E19: Union Square Venture’s Rebecca Kaden on How the Firm Develops Their Theses

0:08Welcome back to Turpentine VC, a podcast where we discuss the art and science of building successful venture firms, VC to VC. For today's episode, we have Rebecca Caden. Rebecca is a managing partner at Union Square Ventures, one of New York's most iconic VC firms. Previously, she was a managing partner at Maveron, investing in early stage consumer companies. In this interview, we discuss the rationale behind USV's partnership-driven model, the mechanics and diversity of venture strategies, whether venture automation is imminent, partnership models, generational transition, and what USV looks for in investors.

0:45Here's our conversation. Rebecca, welcome to Turpentine VC. Thanks so much for joining. Thank you so much for having me. USV strikes me as a firm that has set a very specific way of how it wants to operate in the ecosystem. And as how the markets have changed, USV has stayed consistent. And we've seen lots of other firms change their AUM significantly as markets have given them the opportunity to too. And as results have, and USV, while it also had the opportunity to do so, chose not to do that. Is that a fair characterization of USV? And talk about why that's been the case. Yeah, I would say that's definitely a fair characterization of USV.

1:25You know, USV, I think, one thing we talk a lot about, about the firm, and honestly, about companies as well, but to start with the firm, kind of what's sacred and core and what's flexible on the edges, right? And we're big into things that are flexible on the edges. We're not actually big into structure or rules or process, but I do think you can only be that way if you know what's core. And core to USV is a small partnership-driven model, a consensus-driven decision-making, a equal partnership that's idea-driven. And so if you just start there, that model only scales to a certain amount, right?

2:07And that doesn't have infinite bandwidth. And so there's a constraining factor just there on how you want to do it based on how you want to run a partnership in a firm. And then there's a belief on what maximizes returns and the stage we like to invest in. But what I always say about USV is one thing I really like is the answer to these questions of kind of why it is, how it is, is always a mix of optimized performance and just what we enjoy. And there's a big focus on, you know, why do you do it this way? Because we like to do it that way. Right. You know, and, and I think that really struck me when I first joined the firm, but it's, it's liberating in a lot of ways.

2:48And it's very true. On the first episode of this podcast, we had Ben Horowitz who talked about the Andreessen platform approach. And then we had Kleiner who talked about, you know, much more of the craftsman approach, similar to what you guys practice. When you look out at sort of the where venture is going, do you see the top returners in your mind, or at least the people who make the most money, is it just going to be kind of an equal mix of sort of this platform or craft approach? Or how do you think, as we think about as venture will evolve, will there be more platforms like like YC, et cetera, that are truly just aggregating all this capital?

3:28Or how do you think about that? My belief is as venture evolves, there's going to be a mix of both. And some of it relates to that. I think there are people who will always find joy and success in the ability to aggregate, right? To make it bigger, to do more. And that is a drive. That's an ambition. And as long as that's human nature, you're going to find in any industry, the pressure and the momentum of doing that. So kind of divorced from returns, I think you are going to find that. We also are in an industry that rewards AUM on near-term cash. That's just a mechanic that we're all dealing with.

4:05And so also in that industry, you will also find AUM gathering. I'm not sure. I don't think it's a bad thing. I just think that's one way to optimize as a market. And then there's another way. And I think that's great. I think this industry would be a lot less interesting if we could all just agree on one best model and everyone did the same thing. And in fact, everyone benefits from the variety that goes into it. And I think you will continue to see that. There's this profile with Mark Andreessen in the New Yorker, maybe like a decade ago. I don't know. It was a long time ago. And in the profile, he says to Ben about AngelList, he says, what if we're a mammal and they're a bird or something?

4:49I can't remember the exact analogy, but this idea that maybe AngelList is a different species and that A16Z will get left in the dust. And it was this fear that venture has been this craftsman approach for so long. And despite A16Z's innovation, it's still people making decisions and that maybe there was going to be this sort of data-driven or technology-driven approach to venture. And it seems like that hasn't really panned out. Yeah. That I have, you know, a funny anecdote. I won't say what VC this is, but one time a prominent VC said to someone, you know, then it got back to us, you know, um, our firm, big platform firm is like Beyonce and usv is an indie band.

5:39And it was meant, obviously, as somewhat of an insult, right? Like, look at that small animal in the corner. And you tell my partners that and they're like, we love indie bands, right? Like, they're like, our whole thing is indie bands. Do I think technology can help almost everything? Yes. Do I think data provides inputs we don't currently have? And there will be ways for it to impact decision-making in formats we can't currently predict? Yes. Do I think it's going to replace, particularly at early stage, the element of decision-making and conviction that is essential to an investing process?

6:26I have never been able to figure out how that could happen. If anyone could, I think it would be kind of incredible, but it's not clear to me that's possible. Yeah. I think the closest thing may perhaps to a Beyonce, like YC, if they're doing a thousand seed rounds a year, I wonder how many seed rounds get done a year, but it's probably some like non-trivial percentage of good companies at the same time. You know, if you're a firm like USB, you can have incredible returns and never even look at a YC company. I mean, the ecosystem is, is, is just so vast. So there, there, there is no firm that has ever truly like, you know, had dominant market share, um, at least at the, or it doesn't today at the, at the early stage or the late stage.

7:12Yeah. And I'm not really sure that's the goal. Do you know what I mean? Like it's, I'm not sure that's, um, we're all competitive. I certainly am, but I, I, I just not sure that's the goal. It's not the goal in the sense that you could still crush it without it. At the same time, when we advise our startups, we want them to have market share. We want them to have moats. We want them to become monopolies to some degree in certain types of companies. And yet, when we look at our own businesses as venture capitalists, we don't do that. And maybe it's just a different type of business, but it is interesting.

7:49I think it's a very core difference why. And one is the role of human decision-making in competition. I think one belief we have, right, is that the muscle that's going to get to excellent returns isn't market share and isn't market momentum. It is decision-making, right, and thought and the ability to have a hypothesis and invest behind it, particularly when others don't believe. And we've been in markets where that's easier and harder to do, but just practically out chasing each other is going to optimize prices. You're never going to optimize returns that way. So at some point, I believe to be, my goal is to be one of the very best venture investors of my generation.

8:40We'll see if I can come close to that, but it is certainly my goal. And the thing I have conviction on is it is an impossible goal to meet without making investments around ideas that are not obvious and others don't believe. That out chasing a market and out momentuming it will never get you there to that extent that we want to. And that is probably different than a company. It is interesting when you're as disciplined as you guys are, it must be challenging because there are trends where people are making a lot of money doing this thing and it's just not fundamentally sound and it only works in a certain market scenario or a certain situation.

9:21And at some point that's going to sort of end, but it goes on longer than you think it should. And so the disciplined person is just biding their time, but also it can't help but experiencing a little bit of FOMO. Yeah. I mean, I've never met anyone who doesn't experience a little bit of FOMO, but the people I might have met who come closest to not experiencing it are my partners. Again, that's another, there's a lot of ways to do this, right? There are people who very, very much believe in a solo model and I understand why there's good arguments, but one of my best arguments for a partnership, particularly a strong partnership, like I believe ours to be, is the balance it gives you, right, around where you excel and where others do.

10:03And particularly, I think, at the stage I am at my career and being earlier in it, it's impossible to be immune from FOMO. You see it, you feel it, that's going around, and you get that urge. And then working with people who say, that is not the way for us to, you know, optimize and create the returns we want to do. That is not the way for us to invest in a thesis that we're excited about, has been invaluable to me as a counterbalance to that kind of natural instinct. Yeah. Talk about the USV partnership model or talk about perhaps, you know, you've been in other partnership models. What are the different kinds of partnership models that you've seen and maybe the trade-offs or pros and cons as it relates to them?

10:45Yeah, I think this is another one where like, you know, obviously there's the kind of company building partnership model more like an Andreessen, as we talked about, where it can get very large. It's more structured. It kind of has to be because of the scale that it's at. It's more layered. It has to be because of the scale that it's at. There's partnership models with clear leadership, right? Look more like companies and CEOs. Someone runs the firm. They hire people. They may be partners. They may be general partners, but they don't run the firm. Maybe they have pieces of the management company.

11:17Maybe they don't, but they don't run the firm. And the pro of that is that there's a decision maker on investments, but even more on firm management, right? They ultimately, people have, you know, different perspectives and someone decides. And there's the same way why when we see a, you know, co-CEO model, we always, you know, have a question on it, right? Ultimately, what's the efficiency in decision making? There's pros to that. Um, the con is, I think that it's very hard to have the power of a partnership driven decision-making model that way. Um, because the power is imbalanced. Um, look, we all drink our Kool-Aid around what we do.

12:00I've drank the USV Kool-Aid for sure. Small equal partnership, five to six partners, um, very idea driven. Uh, we co-run the firm. Sometimes that's messy. We don't know who manages what. We don't really know who manages who, you know, outside the partners in the firm. You know, every time something comes up, whether that's the annual meeting or raising a new fund or throwing our CEO summit, someone's kind of got to raise their hand and say, all right, this time I'll take this and next time you'll take that. So it's unstructured. And sometimes that means it's messier, but it has a lot of mutual respect and it has a lot of share of voice.

12:44And so I think you get the benefit of the strength of the ideas around the table. I think the cons are, you know, probably sometimes structure is helpful on certain decisions, maybe less than investment ones, but sometimes it's hard. You know, we all ran deciding really where to move our office, which some would argue is not, you know, the most efficient process, but kind of fun. Um, and, uh, it's very hard to hire into, you know, we talk about that a lot. It feels like this bar is really, really high and, uh, there's no, um, ability to test, right? We don't have, uh, junior investors that work up the rank.

13:28And so it makes it really hard. Um, and we have more limited kind of leverage and support functions of other firms. So it, heavily relies on, on the partners involved. So they're trade-offs. And, and you and your, your career, you were at Maveron before, and you could have, you know, you joined a firm like USV, but you could have joined one like, like Andreessen or other, other different kinds of firms. How about from an individual career perspective, you know, you've talked about what it's like to be in part, what are other factors to, to, to think about when determining, Hey, do I want to rise up the ranks of a firm like, like, like, like usv or do I want to rise up the ranks of kind of like a, or join at, at a senior level?

14:12Um, you know, one of these much bigger platforms where, what are some of the other trade-offs? I think that's just personality and, and, um, inclination. I love what usv does, right. I, I love a small partnership. I've never been a big company place. I'm not very good at politics and I, um, don't think I would enjoy them. And, and with scale, they come, Um, sometimes even not with scale, they come. Um, I, I, I just like a small, um, culture where it feels like kind of everyone's in sync. Um, I just think it's, it's a inclination more than a right answer by a lot. And, and mostly in investing, I think a lot about how investing is just a, uh, group of people and a pool of capital, right?

15:01Like that's all it is. And the pool of capital is a commoditized asset to some extent. And so you're just, it's just who you want to do this with. And I'm sure there are, you know, a bunch of groups that I would have enjoyed. I certainly, you know, wasn't just turning down options left, right. But what I learned when, when USV approached me and I got to know them is that this is a group of people that I would really enjoy doing that with. And I, the longer I do it, the more I think that that's priority one, two, three, four, five. I think I like early stage investing. I think I like series A. I think I like low velocity, high conviction.

15:39I think all those things are true, but I think I could like other things for the right people. And I think you can't budge on the quality of people you do this with. It's famous in venture that there's all these rumors about all these dysfunctional partnerships, perhaps for some of the reasons we talked about where there's no CEO sometimes and it's hard to make decisions or, you know, structurally and VCs are very sort of, uh, you know, independent thinkers at times. Um, what have you seen, uh, for partnerships, the difference between ones that function and are dysfunctional, what's like so important to get right either structurally or, or otherwise?

16:15I think a lot of it is just like mutual respect and trust. Um, I think at USV, people excel in different ways. Obviously, Fred has been, in many ways, the face of a firm, right? Let's call the spade the spade, right? He's the most well-known. He's produced insane returns. He has a very big voice, largely because of his blog, and all of that's a huge asset to the firm. But internally, there are things that come up that like Albert, you know, no one is better on than Albert or Tisa Fendek then come up and no one is more respected than John or elements of, you know, marketplaces that arise and like Andy, there's no one in the firm that wouldn't turn to Andy.

17:02And so there's a lot of shared, I think, respect and belief that everyone does have very strong skill sets and in some ways are proven in them. I think when that's not the case, it becomes a lot harder. And so I admire that a lot about the firm and it gives me a lot of drive to make sure that that's true for me too, that I'm proving it and that I'm, you know, can be that valued voice as well. And so I think it has a really good effect. Um, and I, you know, it's very, people feed off of each other. But one thing I always say about the partners that used to be, which I try to learn from is that they're high ambition, low anxiety.

17:42Um, I can sometimes be high ambition, somewhat high anxiety. Um, but I've learned from them that that doesn't really get you anywhere. Um, and that if you can be high ambition and low anxiety, um, you're a better partner, you're a better partner to founders. Um, you know, we're in an industry where there's a lot of other players that can feed off your anxiety and it's not that helpful. And so it's something I admire about them. Hey, we'll continue our interview in a moment after a word from our sponsors.

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19:14With Shopify Magic, whip up captivating content that converts from blog posts to product descriptions. Generate instant FAQ answers. Pick the perfect email send time. Plus, Shopify Magic is free for every Shopify seller. Businesses that grow, grow with Shopify. Sign up for a$1 per month trial period at shopify.com slash moment of zen. Go to shopify.com slash moment of zen now to grow your business, no matter what stage you're in. Shopify.com slash moment of zen. Talk about generational transition, right? Because the partners at USV have been doing this for quite a long time. And I presume when they brought you in, in addition to your excellent qualities, they probably wanted someone younger than them who would help carry the torch into the next generation.

20:01we've seen some firms do that exceptionally well, uh, over the, over the decades, we've seen some firms, you know, sort of lose their firms legacies or challenge firm legacies because they didn't do it well. How do you think about what makes excellent generational transition and separates the firms that do it well versus those that don't? Yeah. I mean, we think about this all the time, right? So I came in when my partner, Brad was starting to step back and one is to do, One thing I've learned is very conscious decisions and communication, right? Like everyone's really up front. Where am I? How long do I want to do this for?

20:39I might change my mind. Who knows what's going to happen? But there's a lot of communication around where everyone is. So the people who are in are all in, right? Like no one's doing this with one foot out the door. If you're in, you're in. And when you think there may be a time where you're not, you communicate that well in advance and we have a kind of plan around it. And I've learned that that clarity and communication, I think one is really, really important. So like my partners who are in are all in, right? So Fred and Albert and Andy and Nick and I are the kind of managing partners of the firm.

21:11And we all know we can look at each other and say, all right, we're doing this. Brad stepped back, which was kind of the impetus for me joining. And then in this most recent fund, my partner, John stepped back. We knew that was going to happen. And so we will bring on another partner. And so it creates kind of a clear and consistent motion. I think it is really hard to do it, to bring on great partners, but we spend time on it every week, wherever we are in the hiring cycle. We talk through potential talent in the market every single week in our partner meeting. We have a designated slot for it.

21:48because I think you have to look at talent both opportunistically and where they are in the market and then what you need, right? Because we all know how this works and all times aren't equal. Particularly, we have a model that's really focused on investors, right? Different firms hire different kinds of people and have had success there and maybe ours will evolve, but historically we've hired investors and so, um, or brought on investors as partners. And so we, I think just dedicated time and attention to it extremely consistently as a priority is really important. And that's something that I've definitely stressed internally.

22:29Say more about what the, what the criteria is for, um, you know, when you say you hire investors, like what exactly are you looking for there? Yeah. How is that perhaps different than maybe other firms think about, think about hiring or what makes a great, you know, kind of USV candidate in terms of, I think you were the last, you know, partner hired at USV. What is the characteristics of the next person? Yeah. I mean, I think there's a couple of things. I think the biggest one is, um, we're looking for a thinker, right? Someone who enjoys doing this, this job thought first, who is an idea person, right?

23:03When you talk to them about markets or about categories or about trends, they have hypotheses and they have things that they're interested in and they may be dead wrong, but they're a thinker and they're comfortable sharing those ideas. Um, you know, there are people who we both know who are incredible deal chasers, right. Who just like something happens and they just know immediately and they're on top of it and they meet them first and that, that probably serves them extremely well, um, and will create great success. It's not right for us, right? It's not what we're looking for. And so, I mean, we love a network.

23:39You got to be able to find the deals. All of that is true, but we need someone who's thought first, kind of regardless of what they've been thinking about before. We actually have more belief that venture is not about expertise, right? It's like, you don't have to be an expert in healthcare and be a healthcare investor or climate and be a climate investor or Web3 and be a Web3 investor. You have to be a thinker and a learner and have a process that's repeatable from going to, from interest and intrigue in something to perspective on it over and over again, no matter what it is. And we look for people who have that.

24:14You mentioned sort of you take part of your partner meeting to talk about this. Talk more about the anatomy of a partner meeting at USV and how it's maybe different from past firms you worked at or just other firms in general. Yeah, I mean, there's a couple of pieces of it that are, we spend most of Monday together. I think that's not particularly unusual. We've actually added Thursday as well. That's a vestige of COVID when we did it as more of a checkpoint of a team, but we've kept it because we love that there are two opportunities in a week for us to touch base with each other on portfolio issues, firm issues, deal opportunities, or have founders present.

24:53That's been very efficient for our deal process. So we have our primary meeting on Monday, but then we also spend time together on Thursday. We start with an hour that are just the partners. And then we do our whole investment team, which includes our analysts and our network team. And our meetings tend to have like a pretty fun and casual vibe. They're often all in person in New York. It's not by mandate, but summer is often less so. But overall, we like to be there. And then we spend time, we go through cash views. That's kind of unique every week. So we talk about upcoming cash needs across every fund in our portfolio from the beginning of the firm so that we can project managing cash.

25:37then we go through deals. So we talk about opportunities, where they are at different phases of their life cycle and what might be coming up. And we take a pretty liberal view from that. We like people to bring things up very early. I met a company and I'm doing more work on it, but here are first impressions. You don't have to have a fully baked hypothesis. You don't have to decide it's interesting to bring it up. We want to make sure there's a lot of shared knowledge. and we want our analysts and the rest of investment team to feel very comfortable participating and that's a good also way for them to do that.

26:12But then probably the biggest difference of other firms is we go through our entire portfolio every week. Sometimes one of my partners, Nick, kind of built this software dashboard so we can sort it by partner, we can sort it by fund, we can sort it by category, we actually kind of like to mix it up to keep it interesting, but we talk through the whole portfolio, which is something like 135 companies every week. That doesn't mean we go in depth into each of them. You could be like, blah, blah, blah, nothing, nothing. Okay, here's something. But the agreement between us is that we are all up to speed on the portfolio.

26:50So that if one of the founders who primarily works with Albert reaches out to me, I can have a conversation with them with a pretty high degree of fluency on what's going on in their business. And so we, we use that opportunity to do so. And then obviously we have teams present when relevant. That's it. Yeah. Fascinating, uh, uh, overview the, um, earlier in our conversation, you mentioned how, um, you know, you guys spend a lot of time, not just chasing the, these hot deals, but really think about the opportunities in places that other people aren't spending a ton of time on and, and that you really wanted to hone your craft as a, as an investor.