Decoding the secret sauce- Crafting VC for Outperformance
In the competitive world of venture capital, few firms have achieved the level of success and recognition as Union Square Ventures (USV).
The venture capital firm Union Square Ventures (USV) has returned a mammoth $1.18 BILLION in cash on just $129 million invested by UTIMCO (The University of Texas Investment company that manages $65bn+).
Let me say that out loud one more time -
The venture capital firm Union Square Ventures (USV) has returned a mammoth $1.18 BILLION in cash on just $129 million invested by UTIMCO (The University of Texas Investment company that manages $65bn+)
As the image shows, this has been across seven funds, with the 2004 & 2012 funds returning an eye-watering 13.8x and 22.8x of capital invested, respectively!
To top that, there are still $201mn of unrealized returns, too!
🥇With an average net IRR of 59% and DPI of 9x across these funds, USV stands triumphant as one of the BEST (if not the best) in the business
The average UPPER quartile DPI for the 2011–2013 US venture capital vintage is just 2x, and 3x is considered very good. (VC is tough, 22% of funds don’t even end up returning capital!)
(*DPI is the number that matters above all others in the venture: The ratio of money distributed to investors by the Fund, relative to the amount paid in)
Their investments in companies like Twitter, Etsy, and Coinbase have generated remarkable returns and positioned them as a leading force in the industry. This article highlights the exceptional returns delivered by USV and examines the key elements behind their investor theses that consistently deliver impressive results.
Huge thanks to Akhil Paul for this breakdown above.
Understanding Union Square Ventures
Founded in 2003, USV has built a reputation for its investment philosophy focused on networks, platforms, and trust-based relationships. They believe in investing in companies that leverage network effects, engage large user communities, and foster trust within their ecosystems. This approach has guided their successful investments in transformative companies that have disrupted industries and achieved substantial growth.
Crafting Investor Theses
- Focus on Networks and Platforms
USV’s investment thesis revolves around the power of networks and platforms in the digital age. They actively seek out companies that can leverage network effects to scale rapidly and create value. By identifying early-stage companies with the potential for large user networks, USV has positioned itself for significant returns.
2. Embracing Trust-Based Networks
USV recognizes the importance of trust in online interactions and transactions. They seek out investments in companies that build trust within their communities, enabling collaboration, transactions, and knowledge sharing. By backing platforms like Etsy, USV has demonstrated the potential for growth in trust-based networks.
3. Long-Term Perspective
USV takes a patient and long-term approach to investing. They understand that building successful companies takes time and requires a deep commitment to supporting founders throughout their journey. This patient capital strategy aligns with their thesis of investing in networks and platforms that can mature and grow over time.
4. Collaborative and Engaged Partnership
USV’s success is attributed, in part, to its collaborative approach with portfolio companies. They actively engage with founders, providing strategic guidance, operational support, and access to their extensive network. This partnership-driven model creates a mutually beneficial environment for both the firm and the entrepreneurs they support.
5. Small Fund sizes and Timing
$200–300mn, which increases the likelihood of high DPI funds.
Timing: Sell enough at the right time — liquidate somewhere between 10% and 30% of the position in pre-IPO liquidity transactions.
Key Takeaways
- Unique Thesis Development: Crafting a well-defined and focused investment thesis enables firms to identify and evaluate opportunities that align with their expertise and vision. USV’s success stems from its ability to develop a unique thesis centered around networks, platforms, and trust-based relationships.
- Embracing Technological Paradigm Shifts: USV’s ability to recognize and embrace major technological shifts, such as the rise of social networks and the importance of trust in the digital age, has been instrumental in their success. Investors should stay attuned to emerging trends and disruptions to capitalize on future opportunities.
- Long-Term Commitment: Venture capital investments require a long-term perspective. Patient capital and a supportive and collaborative approach allow firms to navigate the challenges and uncertainties inherent in building successful companies.
- Value-Add Beyond Capital: Successful venture capitalists go beyond providing capital and offer substantial value-add to their portfolio companies. By leveraging their network, expertise, and resources, they nurture and accelerate the growth of the startups they invest in. Venture capital firms looking to cultivate a collaborative ecosystem should prioritize building strong relationships and partnerships, fostering a culture of openness and trust, investing in community-building activities and events, encouraging knowledge sharing among portfolio companies, and continuously assessing and improving the effectiveness of the ecosystem.
- Small Fund Sizes and Timing: Small Fund sizes: $200–300mn; this increases the likelihood of high DPI funds. They also sell enough at the right time — between 10–30% of position pre-IPO liquidity transactions to ensure cash on cash returns.
Take back to the office.
All venture capital firms can learn valuable lessons from Union Square Ventures’ success. Crafting a unique thesis, embracing technological shifts, adopting a long-term perspective, providing value-add beyond the capital, and cultivating a collaborative ecosystem are all essential elements for achieving remarkable results in venture capital’s dynamic and competitive world.
By incorporating these key takeaways into their investment strategies, firms can increase their chances of identifying and nurturing the next generation of groundbreaking startups.
As the venture capital landscape continues to evolve, these insights can guide investors in unlocking the potential of innovative startups and shaping the future of entrepreneurship.
Together we accelerate impact.
Shout out also to Akhil Paul for these deep dives on USV:
(1) Mario Gabriele’s fantastic deep dive,
(3) Ripple Ventures spotlight on USV.
About the Author
Leesa Soulodre is the General Partner of R3i Capital, investing in disruptive AI companies, climate change adaptation, and the transition to value-based healthcare.
What’s in our name?
R3i stands for returns, resilience, and reliability — three characteristics often used to describe or evaluate investments, businesses, or other assets.
These three characteristics can be important factors when evaluating an investment or asset’s potential risks and rewards.
Three i’s — “Intelligence, Innovation, and Insight”- are the three characteristics often used to describe a venture firm’s edge. R3i synthesizes these into its collective and inclusive “impact.”
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