In what has become InSITE’s ‘State of the Union’ speaker event, last Monday over 50 fellows had the privilege to hear and talk to Fred Wilson, one of New York’s most-prominent venture capitalists, who regularly blogs on the popular ‘AVC: musings of a VC in NY’ –mostly about investing and technology. Fred, a graduate from MIT and MBA at Wharton, began his career in venture capital in the mid-‘80’s. In 2004, he co-founded Union Square Ventures and has made successful investments in companies such as Del.icio.us, Twitter, Zynga and Foursquare, among many others.
He mostly talked about three things: the state of start up’s and VC in the world, the US and NY; the improved relationship between educational institutions and the start up and VC community in NYC; and the areas which he sees as ‘hot’ and interesting right now.
He started off by explaining that start up’s and VC are now happening all over the world: “the city that has grown most quickly in the past 5 years is Beijing. We’ve also seen great activity in India, Western and Eastern Europe and Latin America. So the VC and start up ecosystem is being copied and replicated around the world”.
Similarly, in the US start up’s are now happening throughout the country, not just in NY and in the Bay Area, but also in Los Angeles, Seattle, Washington DC, Boston and Chicago. In NYC, “we passed some sort of critical mass a couple of years ago”. He cited that the city government and other big institutions, such as the educational establishments of Columbia University and NYU are paying more attention to the start up community.
Start up’s are recycling its wealth back into the system, nurturing and developing talent, and that’s starting to show many dividends in terms of companies doing well, hiring and growing. In Fred’s view, “the health of the start up community in the world and in NY has never really been better and brighter than today”.
The second topic of Fred’s talk was the relationships between universities and start up’s and VC’s. A few years ago, there was very little connectivity. He emphasized how the InSITE program was ahead of its time in bringing students and the start up and VC community closer together, and that InSITE remains a key agent in bringing this about. Indeed, today students and faculty are starting to commingle with start up’s and venture capitalists and the relationships among them are much more fluid. “People are moving in and out and meeting each other, so the level of relationships that exist between students, faculty, etc. is much more active tan 5 years ago”.
Finally, Fred shared some of his ideas on the areas he finds interesting to focus on today. He highlighted the opportunities brought about by the shift from an industrial era to the information era. Clearly, the way markets and business work is changing radically because of information technology. Information can flow from business to business and even within companies, bringing about fundamental changes. “We like to talk about the fading of the hierarchical model and the growth of the network model, connecting buyers and sellers directly”. We see this in areas such as media, the newspaper industry or classified advertising. We also see this in Google, which has invented new ways of advertising that didn’t exist. “We think these things will happen again and again, so we’re looking at verticals that haven’t been impacted yet by the technological revolution: financial services, education, health care, etc.”.
In the past, people needed to be assembled into companies because of transaction costs around business. But in a world in which those transaction costs are nearly non-existent, the notion that people have to be assembled into firms start to go away. “You already see this in the growth of freelancing and people who want to work for themselves, without necessarily starting a company”. In this regard, Fred mentioned one of the companies in his portfolio WorkMarket, a marketplace for employers and workers to connect, founded by serial entrepreneur Jeff Leventhal.
Fred also mentioned that not enough activity is happening on health care, life sciences, new forms of energy, and even the intersections between hardware, software and these areas. “There is a lot of innovation that could be brought to life sciences, urban sciences and other growth sectors. That’s one area that is underinvested in globally and here in NY”. 50 years ago, less than 50% of VC dollars went to information technology and around 30% to life sciences. Today IT is getting 60% or 70% and life sciences less than 20%. So there has been a big shift. There are many reasons that explain this: less capital requirements, quicker get to revenue timeframes, better returns, quicker opportunities to exit and so on. Despite this, Fred mentioned we need to think of ways to make life sciences more capital-efficient.
Another area of interest was Wellness. “The idea of keeping yourself well rather than focusing on what happens when you’re sick… The industry has many gatekeepers and entrenched interests, so we’re interested in areas that are outside of that… One thing that’s been consistent in Union Square Ventures is that instead of investing in software that makes the existing establishment and institutions better, we have tended to want to compete with those businesses… When we went into education, we looked into home schooling, continuing education, and so on. Areas that were more entrepreneurial and less controlled by big institutions. New models as opposed to established ones”
Mobile payments was another area of focus. “Money is just information, just some bits in a wire. It doesn’t’ make sense to pay $3 for those transactions”. He cited Dwolla, another of the companies in his portfolio. “What we liked about Dwolla is that they are trying to make money transfers free. How are they going to make money then? The idea is that if you make money transfers free and you have a system that works well, so that you’ve a lot of people and businesses using the system, there are a lot of value-added services that you can provide around it. We liked Dwolla because they want to change the game in this industry”.
He warned “it’s easy to get caught up when you see companies like Facebook going public and everyone is obsessed with that. You’ve to remember that Facebook got started 8 years ago, and that starting a company that looks like Facebook today is not necessarily the right thing to do. It was clearly the right thing to do 8 years ago, maybe even 4 years ago, but not the right thing to do today. So we force ourselves to think not what’s hot today, but how the world is going to look like 10 years from now. And that leads us to new investments”.
It seems to be a strategy that has worked very well for Fred and his team. And we, at InSITE, most definitely hope to learn from it. We will keep reading his blog and look forward to having him give our InSITE’s ‘State of the Union’ talk next year.
This post was written by Lila Pla Alemany, Class of 2013 at Columbia Business School.