Brad Burnham of Union Square Ventures joins Nick to discuss Founding Union Square Ventures, Driving Persistent, Top Decile Returns, How Top Founders Have Changed, and the Outlook for Web 3.0 and Data Control. In this episode we cover:
Founder Focus Shifting from Management to Leadership How Venture has Changed Over the Decades Why Web3 is Here to Stay And more!
The host of The Full Ratchet is Nick Moran, General Partner of New Stack Ventures, a venture capital firm committed to investing in founders outside of the Bay Area. To learn more about New Stack Ventures by visiting our Website and LinkedIn and be sure to follow us on Twitter.
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Transcribed with AI: 0:00 Brad Burnham joins us today from New York City. Brad needs no introduction here; he is Founding Partner, former Managing Partner and Venture Partner at Union Square Ventures. USV is a multi-stage venture fund investing in brands that broaden access to knowledge, capital and well being. Brad first joined the venture world when he spun Echo Logic out of Bell Laboratories, which led to the creation of AT&T’s venture arm when Echo Logic sold in 1993. Brad joined AT&T Ventures, eventually becoming the GP. Then in 2003, Brad co founded Union Square Ventures alongside Fred Wilson, where he remains active to this day. Brad, welcome to the show. 0:37 Thank you, Nick. 0:39 It’s such a pleasure to have you. You know, I’d love to start with your background prior to USV and prior to your experience in venture, what was the first entrepreneurial experience or exposure you had in life? 0:51 First entrepreneurial experience? Well, I, you know, I mean, the easy answer to that is spinning Echo Logic out of AT&T and trying to build a business around very sophisticated Bell Labs technology that was actually probably a lot more technology that was needed to solve the problem. And so it was an interesting learning experience, that technology is not always the answer to building a business. But anyway, it was a wonderful experience, I worked with a bunch of really talented engineers, I learned a lot about the nature of venture capital, I guess more than nature of of startups. I guess one of the most interesting side notes about that was that it was very challenging, convincing a bunch of Bell Laboratories engineers to leave what is a very cushy kind of academic environment where they were able to work on their pet projects, and, you know, pursue their interests to come join something that had a very real profit motive and a very real risk of failure, which is not an A world that they lived in. And the interesting side note, or a follow up to that is that the venture really did in the end kind of fail, we had spectacular technology. And it turned out to be a very small market. And I was kind of waiting for the all of these engineers to come back at me and say, you know, how did you why did you convince me to do this, and they all came back to me without exception and thanked me for getting them kind of out into the real world and helping them understand that their value wasn’t a reflection of their position, within Bell Laboratories, their value was a reflection of their own skills, and they all ended up doing really interesting things and moving on, but all based on, you know, a better understanding of their value and their their skills and their ability to contribute to, for the most part startups, they all went off and did different things in different startups. 2:48 Right. Do you feel like you sort of stumbled upon the journey, you know, into venture and sort of business investment in business creation? Or was it something that you always wanted to do? 3:01 No, I definitely stumbled upon it. And it’s interesting, because it’s a very real contrast with Fred Wilson, who knew early on, came out of school actually studied in school to become an investor. And then, you know, came out of school and went directly to work for Euclid Partners and as an investor, and for me, it was much more just much more of a coincidence that I ended up in the business. 3:28 When you were young, in your career, Were there certain leaders, whether in venture capital, or just, you know, general business leaders that inspired you, maybe mentored you or you took some inspiration from? 3:38 Well, so when I was young, in my career, I was working for the largest company in the world. When I began working for AT&T it was it had a million employees, and was the Bell System and included all the regional operating companies and I got to watch the transition to you know, breaking up that company into a number of theoretically competitive enterprises. And so the mentors that I had in that were largely senior AT and T executives who I remember one story, there’s a guy named rich McGann, who went on to run Lucent is the equipment arm of at&t that got spun out and I worked for him as essentially an executive assistant. I was working in business development for at&t computer systems. And Rich was a senior manager there. And I was in a meeting with a bunch of Bell Labs, executives and a bunch of computer systems executives. And I was pitching a partnership with a tiny startup called Banyan networks that was doing an innovative way of local networking. And I made a very compelling pitch. And Rich didn’t say anything during the entire meeting and pretty much nobody said anything during the entire meeting. Next day he called me into his office and said Brad, I want you to come work for me. And I’m hoping over the course of the next year or two that I could teach you the difference between being right and being effective. And, you know, he explained to me that I was preaching to the wrong audience. This was the people who had built a competitor to within 18 team within Bell Labs, and we’re very proud of their technology. And I was pitching something that was directly competitive with their own internal initiative. And I was right. It was better product, but it was a good lesson. Interesting. 5:32 So you had mentioned Fred, and he had a bit of a different path. How did the two of you meet? 5:39 I first met Fred, when he was working for Milton Pappas, Euclid ventures, and they were an investor in multiplex systems. And I had, you know, speaking of stumbling into the venture business, when echo logic was sold, I was invited to join at&t Ventures as an executive in residence, and I was intended to sort of find another startup and go run that. But while I was there, Alessandra Peale, who was the partner who ran the East Coast office left, and they all looked at me and said, Okay, now you’ve got that portfolio today, you’re a venture capitalist. So I just sort of completely fell into that. So one of the companies in that portfolio is MultEQ systems. And so I attended my first board meeting, and this guy, Fred Wilson came breezing into the board meeting, you know, full of ideas, and, you know, sort of this, you know, high energy, a bit brash, young and enthusiastic. And, you know, everybody kind of had to take a step back and, and recognize a presence, I think, in the room. And so that’s when I first met him as during that and watching him, you know, sort of help steer multiplex and watching him kind of assert himself in in that context, where I was a bit more of a wallflower. That was my first experience with Fred, but then, you know, we went on to, you know, each other sort of peripherally in the New York tech scene, which was pretty small at the time, for several years. But then, after the.com, crash, I had been working with a guy named Dave Morgan to help him launch a behavioral targeting business called Takota systems. And, you know, in helping him assemble some angel money to get that off the ground. I, you know, approached Fred and mentioned it to him, he said, Sure, you’d love to do that. And so we worked on that he and I both actually joined the board of Takota systems prior to the creation of Union Square Ventures. And then, as that business was kind of fledged, and you know, Dave Morgan, very experienced entrepreneur didn’t really need the two of us. And so we sort of looked at each other and said, We should do more of this and went off to raise some capital. 7:56 And that was the beginning of Union Square formally. 7:58 Yes. 7:59 And what was the thesis initially, Brad? 8:02 Well, it was a very interesting moment. This would have been 2003. And, you know, most of the venture capital industry, and most of the investors and venture capital, we’re still reeling from the aftermath of the.com, crash in 2000. And so a lot of things that happened. One is that in the run up to in the late 90s, a lot of new funds were formed, a lot of first time funds were formed, a lot of the LP community were investing in new investors. And they were, you know, digging out from that during the 2003 timeframe. And they were, you know, really skeptical of two investors who hadn’t worked together before raising a new fund and with a provocative thesis, which I will get to but so it was a pretty difficult fundraise. And the other thing that had happened, however, was that there was a generational transition that was sort of stopped midstream. In the venture industry, the early leaders of the in the venture industry had kind of allowed some young investors to really double down on the.com opportunity and get overextended. And when the crash happened, these older investors who had grown up doing hard tech chips and routers and infrastructure, kind of reined in the The Young Turks who wanted to do the applications layer of the internet and said, We’re gonna go back to our, you know, our core business, what the thing that we know, that works, and so we had a difficult time raising money, but when we got to the marketplace with the idea that we wanted to invest in the Applications layer, the fluffy stuff on top of this, you know, hard tech, it was very difficult to raise the capital, but once we once we did, we had kind of an open field because a lot of the market was you know, skeptical of You know, the layer on top of the applications layer of the internet. So the thesis wasn’t really, that we were going to, you know, invest in what became our understanding of network effects, you know, originally, and it wasn’t really even that we were going to invest in the Applications layer. Specifically, it was that we thought that we were still very early in the cycle, and that we had conviction about the importance of the internet. And we were, you know, absolutely convinced that that was going to be a rewarding place to invest. And so we came to understand that investment a little bit more as, as we started to get into the market. 10:41 And, Brad, how was the thesis changed and evolved? You know, over the past couple of decades, I know, you’ve gone through a few different iterations. But at a high level, can you walk us through how, you know, application layer investing evolved into, you know, network effects, infrastructure and beyond? 10:59 Well, so the thesis that we originally were able to communicate as a tweet, which was, I think, large networks of engaged users, differentiated through user experience and defensible through network effects, that was the original thesis. And, you know, when I say original, we probably put that tweet out in, you know, 2005, or six or something like that. So, you know, we had been operating for a while, you know, investing in the Applications layer without a full understanding of the fact that differentiation was different. It wasn’t based on technology. And, and defensibility was different. It wasn’t based on intellectual property or, you know, trade secrets or, you know, difficult technology implementations. It was based on network effects. And so that was the first time we really kind of articulated a complete thesis, I guess. And so, over the years, what happened is, you know, it became clear that the application player of the internet was actually really important. A lot of other players came into it, it became clear that these businesses were not only differentiated, they were defensible, and that network effects were quite powerful. And that was going to end up becoming the marketplace that was characterized by a small number of very large players, which we now live in, you know, the Google, Apple, Facebook, Amazon world. And as that started to become clearer, we started looking beyond you know, that. And we started thinking, okay, so if this is going to happen, where are the opportunities, and that’s when we started focusing on things like Twilio, and Mongo, and these are businesses that helped smaller players compete with larger players, it helped kind of consolidate network effects across companies, because they were using a common fraud detection system or a common communications infrastructure or something like that. And so we began looking for ways in which small companies can compete effectively with these increasingly dominant companies. And then we also started looking at niches and areas where the same kind of company, a company that was differentiated by user experience and defensible through network effects could succeed. And so, you know, we looked at things like indeed, which was a search engine for jobs, which, you know, the only reason it worked is that Google wasn’t paying attention to that space. And there’s a bunch of other examples of that, where we started going into more verticals. And that I think, ultimately led to the focus that we have on access to knowledge, access to well being access to opportunity to financial infrastructure, personal financial infrastructure, things like that. 13:47 Yeah. And I want to talk more about thesis three, point out that later, but you know, back on those early days, Brad, what do you know, now that you wish you’d known then, aside from who the winners are? 13:58 Well, you know, I don’t have a lot of regrets. So I’m not sure that there was any way to anticipate the mechanism that was going to lead to the consolidation of the market and to allow us to kind of participate in shaping a market structure that was going to be more open and more competitive. I mean, maybe I regret not understanding that network effects were actually almost too powerful, and it was going to lead to a winner take most market structure. But if I had had that insight back then I’m not sure I would have been able to do anything with it. 14:36 Brad, you and the others at the firm have shown persistent top decile funds over many vintages for VCs looking to sustain drive persistent returns create long, firm legacy, what key things do you think they need to focus on? 14:53 One thing that I think is really important to understand about the industry is that there are moments when a technology, usually it is a technology or an infant, a new kind of technology infrastructure creates almost a Cambrian explosion of new opportunities. And it makes it very difficult for the dinosaurs of the earlier market structure to adapt to that new infrastructure. And there is a moment when the opportunity to invest in early stage companies is really exceptional. And then there’s a period of consolidation after that as the new giants begin to emerge and recognizing where you are in that technology cycle. And you know, how you should be investing at the moment is, I think, a pretty important mechanism. I mean, a lot of people spend a lot of time talking about financial cycles that, you know, there’s too much capital in the market, there’s not enough capital in the market. And you know, we’re trying to adapt to that financial cycle. I think that the underlying technology cycles are more important, more profound, create bigger opportunities. The other cycles do exist, and they exist in parallel, and they overlap. But I think that recognizing where you are in the technology cycle is really important. 16:17 What do you think is most different about starting a fun today versus when you and Fred did back in Oh, three? 16:23 Well, I already mentioned the kind of open field that we had, as a result of the established firms kind of pulling back away from the applications layer, the internet, and, you know, leaving that opportunity wide open, that there is no sort of open field right now. There is a lot of capital in the market, there are a lot of firms investing, it’s a much bigger business than it was when we started. And so it’s definitely more competitive. I think it’s a great thing for startups for innovation, that there’s this amount of capital, chasing these opportunities. I think it’s great for entrepreneurs, but it’s a challenging moment for venture investors. 17:02 You know, with regard to founders, what’s one major constant that has in maybe will never change? You know, over the decades? And same question on you know, what do you think is the biggest change between founders back when you started and founders today? 17:18 Well, on the first question, the thing that will never change is the value of leadership. And leadership, I think is, you know, really, it’s not management. It’s, it’s the ability to attract talent, and the ability to inspire that talent. And so if you have the opportunity to back an entrepreneur, who is compelling, charismatic, personable, communicates well, has a clear idea of where he or she wants to go, and can bring people along with them that I can’t imagine ever changing, that that is always going to be valuable, and perhaps more and more valuable as the market becomes noisier and more crowded, more competitive, that differentiation becomes more important. And then the second question was, what’s different today? You know, I’m going to answer this second question in the context of what I know as, as an investor, which is consumer facing web services, that’s most of what we’ve done. And so it wouldn’t be the same for biotech, or nanotech, or, you know, material science or you know, any of these others. But in the area of consumer facing web services, the thing that’s changed is the importance of being able to communicate not just to an organization, but to a broader audience, the community that creates these services, most of these consumer facing web services are in one way or the other user generated, it’s the users contribution to the service that creates the value and being able to inspire not just your employees, but also the broader community. And so, you know, seeing entrepreneurs that understand this, that work to communicate to that broader audience in print and video, you know, in various forms of messaging, and to be a part of that broader community. One of the more interesting examples of this would be Vitalik, in the Etherium community who’s a very understated, modest person, but is kind of the focus of it. He provides a way of concentrating the energies in the Etherium community in ways that a different kind of executive wouldn’t. So the big change is that back when we were doing switches and routers and chips, you really needed a manager, more than a leader and now I think you need a leader and you need a leader that can communicate with a community, not just an employee base. 19:54 Brad earlier you mentioned thesis 3.0 I want to double click on that in a minute here. But before we do so, I’m curious, how does an investment thesis get created at USV? You know, is there a process that’s rooted in some data and research? Is it more an organic set of ideas that are debated and investigated or something else altogether? 20:15 So you have to go back and think about the structure of the firm, we are very much partner driven, we’re very much collegial. And we actually don’t I, you know, been with the firm for I don’t know how many years now, but 1518, something like that. And in my tenure, here, we’ve never voted, and anything. It’s always a process of working towards consensus. And all of us kind of reading the room and understanding, you know, whether there is support for an investment support for a change in the way we operate, or a new initiative that is outside of investment, like supporting diversity and inclusion or something else. And we wait until it’s clear that there is that consensus, and then we operate as a group who and so I think there it takes a little longer to arrive at that consensus. But then once we have it’s a shared value that we can operate on very efficiently and effectively, I think. And so the answer the question is that it’s a process of achieving consensus around a new focus or a new thesis. 21:23 How does that manifest within the context of an investment, right, you’re on a time schedule, there’s probably other firms evaluating high potential deals, how can you arrive at some level of consensus and move forward with conviction? 21:40 Well, I think it’s the difference between being thesis driven and being deal flow driven. Union Square Ventures has always been thesis driven. And what that means to us at least is that we work very hard to achieve a consensus understanding of what is happening in the market and why and what that means in terms of where the opportunities are. And so that work takes place outside of the context of a specific deal, you know, we’re trying to understand the implications of the emergence of a technology or a change in the structure of a particular market sector. And then we’re trying to identify the opportunities that that change would create. And so by doing that, you know, sort of thought work upfront. And by achieving a shared vision of what opportunity that change creates, then we we don’t really, we’re not filter feeders, in the sense that we’re waiting for, you know, our network to deliver opportunities to us, we actually, once we’ve achieved that consensus, we go out and look for who is working in that area. And, you know, I think it helps that a couple of the partners here are, you know, able to communicate with a broad audience through their blogs, and we can talk about ideas, we talked about ideas on the Union Square Ventures blog, and that brings deal flow to us in a very specific area. And so it creates a bit of a challenge, because it makes it less efficient for us to go to, let’s say, a, you know, an incubators demo day where, you know, to have eight companies are within our thesis area, and the rest are not, I mean, it’s not a very good use of our time. So instead, what we want to do is we want to arrive at conviction about what opportunity exists, communicate that and, you know, and try and identify who’s operating in those areas, and then build networks of folks that are operating in that area, and then hope to derive deal flow from that. 23:45 Has there ever been a circumstance where a founder shows up with an idea on a market or you know, where technology is heading? And that has actually changed or inform the thesis and, you know, cause you as investors to step back and say, this is an area we should be investing time in? 24:04 Yes, absolutely. But probably not. In kind of the dramatic, you know, scales fall from our eyes way that you’re envisioning here, but more more subtly, that it’s a tweak in our understanding more than just like a Ha, we didn’t even we never thought about that whole market sector. One of the things that having stumbled into the venture business I’ve found incredibly rewarding is the opportunity that it creates to learn. And so we learn from every conversation we have with every entrepreneur that we interact with, in one way or another. And if you’ve done that thought work to develop a conviction, a shared conviction about the kind of opportunity that exists and then you go out and try and identify who’s working in that area. As an investor. It’s an incredible luxury and incredible privilege in some ways a responsibility He that you can basically pick up the phone or you know, send a direct message to almost anybody in the space and they will respond to it, and they will come to you. And they will explain why what they’re doing is important and how it’s going to change the world. And you can ask all the stupid questions you want, and they answer them politely. And it’s just, you know, if you’re the kind of person that learns most efficiently through that kind of interaction, which I’ve kind of come to understand that that’s, that is how I learned, it’s an incredible luxury, I find that, you know, I do a lot of reading in the process of trying to gain conviction about an opportunity. But reading is pretty inefficient, because you can’t interrogate the author. And you can’t, but when you’re sitting across the table from a smart person who’s been involved in a space for a number of years, and you can say, no, no, I get that part. Tell me about this part. It’s an incredibly efficient way to zero in on and, you know, sort of add to your knowledge base, because you can kind of get beyond the redundancy very quickly that way. 26:10 So Brad, you mentioned thesis 3.0, earlier, enabling trusted brands that broaden access to knowledge, capital, and well being by leveraging networks, platforms and protocols. You even cited the example of batalik and Aetherium. You know, I know that you’re spending some time in web three, and at the moment that we’re recording, you know, it’s facing some issues. There’s been some fraud, some financial mismanagement, pump and dump schemes, et cetera. It feels reminiscent of other eras in industries experiencing rapid change, you know, due to technology or other factors. Does web three emerge from this challenging time? And if so, you know, how will the next generation of great companies in the space build lasting value? 26:55 So there’s a lot of questions there. And you’ll help me recall some of them. But the key question is, is web three important? You know, and I’ll answer that question by saying, I think we have arrived at that shared conviction that it is important. And the reason it’s important, has nothing to do with the noise and everything that you mentioned about the pump and dump and financial speculation. And, you know, sort of the heady returns that people have experienced early on in this, largely because it was so illiquid, and there were so few players, and that the market moves could be so dramatic, but that has nothing to do with what’s important about web three, we started this conversation, and we talked a little bit about the consolidation that’s happening around Google, Apple, Facebook, Amazon. And, you know, we’ve been thinking about network effects since we started the firm. And as we’ve come to understand them, you know, we’ve understood that, you know, the market power associated with network effects isn’t really about the, you know, each incremental user on a network adds value to their prior users abstract away from that the market power is the data that each individual user contributes to the platform’s collective of data is what creates the market power. So if once you understand that, the reason that everyone from Google to Apple is able to effectively exploit this market power, it’s because they have exclusive control over the data asset that we contribute as we interact with these networks. And the reason that web three is important is that it’s a completely different data architecture. You know, in the current web two world, the data that sits on the servers of the platform that you interact with. In Web three, the data either is a public good on a chain, that anybody who runs a node can access and have full control or you know, full access to, or it’s a private good in a wallet, something that a user can take with them from service to service. And the only thing in between is a protocol. And that protocol, like SMTP, the email protocol, or TCP IP, the protocol that underlies the internet is not something that any platform can leverage for their exclusive advantage. And so the important thing about web three is recognizing that it is this new data architecture that’s going to bring fundamental change to the market for Information Services and that has nothing to do with you know, the the financial aspect of that. You know, interestingly I think that the the idea that this market is underpinned by a unit of value by the ability to you know, consolidate some of the interests in a particular network in a single unit of value is actually important, but it’s not the reason why we should all be supporting web three. 30:06 You know, with a lot of this data, you mentioned the public and the private data with much of this data being in the public domain on blockchains. Does that imply limitless access but lack of control? 30:20 Well, so lack of control, by who? I mean, I think the question, I’m just going to sort of try to intuit where you were headed there, it probably implies a different market architecture, it probably means that no single vendor is going to be able to exploit control over that asset to build an enormous business, it probably means that there will be a larger number of smaller companies competing to provide services to consumers in a way that will further innovation, and further the interests of consumers. It also presents a bunch of really interesting opportunities to, you know, if you go back to the earlier conversation about the fact that in web two, most of the value in many of these networks is created by the end users. So whether it’s Facebook, or even Google, all of the data that’s created as people interact with that service is what drives the advertising business. So a lot of the value is created by the end users. The architecture of web two, essentially sets up a system where the value is extracted on behalf of a company and its shareholders, not on behalf of the users that create it, the opportunity and the promise of web three is that we can create systems networks, where the value creators, the people that participate in these networks participate in the value they create. And so if you end up using a token to mediate the behavior on a network, and more and more people choose to participate in that network. And as a result, the value of that token increases, then it’s the participants in the network that benefit from that because they’re using the token. And they’re accumulating the token as a part of their interaction with the network. And so I think that the reason we should be paying attention to web three has nothing to do with financial speculation has everything to do with the ability for the value creators to participate in the value that they’ve created. 32:30 Brad, if we can feature anyone on the show? Who do you think we should interview? And what topic would you like to hear them speak about? 32:36 Oh, there’s a bunch of people at Union Square Ventures that would be better spokespeople for you know, for instance, where the firm is going today, I’m very much stepping back. And that next generation is very much owning and running the show. And so there’s a lot of folks here, that would be good to talk to. 32:55 Brad, what resource Have you found particularly valuable that you would recommend the listeners? 33:00 You know, there’s there’s one book that I really enjoyed called the Irrational Optimist, which basically, you know, made an argument for markets and specialization and exchange in a way that creates value in societies. And I thought that was kind of fun. But the you know, what immediately jumped to mind when you asked that question was entrepreneurs. They’re a great resource. They’re incredibly talented, ambitious, driven, listened to entrepreneurs. 33:29 We’re very privileged in our careers. And then finally, Brad, what is the best way for listeners to connect with you and follow along with USB? 33:37 The website, I am not a very active player in social media, I do have a Twitter account. I have a very patient group of followers on Twitter that that wait, you know, months at a time before I actually voice something, but I just check the USV website. 33:54 Well, sir, this has been a true privilege, you know, and hosting the show for eight years, much to our chagrin, we’ve only had one USV investor until now and you make two so this has been a true thrill having you on the program. Congrats on everything you’ve built with the firm and best of luck with everything moving forward. 34:10 Thank you. Nice to meet you, Nick. 34:12 Thank you, Brad. Transcribed by https://otter.ai