The Third Degree

Brad Burnham on Momentum Investing and Rolling With the Punches

brad burnham Brad Burnham on Momentum Investing and Rolling With the Punches

Image from Flickr user Joi

Brad Burnham is a founding partner at Union Square Ventures. He began his career at AT&T in 1979, holding a variety of positions in marketing and business development, eventually spinning Echo Logic out of Bell Labs in 1990. It was AT&T’s first venture project and the catalyst for the development of the company’s corporate venture arm. By 1996 Burnham was a General Partner with AT&T Ventures. In 2003 he founded Union Square Ventures along with Fred Wilson to invest in highly networked communities of users at the applications layer of the web.

Q: You always remember the ones that got away. Tell us about the startup you regret passing on the most.

A: That’s easy Airbnb. They fit our investment thesis perfectly – they are a network of engaged users differentiated by user experience and defensible through network effects. We invest in networks because they have the power to collapse inefficient intermediaries. We should have understood that Air B&B could do to the hotel industry what Craigslist did to the newspaper industry. Unfortunately, I let my personal biases dominate the analysis. Its been a long time since I couch surfed and I had lost touch with the population who finds it natural and convenient. In a way I am most disappointed because my squeamishness about crashing with a stranger reflects a loss of faith in our species. All of our investments celebrate and depend on human connection. I should have recognized that it is always more interesting to stay with someone who is a local that to stay in a hotel that feels exactly the same everywhere in the world. We were also very impressed with the scrappiness of the Joe and Brian. Bootstrapping their launch by selling cereal was brilliant. We keep a box of Obama O’s in our conference room to remind us that we are not necessarily the target customer.

Q: The last thing you want to hear from a founder is…

A: The last thing I want to hear from a founder is “what do you think I should do”. Markets change, competitors emerge, technology fails. There are lots of reasons why a start-up might need to change direction, but the best entrepreneurs are pursuing a vision that is bigger than any specific challenge, and they roll well with the punches. My least favorite conversations with entrepreneurs leave me with the feeling that they look at me as a boss. Someone who will tell them what to do next. It often comes up in a situation where a company has experienced a setback and requires additional financing. An entrepreneur who approaches a venture capitalist as if they were a manager allocating budget for the next year is no longer an entrepreneur.

Q: What “me too” trend should we avoid or invest in?

A: I’d be embarrassed by how often the ventrue capital world chases the latest hot market, except that chasing momentum is such a part of human life in everything from restaurants, to fashion, to hot schools. Right now Ad Tech seems to be ripe for consolidation, and I worry that there may be more dollars flowing into social media than can be justified by the total amount of human attention available on the planet. Momentum investing may work in some markets. It may even work in venture capital if you get your timing just right. I’d argue that you are much more likely to succeed over time if you focus on why you are investing in a particular sector. If the only answer you can come up with is that the sector is “hot”, it would probably be better to stay on the sidelines.

Q: What’s the funniest pitch you ever heard?

A: At the risk of coming across as humorless, I don’t think I have ever heard a funny pitch. Entrepreneurs are almost always blinded by a passionate conviction that there is something wrong in the world and that they can fix it. I respect their conviction. I think they need that conviction to deal with all the obstacles they encounter, so even if I think their proposal is nuts, it is hard for me to think of it as funny. That said, the stuff that comes in over the transom is often hilarious, because it is so obviously off the mark. Why would someone think we would invest in a lawn care company in Orem, Utah, or an algae farm?

Q: What’s the best way invest during a boom?

A: I have been asked a lot recently if we are in a social media bubble. My answer is yes and no. Yes there is irrational exuberance around social media broadly, but no because within that market there are a number of companies – some not yet known – who will be worth many times their current value. The value of young companies in the social media space follows a power law. Facebook, Twitter, Linked-in are at the head of the curve and there are thousands of companies that make up the long tail. I think the fundamentally transformative nature of large networks on the web justifies the valuation of well established networks with defensible network effects. The problem is that the entire curve has been lifted by the current enthusiasm. We have responded to the situation by raising a fund that will allow us to invest in the best networks at later stages whether or not we were early investors in those companies. We have shifted the focus of our core early stage funds towards areas that are less heated. We are investing a little earlier than we had been in consumer facing social media businesses. We are also looking for opportunities to use what we have learned in the consumer internet in a B2B context. Finally we spend a lot of time looking for opportunities that might be indicators of what’s next.

Q: Explain, without jargon, what the word pivot means to you?

A: It means simply that the original plan did not work. Folks who are not part of the start-up world are surprised by how often this happens. If you’ve been around for a while, you begin to appreciate how difficult it is to put together a team that can execute. If you can get ten to twenty people all pulling on the same oar, you can almost always create value. Yes a good idea can overcome poor execution, but it is also true that a good team is a tremendous asset. The key here is to recognize when the original plan is not working and to make hard decisions before you have to. There is often a tremendous amount of institutional momentum around the current plan. It is by definition impossible to prove that the current plan won’t work. The temptation to turn over one more card, to wait for one more feature release is almost irresistible. It talkes a great leader to make the tough judgement call to stop work on the current plan, and redeploy the team against a new opportunity.

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Comments

  1. Spencer Fry says:

    My favorite bit was Brad’s take on “irrational exuberance around social media”.

  2. Anonymous says:

    This hits right on the nail – ” An entrepreneur who approaches a venture capitalist as if they were a
    manager allocating budget for the next year is no longer an entrepreneur”.