#4 Albert Wenger
We’ve had another big week at Robin Capital and this week I have the great pleasure of sharing an interview with the one and only Albert Wenger Managing Partner at Union Square Ventures a venture capital firm based in New York City with investments in companies such as Twilio, Etsy, Firebase, Behance, and MongoDB.
Albert is a real hero of mine. Having also been born in Germany, Albert moved to the US after studying there as a high school student and went on to graduate from Harvard and to complete a Ph.D in Information Technology at MIT. Before joining USV, Albert founded and co-founded several companies, including a management consulting firm and an early hosted data analytics company.
Today, he leads a small but tenacious team at Union Square Ventures which he describes as a “thesis-driven” early-stage venture capital firm.
In fact, we’ve actually met in person a number of times and I’ve always been impressed by the fact he takes time no matter what. In 2013, I was in New York and I knocked on his door. It was obvious that he’d had a long day as he’d flown up from LA and had zero sleep but he took the time to sit down with me at 6pm. I showed him my Mixpanel analysis. Then he saw it, he calculated it in his head and even found a problem I hadn’t found yet. So, it was a real honor and privilege to touch base with him again this week.
First of all, thank you so much for taking the time to chat with us today, it really means the world to me. As you know, I recently started a solo GP and the fundraising environment is especially complex right now. So, can you tell us what Union Square is like as a team as people? How do you describe it to people outside the organization?
Well, my business partner, Andy, has this great way of describing it. He says Union Square Ventures is a conversation. That's spot on, we talk a lot, we write a lot, we write to each other, we have long email threads going through the partnership, often on multiple topics and different threads. And so it's this ongoing conversation in which we feel comfortable asking all sorts of questions, giving potential answers, trying out different answers, and seeing where this conversation takes us.
And do you have guidelines, values, a mission, or a vision?
I think the guidelines are – genuine, intellectual curiosity. It’s about really trying to understand where people are coming from, what's new in the world, why it's new and how it might work. There is, I think, our first principle includes not buying into mantras, but instead being like, “okay, what is the underlying rationale or reasoning for why this might work?” I do think there's a fundamental belief that for humanity to progress we need innovation. And that innovation comes from a complex interaction between the worlds of research, entrepreneurship and government. So, I think these are some guiding principles for us at Union Square Ventures.
This leads well into my next question. I sent you a deal recently, right? But you were like, oh, no, we haven't thought about that part yet. And I know from limited partners, it's very important, for example, that GPs are disciplined in what they do and what they don't do. So I wonder, how do you vote on these deals? Do you sit together with wine and do a workshop or two? Or, do you start with the broad picture and know already once GPs like myself reaches out to you, what you want and what you don't. How does this all come together?
Yeah, it relates back to this idea of having these conversations. But we also write a lot as I said. Writing is an exercise of distilling your thoughts, as conversations can be very meandering. So the idea of writing these theses is about distilling the main thesis. And you should always think of this as having multiple levels. So there's a very high level thesis. And then there are sort of specific incarnations of that. And so, you know, if you take the Climate Fund thesis, for example, which is that we want to invest in reducing emissions, drawdown and adaptation, that's very, very broad. So, then we have to ask ourselves, “how do we take that very broad idea, and make it into a specific sub idea?” From that, we consider that one of the big emitting sectors is transportation. And then you can start to think, “what are the different ways that one might tackle emissions from transportation?” And in this way, we have many of the same sort of ways we think about deals that we have always had. So, for example, we don't like selling into highly concentrated industries, right? If you have only a few buyers, then buyers have a lot of power. So when people come to us and say, we have this thing that we want to sell to the automotive industry, we're like, you know what, there's not many car companies in the world and they exercise a lot of power.
That’s interesting because every podcast you would ever hear on later stage growth, will tell you market size matters most. And I was like, yeah, that makes sense if you invest pre IPO, but for you, you're investing earlier so it’s different, right?
Yeah, it's not just about exit options. It's about whether you can grow your company profitably so market structure really, really matters. For us, investing in a potentially large market that's controlled by a few players is not as attractive as investing in a somewhat smaller market that is quite fragmented. When you have many different customers, no single customer can exercise a huge amount of power. My point is that we use these kinds of principles when considering where to invest. Our first principle is that in concentrated markets, people try to buy power, that's kind of the first principle of micro economics as it were. And so, we generally try to stay away from those markets. And so, you know, taking this transportation example further then we know that electrification means that vehicles need to get charged. Now, are they going to get charged the same way that we put gasoline into cars? And we think no, because if you say another thing that another principle that we think is very important in the world is, is decentralization, right? Because again, it's about power. And we like to find and invest in technologies that help take power away from large powerful entities and push it out towards the edge. And so gasoline is very flammable, it's very dangerous, it needs to be delivered. And so it has always made sense that you would get gas at a gas station. But with an electric vehicle, you can just plug it in. Electricity is everywhere, and we can control it – it's very safe. And so, our vision of charging isn't that there'll be a few charging stations, it’s more like our vision of churches, as the church is ubiquitous. And so, once you have these kinds of ideas, then you can build a thesis around charging, like, you know, you can say where can we invest in somebody who's building a charging network, that might be a kind of ubiquitous charging.
So you drill down your thesis and make it more granular depending on the vertical and then you pin it down somewhere? To bring it back to the question of what Union Squares Ventures is, it’s about bringing the different pieces together – connecting the lines, not the dots. I guess with the transport industry you are taking some of what you have built before into the Climate Fund and making it better. Right?
Well, there's certain things that we have learned that we keep and then there are other things that we need to unlearn. So I think one of the important things in life is that as the environment changes, as the things that you invest in change, you also need to unlearn things. I mean, we made a mistake in the early days of crypto, right. We were talking about crypto in our office before the theorem crowd sale. And we're like, this is interesting. And then they were like, you have to send money to a foundation in Switzerland. And then we were like, where's the company? I mean, you know, we buy equity. We don't send money to foundations in Switzerland, right? So there's some things you have to unlearn right. Like in the climate, we're doing a lot of hardware investing, and there will be new things to learn. And then there's some things to unlearn. And that's the tough part, because unlearning is actually significantly harder than learning. So the early successes, you know, things like Twitter and Tumblr, and Etsy, very consumer type applications with network effects. We did a whole bunch of investing in digital infrastructure, you know, in MongoDB, Twilio, CloudFlare, very successfully. We've done crypto very successfully, you know, Coinbase, uniswap, and some others. These have all been very successful investments. And now, it's too early to tell whether it will be successful in climate, but we have gone into different areas. And we had to network along the way.
Yeah. And I wanted to touch on it again as VCs, I love that we can go into depth and that we have the highest adaptation rate, we are always adapting. And we always do what's best. But, exactly, you can’t do this without unlearning some things. And unlearning is harder than anything else.
Over the history of humans we have invested in some very different areas, right. So the early successes, you know, things like Twitter and Tumblr, and Etsy – very consumer type applications with network effects. We did a whole bunch of digital infrastructure, you know, with MongoDB, Twilio, CloudFlare, very successfully. We've done crypto very successfully, Coinbase, uniswap, and a bunch of other things. These have all been very successful investments. And now, it's too early to tell whether we will be successful in climate, but we have gone into different areas. And we had to, I mean, I guess, network and hope that these network effects carry over.
So, you’ve been looking for businesses with network effects?
Yes, ideally, we want to find businesses with network effects. But it's also true that you can find these kinds of things as time goes on. And, it was one of our early insights, like I do think we as a firm understood network effects before many others, which allowed us to invest in some very interesting networks. But then you get to the point where everybody's looking for network effects all the time. And then, you know, what happens is that businesses that look like they might have network effects, get priced, the rounds get priced on the idea that they will definitely have network effects. And then when those network effects turn out not to materialize or to be weaker than expected, those valuations look silly in the aftermath. And conversely, there's also been a history of very good businesses that have not worked. So, this is one of those things, for example, where I think we have some unlearning to do, as I do think it's much harder to build businesses in the climate space that have network effects. And in part, that's because businesses often produce commodities, right? I mean, if you make hydrogen, your hydrogen isn't any prettier, or heavier, or, whatever the case may be than other people's hydrogen, it's just hydrogen, right? So it's very hard to have network effects if you're on the output side, now, but you might have network effects on the input side. And so that's pretty substantial, you know, we need to rethink where our source of network effect is, and to do that you really need to have a network effect. Could it be that some of those businesses you just want to find the best execution? And what does that look like? So, I would say, overall, this goes back to what you asked me originally, it's about this genuine intellectual curiosity, and the genuine intellectual curiosity has to extend to your own premises, your own learnings into questioning whether those still apply. And whether there are things are alternatives.
OK, last question about Union Square Ventures. If I were an LP investing in Union Square, or if I would be looking to work with you on an acquisition, what kind of person am I?
I don't know but on the LP side, you know, we have been very loyal to the LPs since the firm started in 2003. We've been very loyal to those LPS over the years. And so there isn't, I think, necessarily a distinguishing characteristic. I think we have added LPs over the years, though. And there we've always, I think, also tried to optimize for people who we think have independent opinions who will challenge us and who will ask good questions. I can also think of a couple of women who are on our LP advisory committee, for example, who I know will always ask us good, tough questions, and that's great to have. We have a very, really, really small team. We have about 20 people, and we just brought in three new analysts. And the way we do this is that we have this completely open recruiting call, we get hundreds and hundreds of applications and we sort through all of those, again, very much within the same set of characteristics I spoke about. We're not looking for people who are highly transactional, or just want to do deals, we're looking for people who would like to deeply understand a particular area to develop a novel idea. You know, for every single company in our portfolio, I can tell you what the idea was under which we invested. Sometimes it turns out to be right, sometimes it turns out to be wrong, but we never go and make an investment without a specific idea about why we think it is interesting.
So you always invest with high conviction at the beginning and never regret an investment?
Yeah. And it’s also very important that every deal is a deal belonging to our firm, we don't do deal attribution. It's always a deal that belongs to the firm as a whoöe. And when stuff goes wrong. It's all hands on deck with everyone asking: “How do we fix it?” There's never a “well, I told you this was a bad idea.” It's no Shark Tank. It's like it's a partnership – a true partnership.
You can really feel it by speaking to every single one of you. I just wanted to ask one more thing about climate. So my former co-founder is running something called climatic on API and structuring. And I have the feeling everybody wants to have a software climate solution, right? But the majority of climate products are hardware when we talk about decarbonization and other things. So I wonder where you see yourself because you have to take a certain leap of faith. I heard you on one podcast called “Capitalisn’t” where you were saying that you and your wife were funding some research where you don't know what the outcome will be. So on the climate side, do you want to have certain returns?
Fundamentally, the climate crisis is a physical problem, right? It's a problem of having too much carbon in the atmosphere. And so it requires physical solutions. Software will play a role. And we have some software investments, but we have a lot of hardware investments, because we need more electricity and where's this going to come from? Well, you know, things like, potentially nuclear powers, we have to make investments in nuclear power. And then, vehicles need to be electric, so we have to invest in a charging network that involves building a physical charging network. We have an investment in a company in Egypt that retrofits existing vehicles from internal combustion engines to electric. So it’s a physical world problem. And the biggest opportunities, the biggest solutions here are going to change the physical environment that we live in, how we make things, how we consume, how we transport all those things, they all have to change.
That’s a very different way of investing…
Yes, very different. And, you know, time will tell. The beauty of our business is, you know, 10 years from now, we will know whether this work did work, right? So there's lots of reasons for why I think returns in software are going to stop and investing is not going to be very strong. And I think there’s a good chance that returns in climate will be very strong but that remains to be seen. But if I often compare venture capital to the cement industry, people ask what do you mean by that? Well, it's the capacity industry, right? So every fund that somebody raises, you know that you raise a billion dollars, and that's a billion dollars worth of capacity. And the cement industry, the capacity industry, you build a plant with a certain amount of capacity of cement that you can output. Now, when you get a building, boom, the price of cement goes up and the more cement plants get built. And then the most capacity comes online at the height of the building, then the building boom goes away. Now we have the maximum capacity of new cement plants and falling demand. So what happens to the price of cement, it just falls off a cliff right? Now, over the years, the cement industry has become controlled because of this, and so the price of the longer falls off a cliff because they basically manipulate it, but you get the idea. But the same is true for venture capital. Software has been so good to VC and has created such great returns, because you can raise ever bigger funds. And now you're gonna raise the match funds just when returns start heading south and so I believe investments are going to suck – that's a technical finance term – for years to come. But that doesn't mean that there won't be a few big outcomes here and there. There will definitely be big outcomes because there'll be a network of companies that get going but it won't be that kind of reliable fund after fund massive return that people have gotten used to.
We’re seeing this from an LP perspective…
I do think art tech, by comparison, is underfunded. If you think of all the extraordinary breakthroughs we've had, and we've had some extraordinary breakthroughs. Like the AI breakthroughs can enable a lot of heartache, right, a lot of improvements in robotics, fine grained control of industrial processes, new material discoveries, you know, and we have had breakthroughs in you know, understanding the genome and how to manipulate it. We've had breakthroughs in various aspects of material science, for example, there’s been a potential breakthrough in superconductivity. It remains to be seen whether that pans out, but just looking at what Elon Musk has done with reusable rockets. We can have long debates about other aspects of Elon's personality and so forth. But, we've gone from rockets that were super crazy expensive to reusable rockets. That's a pretty big breakthrough. It's pretty big.
I've got one last question around this. I know you're a big fan of let's call it DNA for good investing or doing it could be DNI on gender diversity, social, it could be CSR programs, and so on, many companies are covered by this label and so on. So further than only climate, what are you doing differently both personally, and also with Union Square, as a fund? I know that you personally have invested in female led funds, for example.
I think there's a huge amount of catching up to do. I mean, the capital and venture is still being allocated by a lot of people who look like me, which is white, middle aged men. You know, I think we have made some gains on bringing other people, other voices, other backgrounds into the room, but it's slow going. And for instance, in the US, it's still the case that a tiny fraction of venture dollars go to women founded women led firms. And then the same goes for minorities, and then you know, you get the sort of intersectionality, like female minorities, you know, raising tiny, tiny amounts of money and having a very hard time doing it. So. So yes, I think that's something that requires all of us to do some work. And I very much wish that LPS, who are ultimately the source of money, were more aggressive here and would be pounding the table more for firms to change the mix of investors. You know, things are, in some way, slow moving. I mean, we had USB and added a partner, you know, every few years, sometimes it's three, four or five years between us adding a partner. So it's very slowly moving and that’s just in one firm.
Let’s move on to your book The World After Capital. What was the feedback? And if you could change it now what learnings or retrospective ideas would you add today?
I'm really happy. The book has held up really well. It's not like a book that was good for one year. I think this book will be very readable and, and relevant for years to come. Why do I think this? I think that because the book deals with the kind of extraordinary transition of humanity that we've had twice before, when we went from the hunter gatherer age to the agrarian age and then from the agrarian to the industrial age. I believe we're in such a transition right now. I believe most politicians are in denial about such a transition, and so they're trying to keep patching up the industrial age, instead of inventing a new age, which I call the knowledge age in the book. And I also think we have these extraordinary vectors of change, the climate crisis being one of them, and then the rise of artificial intelligence being the other, both of which I talk about in the book. So I think this book will stay timely for quite some time. Because these transitions take a while. You know, the reason I wrote this book in the first place is because the previous transitions were really, really bad, right? The early agrarian societies, the first thing they did was wipe out all the hunter gatherer societies. And then, you know, the transition from the agrarian age to the industrial age was a series of bloody revolutions, and then two world wars and we didn't really finish this transition until the end of World War Two. And that's not that long ago, right? And that's less than 100 years ago. And so I sort of it kind of would suck to make the same sort of mistakes again, and what is the fundamental mistake? Well, the fundamental mistake is to think that we are not progressing. What's necessary are incremental changes to the existing system. Just some regenerating of the curriculum in school, tweaking of the interest rate, changes to employment policy or industrial policy – that's just not going to cut it. In those other transitions, we made really, really fundamental changes, right. So, when we went from the hunter gatherer age, to the agrarian age, we went from being migratory to being sedentary. We went from living in very small and flat tribes to living in a large and very hierarchical society. We went from being promiscuous to being monogamous, and even our religious ideas changed. It's so radically different, in terms of very big things, not just marginal little things.
My next question is more about the timeframe. You gave a rather broad timeline, and you said that it has to get much worse before it gets better. And then 50% of the global GDP, our GDP should go into this. And so I wonder, what's your prediction of how long this transition will take?
I think at present, things are getting worse. I mean, things are getting substantially worse. The climate crisis is unfolding faster than most models have predicted. You know, the IPCC conveniently admits to having bad models. So, when you look at the IPCC consensus models, it never includes the really bad models, and they're just like, oh, it's going faster than the IPCC expected. Well, it’s no surprise, because you excluded the worst examples from the IPCC report. So that's happening. Polarization of society is continuing to pick up speed, with people demonizing each other. And, nationalism is on the rise, with Chinese nationalism and nationalism in various European nations, and in the US too. And now AI systems are becoming more powerful without us having to figure out exactly what we want them to do. I do think it's gonna get a lot worse. Unfortunately, there are very few things happening that would lead me to believe that it isn't gonna get a whole lot worse first.
So, you think the inflection point is yet to come?
I am very optimistic about the long run, like where we could get to if we got our act together. But I'm quite pessimistic about how we're gonna get there.
What's funny to me is every pitch deck I've ever seen ever in my life, and even with SmartRecruiters you know, we had an AI and it says, it makes you more human again. So we'll take time until everything gets better. What do you think about AI?
Part of what I write about in the book is that I think we're confused about what it means to be human and we're confused about what makes humans human. And, you know, I provide some suggestions for what it is that makes us human. And I think this is a good starting point for us to figure that out before we wind up having what I call neo-humans with artificial intelligence or super intelligence or whatever you want to call it. So to me, fundamentally, what makes us human is knowledge. We're the only species on this planet so far that has knowledge, we're bound to have other species, species that we have created that will have knowledge. But what I mean by knowledge is that we have these artifacts that we have produced. I can read a book today that somebody else wrote 1000 years ago in a different part of the world, which is why we know how to make fire and no other animal species knows how to make fire, right. And part of knowledge, to me, is art and so we also have extraordinary art that we preserve. And so like, the scientific part of knowledge is how we stay alive. And the art is the why. So I think focusing on these things helps me understand what they mean. And then understanding how we should be treating other humans, right. So I believe, if we don't learn how to treat each other better, why should AI be able to do that? And by the way, it's a little aside but Berlin has a great idea for a project, which I absolutely think we should engage in, which is that we should write lots of stories about how AI is benign and how it’s helping humanity. Because all the stories that are out there are how AI is killing everybody. And do we really want to be training a lot of AI on only stories about how AI is evil?
You think we are making a self fulfilling prophecy, right?
Of course we are, 100%.
One of the things you talk about in your book is universal income. We could focus on this, but it would also mean that fundamentally the human wants this right. But in Buddhism it is believed that everybody can become enlightened, but obviously, not everybody is and it will take some time. And throughout history there is always the question from Hobbes and Robespierre of whether humans can change, right?
This is a great question. I mean, there is this question about whether there is such a thing as human nature. Christianity has the idea of the original sin, and that we're all evil. But have I tried to have a somewhat scientific perspective on this. And to me, the scientific perspective is, we just know that the brain has different parts to it, right? It has parts that come from evolution where we experience emotions, and we have a part of the brain that can sit with these emotions and analyze them. And that's kind of a superpower. And so I don't believe that there is such a thing as an immutable human nature, I don't think biology is destiny. And we also have the means to change our biology. So, anybody who says that biology is destiny, to me, is fundamentally against the idea of technology and innovation and the idea of progress. I think there are dangerous questions about whether we can become perfect and should we become perfect? And what does that look like? But I think that what a lot of people believe to be human nature isn't true. And I had the great benefit of seeing that early on in my life as I was exposed to a totally different culture. I grew up in Germany at first and then spent a year in the US when I was 16. And I came back and saw my own culture with different eyes and saw the US culture with different eyes. And I've since traveled the world extensively, and so much of what we define as clearly human behavior is dependent on the culture you grow up in.
Part of that attention you talk about in your book is about what it means to be human. So, how should humans spend time? And how should we live together?
I think we should all spend some time developing some type of mindfulness practice, I mean, that also ties back to the beginning conversation about investing. I think so much of investing is dependent on being mindful. So, if you suffer from severe pangs of FOMO, for example, you probably don't make as good investment decisions as if you can sit back and realize “Oh, I'm having an episode of FOMO, I should probably examine that, from first principles, rather than jump in with everyone else on that deal.” So I think that's something and it goes back to this idea that I was talking about earlier about changing everything. Take the school system, for example, so much of the discussion around the school system is around making incremental changes to the existing school system, instead of saying, “look, we built a system for the industrial age, we don't live in the industrial age anymore so we need to fundamentally rethink what learning looks like and what the goal of school is and what we educate people for.” It’s about fundamentally rethinking not incrementally changing how many hours kids should go to school for, or what the class sizes should be. On some level it's scary as hell, but it's also exciting, because I think we get to really fundamentally reinvent things, you know, how people live together, whether that’s in families and what kind of families, and living with different people of different ages. I think these things all need to be looked at and are all kind of up for grabs.
I know that you now have a farm, and a diner, right? Personally. So obviously, that's something with your hands and things you can do. So I was wondering, if, if there's a reason you’re working in this space too?
Well, Susan and I are trying to have a kind of a barbell strategy to find out how to affect change in the world. So, one end of the barbell is big ideas, you know, promoting universal basic income, etc. And then the other side of the barbell is doing concrete things like, trying to pay people well at our diner. Trying to give them ownership. And we have an affordable housing project where we're trying to do the same thing but with ownership and housing, so it's, sort of like, big ideas and then concrete attempts to bring those ideas into the world in small instances.
It's all related to this idea that we need to transcend the current age. And that jobs aren’t fixed to the industrial age.
Thank you, Albert. It was so great to hear your insights about the world we live in and how we might rethink investing and capital for the future.