Investment Thesis of Union Square Ventures

Venture firms operate in various ways. Some focus on geography, others on sectors, and still others on stages. Union Square Ventures’ focus has evolved into what we call a “thesis,” better described as a macro-level view of the Internet world that we structure our investment activities around. In short, as described by Brad last year in 140 characters, USV invests in:

Large networks of engaged users, differentiated through user experience, and defensible through network effects.

When organizing our activities and making investment decisions, we parse that a little finer and unpack some components. Large obviously requires scale – Twitter is a great example. However, it can also mean large relative to a specific problem set or community. For instance, Stack Exchange comprises over 80 question and answer sites. Some sites, like Server Fault, target specific communities but aim to engage most potential members actively. Similarly, Behance is designed for the world’s creative professionals.

Networks involve interconnected groups or systems, which can vary in nature. For example, networks can focus on person-to-person sharing of activities (like foursquare, Soundcloud), facilitate transactions (like Dwolla), enable creativity (like Tumblr and Wattpad), or create person-to-person marketplaces (like Etsy and Kickstarter). Marketplaces often use efficient information exchanges to produce superior economics, creating new economies. Examples include creative projects funded through Kickstarter and individuals finding work via Workmarket’s labor resource market.

Additionally, networks can be data-focused, such as what DuckDuckGo (search), Indeed (jobs), and Flurry (mobile apps) achieve by providing aggregate data-level benefits from their network aggregation.

We also focus on the user experience of these networks, particularly novel (“differentiated”) web and mobile native interfaces that engage users with solutions to problems in harmony with their experiences. For example, the foursquare check-in is designed within the context of city exploration, while Codecademy’s method of teaching programming by writing code in a browser window exemplifies engaging experiences. Other unique platforms include Canvas for image sharing, turntable’s music collaboration, and tumblr’s dashboard for creative interaction. Unique user experience extends beyond interfaces to encompass the entire system design, which includes functionality, user permissions, and inherent values. An example is Kickstarter’s incentive/pledge system that aligns with creativity.

The last component of this thesis pertains to businesses that create barriers to entry via network effects, where a service’s value increases as more users adopt it. This can result from proprietary data assets, robust seller and buyer dynamics, or communities that share and exchange information. As product development costs decrease and scalable open-source tools and cloud infrastructure become available, defensibility might not be about the underlying technology. It may instead stem from a service that gets more valuable with each new participant. A notable example is Twitter, which derives value from the relationships and content created within its network.

Together, these components inform how USV views the Internet and identifies investment opportunities. These components are nuanced and subject to interpretation (see for instance “Do Network Effects Span Geographies” or “How Strong Are Network Effects Online, REALLY”). This complexity is part of what makes these topics fascinating.