund that would allow us to go deep on our very best companies, and that’s a lesson that you learn again and again in the venture capital business. And I am glad we did it; you know, we have almost $10 million in Twitter, for example, and we have got something like 7 or $8 million into EDC now and these are over three, four, five rounds of financing. So, if you have a smaller fund size, you can’t do that. And, you know, my friend Howard Lindson said something interesting to — on his blog two days ago, or yesterday; he wrote that entrepreneuring is a lot like being a running back, that every once in a while you break through the line and all of a sudden you yourself in the open filed, and when you do, you have to take advantage of that. And that’s very true in the venture business. If you think about the portfolio companies, maybe 20 companies, only half a dozen of those companies are going to break through the line and get into the open field. And the ones that do are the ones that are going to provide all of the — most of the value, maybe all the value in the fund. And we want to be there for those companies with our capital because they are going to need it, and that’s also where we want to invest our capital, because those are going to be producing the highest gross returns, if anything, in the portfolio. So, I don’t really believe in the micro fund model. It’s — I think it works to a degree, and I definitely think you can make very good returns with the micro fund model, but I think what services entrepreneur best is the fund size that sits between the micro fund and the mega fund, and I think 100 million is really a great fund size because it can do both.

Andrew: All right. Something else that you said earlier was that you dumbed down your message, how did you dumb it down?

Interviewee: We hired two women, Dana Gan and Jane [xx] who had at that time an advisory firm called [xx] Boston, and their specialty was helping funds — raise first time funds, which — this was not for us as individuals but for us together as a firm. And they understand the large investor community very well, and we worked with them. It’s a frustrating process not because of them but it’s always frustrating to dumb something down. But they were very helpful in making it simple. They had a requirement that we had to be able to do our pitch in six slides, and I loved that because when someone forces you to just do something in six slides, you really have to be crisp. And I learned a lot from them and I encourage a lot of entrepreneurs to try and do the same thing. You know, when we sit in a presentation and an entrepreneur takes us through 40 slides, it’s mind-numbing, you know; and the entrepreneurs believe that they’ve got all this information and they’ve got to get it out. But in reality they’ll have plenty of time to get all that information out; what they need to do in that first meeting is just convince you you are someone that they want to spend — that you want to spend more time with. And that’s what Jane and Dana told us, and it was right.

Andrew: So, when you say dumb down, you mean simplify it, or did you take down —

Interviewee: Well, you know, I mean both: you know, simply it but also — you know, [xx] you’ll got to sleep. It’s complex and detailed and dry, and I imagine our, you know, was thesis was some of that too. And so, we just made it simpler to understand and took away a lot of the more, I think, rigorous analytical stuff, which I think was important for us to do but maybe not important for us to share.
25:00

Andrew: I see.

Interviewee: My friend Roslyn Resnick invested in the fund, and I think in the first one?

F: No, Roslyn —

B: Yes, she did, absolutely.

F: She said that —

B: I do.

Interviewee: I am sorry?

B: I do.

Andrew: Right. She said that when you approached her, you said that you — I think — I could be wrong here, but this is what my memory — this is what I am remembering. You said that you made a mistake by not investing in her memory which was a bootstrap email marketing business and that you wanted her on not just as an investor, but as an advisor who will help you pick up on those opportunities that you might have missed in the first round of the internet. Has having her there and having that kind of thinking influenced the way you make decisions today?

Interviewee: We cultivated a group of about 20 or 30 entrepreneurs who were really successful in the first wave of the internet, and they all invested in that 2004 fund. And yes, it’s been very helpful to have not just Roslyn but lots of those kinds of entrepreneurs as investors in the fund.

Andrew: Roslyn’s believe I think at the time was that there were too many companies that weren’t making money in the first — the first round of the internet. When the — when the bubble burst, people started to question that – did you question the need for profits first and then lay — the profits maybe — did you question your belief about profits?

Interviewee: I think every business has to have profitability as its objective to — you know, profitability is sustainability. If you are not profitable, you will go out of business at some point unless you continue to finance the business, and financial markets aren’t always going to be there. So profitability is important but I don’t think that optimizing for profitability early on in a company’s life is generally the right thing to do if you are working on a large scale opportunity. If you are working on a niche opportunity, it may well be, but it wasn’t the right thing for Facebook to do, it wasn’t the right thing for Google to do, wasn’t the right thing for Twitter to do. So there are situations where optimizing for profitability isn’t the right thing to do.

Andrew: Okay. So we talked about how you came up with the thesis behind the business, how you went out and talked to investors; how did you find the first investments?

Interviewee: Our first investments?

Andrew: Um-hmm.

Interviewee: Well, Dakota was already there, Brad and I had been working on it and it became — it moved past the [xx] phase and into the BC phase around the time that we raised the fund. So Dakota was one of our first investments and — and that was great, because we were able to put money into a company that we deeply understood and were already involved as strategic advisors where we loved the management team, and that also turned out to be our first big exit. So that was right in many ways.

Andrew: And then was the second company Delicious?

Interviewee: Delicious was probably the third or fourth company; Delicious was the first exit we had. And it wasn’t particularly important financial outcome for us, but Delicious was very important for us. I think it established our firm as a firm that would take chances and that understood some of these new emerging web services and — you know, when we invested in Delicious, it was one person, Joshua, and I think that also showed that we were willing to get involved in things where there wasn’t yet a team in place; all of which I think has gone on to serve as well reputationally. Our mutual friend, Mark Souster, recently got into the venture capital business, and I remember when he first started in Los Angeles, he went out and he met everybody, anyone with any entrepreneurial aspiration who didn’t shake Mark Souster’s hand and whose family name Mark Souster didn’t know, he got that intimately involved in everyone. You already had some experience in this base, but you needed to meet more — did you need to meet more entrepreneurs? How did you go about finding the companies that you’d ended up investing in?

Andrew: Well, you always need to be meet more entrepreneurs. You know, the minute you decide that you don’t want to meet with entrepreneurs is the day you should get out of this business, because entrepreneurs are the rock material of the business; without them there is nothing. So, that’s a — that’s a requirement every single day. The thing that I did differently with Union Square Ventures that I had never done before was blob, and I started blogging right around the same time that we started Union Square Ventures in the late summer/early fall of 2003.
Interviewee: “The thing that I did differently with Union Square ventures that I’d never done before was blog. And I started blogging right around the same time that we started Union Square ventures in the late summer early fall of 2003. And blogging has made it vastly easier for me to build relationships with entrepreneurs even if they’re just tenuous relationships in the beginning. They can turn into something much more, and so that has been a real boom to our business and we’ve embraced it in many ways.”

Andrew: “Do you have an example of something or an investment that came from the blog?”

Interviewee: “Well that depends on what you mean by ‘came from the blog’. But, Twitter I would argue came from the blog because as I was blogging, I was encouraging everybody else to blog, and it occurred to me that very few of the people that I thought should blog actually could wrap their heads around how to create long-form content every day. And when I started using twitter, I immediately understood that twittering was a lot like blogging, with most of the same benefits, but without the same costs – and so we quickly wrapped our heads around why that was such a large opportunity and make an investment there. And I think if you weren’t a blogger it would have been harder to figure that out.”

Andrew: “I’ve got someone here in the live audience – Michael Yerechco says ‘Fred’s blog got me my last job’. Apparently he left a comment on your blog and he ended up connecting with a local venture capitalist.”

Interviewee: “Yeah Boris. Yeah, that’s true, that’s true. I wrote a blog post about the fact that many entrepreneurs don’t go to college, and the comment thread turned into this raging debate about whether I was being irresponsible in encouraging people not to go to college, or whether it was ok to speak that blasphemy and Michael just left a comment saying “I’m graduated from high school and I’m not going to college” and I responded “well, where do you live?” and he said “Vancouver”, and I said “send me an email” and I introduced him to my friend Boris and he got a job. So there you go.”

Andrew: “Boris, whose interview I did hear just a few weeks ago.”

Interviewee: “Yep.”

Andrew: “How else did you meet the companies that you invested in?”

Interviewee: “We tried to be out in the marketplace as much as possible – going to tech meetups and hackathons and those kinds of things. And we tried to be as open to entrepreneurs as we can be, and that’s how we meet entrepreneurs.”

Andrew: “Do you have an example of an entrepreneur who met you there who you ended up backing?”

Interviewee: “Well I met Dennis Crowley, founded of ForceBroker at ITP, probably five or six years ago. ITP every year does this senior demo day thing where – that’s not what they call it – where all the seniors show their projects. And I met Dennis, he was doing Dodgeball at the time and followed him through that experience, watched him sell to Google, watched him leave Google, and start Foursquare. So, that a great example of somebody who I met four or five years ago who I didn’t invest in until a year ago. And you have to cultivate relationships over time.”

Andrew: “How did you cultivate – oh, lost the pencil there – How did you cultivate that relationship over time?”

Interviewee: “Not very well, honestly. It’s not like we worked really hard on becoming Dennis’ favourite BC which we probably should have with hindsight. Even though we aren’t besters, looking back on that I’m a little embarrassed that we didn’t spend more time with Dennis, because he really is a special entrepreneur. But, we’re a little lucky here in New York, that only a dozen or so venture firms that focus on what we venture on. So it’s not like Silicon Valley where there are hundreds of firms competing for an entrepreneurs attention, so could get away with it – I think in the future we might not get away with it but – cause I think the New York market’s getting a lot more competitive, but in that one, we were able to.”

Andrew: “Did I just lose your connection?”

Interviewee: “No, I’m here”

Andrew: “Oh, sorry looked like we did. You said that he was a special entrepreneur, what makes for a special entrepreneur?”
Interviewee; No, I’m here…

Andrew: Oh okay, sorry. Looked like we did. You said that he was a special entrepreneur, what makes for a special entrepreneur?

Interviewee: It’s a combination of a product vision and the ability to work with engineers to turn that into a functionating live experience on the web. And also the ability to rally people to your project or business to get those special engineers working with you. Also the ability to evangelize the idea in the media and in the marketplace, and that’s a rare set of talents. Of course, if you think of the people who started many of the biggest and best web companies, they’ll have most of those characteristics in common. But that’s, but you know, if you just look across the spectrum of people you meet every day, you’ll quickly realize there aren’t that many people who have that particularly, particular set of skills.

Andrew: How does Dennis Crowley evangelize?

Interviewee: Well, you know, first of all he does it in his online presence, he also does it in his physical presence. He’s constantly, he has a vision, he’s constantly evangelizing that vision… Not in a, you know, kind of, a dogmatic sort of way but, you know, just in terms of the way he lives his life and the things that he’s interested in. And when you have a conversation with him, it always leads back to four square, but not in a, not in kind of a pitch sort of way… Just a kind of, you know, you realize this is somebody who, who’s deeply passionate about what he does and has figured out how to be, kind of, the iconic power user of the service and it’s infectious.

Andrew: I see. you mentioned Howard Lindsen earlier. He said that you gave him an opportunity to invest in Twitter, and he didn’t take that opportunity, and he felt bad about it… but, what I’m wondering is, why? Why did you give him an opportunity to invest in Twitter with you?

Interviewee: Well, I like Howard. I think he’s a very talented entrepreneur and investor and I knew he would understand Twitter. And he did understand Twitter, he built a whole company on top of Twitter. That happened after we invested. Howard, you know, he just didn’t understand why it was worth what I was willing to pay for it at the time… which is why he didn’t do it. And that’s fine, but it wasn’t like he didn’t understand it.

Andrew: What would having him as an investor do for the business?

Interviewee: He’s a one-man promo, I mean, you know, Howard is out there promoting stuff he cares about and he, you know, look, he did it without even investing in Twitter. He’s been promoting Twitter and stock Twitts and the idea of social media and so on and so forth. So, he would have been great. He is, he has been great, you know, but it would have been great for him to have been an investor.

Andrew: Alright. I know, as an entrepreneur, we get pains in our stomachs thinking about whether we’ll make enough money, whether we made the right decision, whether we’ve made Fred Wilson happy in the five seconds we got to meet him at a meet up… what I’m wondering is, do you have pains in your stomach or is life just easy once you’re on your side of the deal?

Interviewee: I think it depends on who you are, mentally.

Andrew: How about you, personally?

Interviewee: Yeah, I have pains in my stomach all the time.

Andrew: From what?

Interviewee: The more successful our investments get, the more pains I have in my stomach about them… It’s just how I’m wired up, I’m a worrier.

Andrew: So how does that manifest itself? How does that express itself, do you wake up in the middle of the night worried? Do you..

Interviewee: Yea.

Andrew: You do?

Interviewee: I woke up this morning at 3:45 in the morning.

Andrew: And what was on your mind, without getting into specifics?

Interviewee: Everything. I mean, you know, I’m a worrier. I’m a nervous nelly, you know… it’s, I get wrapped around the axle about stuff. I just…

***********(transmission problems?!) at 39.34 of the interview-

inadequate sound to transcribe.

Interviewee: …Doing that to the entrepreneurs who we invest in, I think if you talk to Evan Williams or

***********(transmission problems, inadequate to transcribe)

Rob Kalen, or any of the entrepreneurs that we work with, I think that they will
Interviewee: …will probably tell you that they don’t feel like I’m dumping my anxieties about their business on their lap. That’s my private set of anxieties and I’ve got to figure out how– [tape cuts out] … to help without making their life miserable. And I think I do a pretty good job about it. But nevertheless, most of the people I know in the venture business worry about their investments all the time.

Andrew: Worry that what will happen?

Interviewee: Well, anything, right? They’ll go out of business, they won’t succeed, they’ll be successful for a while and then they’ll stop being successful. That, you know, that billion dollar– [tape cuts out] … [unintelligible] … management teams will fall apart, the talented people will leave. I mean, I could go on and on. You know, I could recite you every nightmare I’ve ever had.

Andrew: Do you think it ever goes away, or as you say, you think it’s just part of who you are, and it just will always be there?

Interviewee: For me, when I stop worrying, I think I should get out of the business.

Andrew: At this point, it looks like we lost the connection. I’ll reconnect and we’ll pick up the program again. [pause] What do you think about what Jason Fried has been saying about how you’re better off not taking money, starting slow, small, building up over time, and building a profitable business?

Interviewee: I think he’s right, if you can do that. And it depends on what kind of business you have. I think for a lot of these software-as-a-service businesses, small enterprise-ish kind of businesses, I think that’s a very good model. For the kinds of businesses that he’s building, I think it’s an excellent model. I don’t necessarily think it’s the right model for every business. So you know, you’ve got to finance the business and develop a business plan that makes sense for the kind of business you’re creating.

Andrew: I see. What kind of exits do you look for from the businesses you invest in?

Interviewee: I think most of our businesses are likely to end up getting bought by a company that wants to own the technology or the team, or both, or the business, for the revenues and profits, but I think we will see a return to public offerings, and I also think that we’re going to have some exits to financial buyers who, you know, need to–want to be in the Internet sector, who are either late-stage venture firms or growth equity firms or private equity firms. For example, you know, Skype was bought by a consortium of VCs and private equity firms for, I think, 3.5 billion dollars. There’s no reason why, you know, Twitter couldn’t be bought. I’m not–this is just an entirely theoretical example, I really don’t–I’m not telegraphing anything here at all. Just, there’s no reason why Twitter couldn’t have a change in ownership the way that Skype had a change of ownership. And it wouldn’t necessarily have to flow through an eBay-type of acquisition along the way. That’s all I’m trying to say. So I think that’s there–there are some other forms of exits for the early-stage investors and founders that don’t necessarily require a sale to a strategic buyer or a public offering.

Andrew: What about you? What kind of exit are you looking for from Union Square Ventures?

Interviewee: Not looking for an exit from Union Square Ventures.

Andrew: Why is venture capital so different from the companies that it invests in? I mean, you look for growth industries, and as you’ve said on your blog, venture capital isn’t a growth industry. You look for companies that can have an exit, and in your own business you don’t look for an exit. Why are there so many differences?

Interviewee: Well, venture capital is a service industry for entrepreneurs. We’re like lawyers and accountants and PR firms and that ilk. We’re a service business. We provide a service to entrepreneurs. The service we provide is capital and, if we do our job well, some advice and counsel and good fiduciary board representation. But we’re a service business. And I think that venture firms are a lot more like law firms and accounting firms than they are, you know, tech startups.

Andrew: Let’s take a few questions from the audience, here, since we’re getting to the end of the interview. Todd W wants to know what lessons can a single founder learn from Delicious, the company that was founded by a single founder?

Interviewee: Well, basically, the lesson is eventually you’re going to have to choose. You can’t–as the business scales, you can’t do it all yourself forever. And you know, Joshua chose to raise some money and build a team and scale the business, and then he went and sold the company. He could have sold the company for probably three to five million dollars before he raised capital. He had offers, he raised some capital–
Interviewee: …Not very much, about a million dollars I think, and sold the company for thirty million dollars. So, obviously there was a order of magnitude improvement in the value he got out by raising a little money, building a team, and going for another year to eighteen months. So that’s the lesson of Delicious, is that you can’t go it alone forever, and you’re going to face a hard choice at some point, and you have to figure out what the right answer is.

Andrew: A few people in the chat room are asking ‘how can an entrepreneur get to meet you, what’s the best way to meet you?’

Interviewee: I think getting an introduction is probably the best way to meet me. Another good way is to engage with me in social media, and you know, that might take a little bit of effort. You know, I generally start to recognize peoples names the second or third time they leave a comment on my blog or send me a twitter or something, and sometimes it’ll take four or five times before I really actually check out who they are and start to get a sense of what they’re doing, but those are lightweight interactions, they don’t cost very much and they’re, I think, pretty effective at getting my attention over time, so that’s another good way.

Andrew: All right, one more question from the audience before I ask my two wrap-up questions, and that is Jeff is asking ‘How important is location, do you think, for an entrepreneur?’

Interviewee: Where you are? Are you in like, San Francisco or New York or Boston or – Boston? I think it’s important to be somewhere where there’s some critical mass of tech companies and tech investors, and the reason for that is, it’s hard to recruit talent into a region where there isn’t some of that. So I think it’s ok to be in Boston, New York, Seattle, Los Angeles, Austin, Boulder, probably Chicago, you know, and a few other cities. Then you start getting into, you know, kind of tenuous territory where I think it’s much harder, it’s not impossible, its just harder to build a company.

Andrew: Okay, here are my two last questions: What can I do to do a better job here with the interviews that I do?

Interviewee: I don’t know, I think you do a pretty good job. The questions are good, they’re varied. You asked me a few questions today no one’s ever asked me before. So you seem prepared, you seem to have done your homework so, I’m impressed, frankly.

Andrew: All right. I got to meet you through an introduction. Who that you know, which entrepreneur that you know, should I be interviewing to learn about how to build a business? Who’s got a story I should be talking, I should be hearing here?

Interviewee: You know who a really good entrepreneur is that nobody really talks very much about, are the two founders of indeed.com job search company, which is actually quite a significant company now. They’re serial entrepreneurs, located in New York, in Connecticut and Austin, Texas, [Paul Forrester] and [Ronnie Kehan]. Great entrepreneurs, built amazing company, strong technologists, you know really good business people, and I don’t think that many people know about them. So they are one of the secrets of Union Square Ventures.

Andrew: If I send you an email can you make an introduction or forward my email to them?

Interviewee: Sure, absolutely.

Andrew: All right, well Fred thank you for spending this time with me, I appreciate you doing the interview.

Interviewee: Thank you. Take care.

Andrew: All right, thank you all for watching. Bye.

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[Thank you Mike Colella for introducing me to Fred!]

  • pedro

    Andrew, great question about why didn't he raise less than 100M and iterate.

    Your really pushing those interviews and mastering this art, congratulations on your evolution.

  • http://mixergy.com Andrew Warner

    Thanks.

    Not sure I understand why venture capitalists don't operate the way they
    tell startups to run.

    Why don't they look for exits?

    Why don't they start lean?

    Why don't they merge?

    Why don't they pursue a high growth industries themselves? (The VC business,
    as Fred said on his blog before, is a mature business.)

  • Chu Muonelo

    Nice interview! I love these interviews where I get in the mind of VCs. I especially love his advice about leaving comments on blogs to get in contact with people. Kinda goes along with the How to Win Friends and Influence people philosophy: Become genuily interested in people, and they'll become genuinely interested in you. Timothy Ferris used it to market his books, and it works here as well. Thanks for a great interview Andrew, and thanks for coming on Fred, you definitely lived up to the hype. Thanks.

  • coletaylor

    Typo Above |
    When Fred Wilson looked at the previous venture capital firm that co-founded

  • http://mixergy.com Andrew Warner

    Fixed. Thanks!

  • http://mixergy.com Andrew Warner

    Fixed. Thanks!

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