Union Square Ventures has always been a “thesis” driven firm. We maintain specific principles about the internet that guide our investment decisions. While other things like stage and to a lesser extent geography, also matter, our thesis or point of view is the primary thing that guides our decision making.
We last wrote about this a few years ago, in Investment Thesis@USV, where we attempted to describe this view of the world. There, we also tried to describe how dynamic the thesis is, or can be. A few years later, we have a better idea of how our thesis has evolved and now presents, circa 2015.
Since USV was founded, we have focused on the applications layer of the internet. The layer that sits on top of the relatively open and robust infrastructure of the internet, the infrastructure that allows for permissionless connectivity.
Initially, the investments related to that applications layer were what we called “large networks” – that is – broad based, mostly consumer-oriented networks that could, or at least aspired to, touch many many people (hundreds of millions or more).
Brad reduced this to 140 characters a number of years ago:
USV in 140 characters: invest in large networks of engaged users, differentiated by user experience, and defensible though network effects
— Brad Burnham (@BradUSV) June 8, 2011
Over time, it became harder – and it’s still hard – for newer entrants, newer broad consumer networks – to gain scale because to do so requires them to displace the time users devote and spend on the new incumbent networks, such as Facebook.
As a result we turned our attention and applied the thesis to those services that support the larger networks – so called “enabling technologies” – that were horizontal in nature, yet also broad with respect to the numbers of networks they could potentially support.
These enabling technologies are basically businesses that provide essential services to the new crop of web companies.
These are investments such as Twilio (a communications service), MongoDB (a database service), Cloudflare (a network and security service), SiftScience (fraud protection), and Firebase (a synchronization service). And a more recent investment – Clarifai (image and visual recognition service).
Then, roughly in the 2012 time frame, we also turned our attention to thinking about market-specific networks: networks in high-value niches that are differentiated and defensible, partially because they are domain-specific. These networks generally have more subtle or less obvious network effects, precisely because they involve something more specific and tight.
These often fall into specific categories – like education or learning (Edmodo, Codecademy, Skillshare, Duolingo, Quizlet, Stack Exchange), financial marketplaces (Lending Club, Funding Circle, Circle Up, C2FO) healthcare and medicine (Figure 1, Human DX, Clue), science and engineering (Science Exchange, SimScale), the law (Casetext) and company ownership management (eShares).
These more subtle network effects also include platform shifts, such as mobile (Amino, Figure 1 or Duolingo), venue shifts (enterprise security delivered in the cloud, such as Cloudflare), and data networks like SiftScience, which delivers fraud protection by aggregating data points across thousands of domains.
Finally, and more recently we have been thinking and talking about the blockchain and bitcoin. When we analyze the network effects of the large internet platforms, it appears that part of their defensibility is through the centralization of data – user data, interaction data and transaction data.
We started to see that blockchains – by basically being a decentralized data layer – could over time erode those advantages.
So we turned the thesis to the exploration of services that could undermine larger networks by decentralizing the data asset that the large networks have. While this area is obviously early, we have made a handful investments in this decentralized layer including Coinbase (banking and brokerage), OB1 (buy and sell marketplaces) and Onename (identity).
Finally, as infrastructure providers gravitate towards the applications layer, they are underinvesting in connectivity itself at a time when the demand is growing and new technologies are available. Inasmuch as the internet itself is an enabler of creation and creativity, we believe that businesses like Veniam (the “internet of moving things”) and one other unannounced investment we have made will be foundational layers for future generations of technology. So, we have also made a few investments in those telecommunications infrastructure companies with innovative technologies or business models (Access 2.0).
Importantly, the way in which we invest against this thesis is also cumulative – we don’t simply stop investing in any one area as we uncover other ones. It looks something like this, a chart of our active investments over time from 2004-present:
To capture this image into a current version of our investment thesis, we’ve reduced it again today to 140 characters.
This is USV, 2015:
As the market matures, we look for less obvious network effects, infrastructure for the new economy, and enablers of open decentralized data.
— Andy Weissman (@aweissman) December 15, 2015