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State of the Union
Meena Behringer & Ike Okereke
May 28, 2024
Social media is nothing new for Union Square Ventures. The renowned firm has previously backed X (formerly Twitter) and Zynga back in 2007.
In retrospect, USV believes Twitter’s upside comes from its ability to let people freely share information, while its downside comes from the lack of decentralization.
On the other hand, they view Zynga as an investment that failed to fully blossom because of its reliance on another social network - Facebook.
15 years later, USV is sold on the potential for Web3 based social networks.
Enter Farcaster — Union Square Venture’s latest investment.
Farcaster is a crypto-based open source social network, founded by two former Coinbase employees, Dan Romero and Varu Srinivasan.
It enables decentralized social media platforms, meaning that users control their own data and digital identity.
The startup just raised $150 million from USV, a16z, Haun Ventures, and Standard Crypto, in a round led by Paradigm.
USV’s investment into Farcaster is a perfect example of the firm finding companies at the cusp of transfiguring markets.
Lets take a closer look at New York City’s most renowned venture fund
King of New York
Founded in 2003 by Fred Wilson and Brad Burnham, USV is known for their elite performance which stems from (1) thesis-driven investing and (2) fund size discipline.
Their approach:
A thesis-driven framework across various sectors and technologies
Small portfolio and small team, ensuring that everything is hands on. Likes to raise $250M funds.
Allows companies to remain private for longer periods of time than bigger VCs, and if the firm takes a company public, it tends to exit quickly post-IPO.
The thesis has evolved over time and provides great insight into the collective mind of an elite VC:
USV Thesis 1.0: Invest in large networks of engaged users, differentiated through user experience and defensible through network effects.
The OG thesis was established in 2012 and led to investments in Twitter, Kickstarter, Stack Exchange, SoundCloud, and more.
USV Thesis 2.0: As the market matures, we look for less obvious network effects, infrastructure for the new economy, and enablers of open decentralized data.
Refined in 2015 to reflect a transition in the fund’s focus. From 2011 to 2015, USV started investing in market specific networks at a higher rate (~60% increase). The company also started investing in Blockchain/Web3. Led to investments in Coinbase, Duolingo, Twilio, Quizlet, and MongoDB.
USV Thesis 3.0: Back trusted brands that broaden access to knowledge, capital, and well-being by leveraging networks, platforms, and protocols.
2018 vintage; USV re-works the thesis once again by focusing on brands that help people build knowledge, wealth, and health. Led to investments in Stash, Algorand, Flip, and Farcaster.
USV’s thesis-centric framework is an interesting contrast to Founders Fund, which we looked at last week.
Thief of Joy
On the topic of comparison, check out this AUM growth chart:
USV’s ~$3B AUM is dwarfed by their peers founded in 2004/2005:
Spark Capital: $6B
Founders Fund: $12B
Khosla Ventures: $15B
The consistently slow growth of assets is a feature, not a bug.
USV has intentionally capped their fund sizes in the $200M-$300M range, even though their performance could have warranted multiple $1B+ raises.
As a result, they are able to stay within their thesis and continue to return large amounts of capital to LPs.
In terms of performance, USV is arguably the best:
Returned $1.2B in cash on just $129M invested by the University of Texas endowment system (UTIMCO)
2004 vintage returned 13.8X on capital
2012 vintage returned 22.8X on capital
Average net IRR of 59% and DPI of 9X (Top quartile DPI across VC is 2-3X)
A final component of USV’s recipe is selling relatively early - founder Fred Wilson stated on his blog: “We typically seek to liquidate somewhere between 10% and 30% of our position in these pre-IPO liquidity transactions.”
LPs of firms that held onto stock after they exited and were hurt when stock prices went down should fire those fund managers
USV’s approach can be broken down into three components:
Thesis-Driven Investing
Small Fund Size
Exit Early
Headlines
Elon Musk’s xAI raises $6B to fund the battle against ChatGPT. Verge article here
Vivek Ramaswamy builds an activist stake in BuzzFeed. Financial Times article here
Between unicorns and small businesses, the “mighty middle” of startups aim for high 7-figure valuations. HBR article here
GameStop shares jump 15% after $933M stock sale. CNBC article here
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