The transcript from this week’s, MiB: Albert Wenger, Union Square Ventures, is below.
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ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, what can I say, I have yet another extra special guest, Albert Wenger, managing partner at Union Square Ventures. He has a fascinating background in technology and software, and is interested in all sorts of interesting things, ranging from climate change to humanism, to the huge transitions that humans have gone through as a species and what it means to society, investing, scarcity and just the quality of life that we will enjoy as a species. I found this conversation to be really intriguing. If you’re interested in venture capital, in technology, in how to think about early stage investing, well, strap yourself in, this is a great one.
With no further ado, my conversation with Union Square Ventures’ Albert Wenger.
You have quite a fascinating history. Let’s delve into that, starting with your background. You won a national German competition in computer science in high school. Tell us about that and where that led you.
ALBERT WENGER, MANAGING DIRECTOR, UNION SQUARE VENTURES: Well, I fell in love with computers very early on when I was a young teenager. And my parents were super indulgent of this at a time when that was very unusual, and they bought me an early Apple II computer, one of the earliest Apple IIs to be sold in Europe, actually. And I’ve stuck with that, my entire life. I’ve studied computer science as an undergrad and as a graduate student. And I’ve been investing in a lot of computer companies over the years. So it’s been a central to what I do and who I am.
RITHOLTZ: So let’s talk about the timing of school. You graduate Harvard in 1990, with an Economics and Computer Science degree, perfect for the explosion of the Internet; a PhD from MIT and Information Technology in ‘96. So when you were leaving school, were you interested in the Internet, or was it more hardware and software?
WENGER: No. The web was really exploding while I was at MIT. And I actually finished my PhD in ’99, but I started a company in late ‘96, early ‘97. And I was kind of doing the company and the thesis at the same time, which wasn’t great for either, and also wasn’t great for our marriage. We kind of managed to get through that. But I was really fascinated with the web from when I first discovered it, which was in a computer lab at MIT where I’m trying to do my stats homework. So —
RITHOLTZ: So let’s talk a little bit about some of the other companies you either founded or run, the most famous is probably del.icio.us, which ended up getting picked up by Yahoo. Tell us a little bit about —
WENGER: It was an early Web 2.0 darling, Joshua Schachter had started. He was working at Morgan Stanley actually full time. He had started this as a side project. And it was kind of this idea that you would share your bookmarks with others, because bookmarks were kind of an indication of something that was actually interesting on the Internet. And Joshua added tags to that, and so you could browse things by tags.
And at that time, Union Square Ventures’ Fred and Brad had started the firm, they had just raised the first fund. I had just finished another project I was been working on. And they were like, “Hey, we’re talking to this guy, Joshua, what do you think?” So I met up with Joshua, and they wound up investing, and I wound up to become the president.
RITHOLTZ: So you’re president of del.icio.us, you see it through in order to be acquired by Yahoo in the early 2000s. Tell us a little bit about that experience.
WENGER: The del.icio.us team was tiny. It was sub 10 people, basically.
WENGER: And it was a very rapidly growing service. I made myself sufficiently unpopular during the acquisition because I insisted on certain things, I’m like, “We’re not doing this. We’re not doing this. We’re not doing this.” At they at the end, they were like, “We want all of you except for this Wenger guy. We don’t want him,” which was perfect for me, mind you, because I didn’t want to relocate out to the West Coast. So I got to just take my marbles and start making angel investments.
RITHOLTZ: So is that what led you to Etsy and Tumblr was the del.icio.us acquisition?
WENGER: Yeah, exactly. I had a little bit of money and I met Rob Kalin, the founder of Etsy. He had just come back from the West Coast. He had tried to raise money on the West Coast, was unsuccessful with that. And so I wrote an angel check here, and then I brought Union Square Ventures in as the first Series A investor.
RITHOLTZ: Is that what led to your transition from entrepreneur to venture capital?
WENGER: Well, I was basically hanging out at the USV offices after the sale of del.icio.us and —
RITHOLTZ: Just because you had no place else to go.
WENGER: Because I knew both Brad and Fred really well, and so it was kind of a natural thing to do. I did these angel investments. I led the Union Square Ventures investment in Etsy, I became a venture partner for that, and then became a GP in the 2008 fund.
RITHOLTZ: So Etsy, also Tumblr was another one. And if memory serves, were they acquired by Yahoo?
WENGER: They were also acquired by Yahoo. Yes.
RITHOLTZ: Okay. So you’re working at a contact list. What was that experience like now not as a president, but as an outside investor?
WENGER: It was a very, very lucky landing for Tumblr, because Yahoo really was the only bidder and they were bidding against themselves, but they didn’t really know that.
RITHOLTZ: So what eventually led you to say, “You know, I think I could do this venture stuff full time. Let me hang my hat at Union Square Ventures and focus solely on something else.”
WENGER: Yeah, that had really been my goal since my own first startup in ’96, ‘97, which was a company called W3Health that ultimately failed. From that experience, I realized that I really loved startups, but then I was never going to be good operator, but I thought I could maybe be a decent investor.
RITHOLTZ: Let me make a digression here, and since you’re in front of me, I have to ask this question. So I deal with traders, investors, fund managers, economists down the list, there is no group of people that seem to be prouder of their failures than venture capitalists. Why is that?
WENGER: Because it’s an integral part of the business. And if you can’t deal with failure, you can’t be a VOICE, because many of the startups you invest in fail.
RITHOLTZ: Statistically, that’s your expectation?
WENGER: Yes, absolutely.
RITHOLTZ: So it just seems like the healthiest way to think about what is unavoidable, yet so many people within the world of finance, kind of dance around it, try not to deal with it. There’s a little bit of denial. It’s almost like an object of pride, “Look, here are all the companies we invested in that didn’t make it. Look, here are all the great companies we passed on.” It’s almost like a point of pride, this sort of self-awareness.
WENGER: Well, it’s also important too, how the venture capital model works overall, right? So the most you can ever lose in venture capital is the amount of equity you’ve put in.
WENGER: But the upside is nearly limitless. I mean, it’s what Nassim Taleb calls convex tinkering, right? It’s the perfect example of that. You take many small, relatively small positions, and any one of them can become very, very large. But you also learn a lot from the things that don’t work. You know, sometimes you learn a lot more from that than you learn from the ones that do succeed.
RITHOLTZ: Sure. You tend to learn more from losers than winners usually. And then I have to ask the same question, so Union Square Ventures, by definition Union Square is here in New York City. What’s it like being a venture investor on this side of the country, as opposed to what seems to be, you know, the gravitational black hole of venture out in Silicon Valley in California?
WENGER: Well, first of all, it’s no longer that. So you know, Sequoia just opened a New York City office. Andreessen Horowitz has people on the ground here. So New York City is now, today, one of the epicenters. When we started, that wasn’t the case. When we started, people were like, “Oh, there’s been no tech company in New York City. There’s been no IPO.” Of course, you know, we were involved with two of the major IPOs. We led the Series A in Etsy. I also led the Series A — we — Union Square Ventures led the Series A in MongoDB, the big New York City-based success story.
So it was incredibly healthy, though, because we were never caught up in the “Oh my God FOMO” of we have to have one of these and one of those, and everybody else is investing in the sector. It was always a “Let’s form our own thesis. Let’s figure out what we believe, and then let’s find companies that fit with that.” And we’ve always been extremely competitive in winning deals in the West Coast. In Twilio, I led the Series A, for Union Square Ventures, and there was a, you know, San Francisco-based company. So —
RITHOLTZ: Last question on this topic, how different is venture in New York versus California, or is there really no big difference?
WENGER: There used to be a noticeable difference between East Coast and West Coast. Today, I think that’s completely erased.
RITHOLTZ: Quite interesting. So let’s talk about the thesis-driven venture capital firm, which is how USV describes itself. Tell us what these theses are and how do they drive your investment?
WENGER: Yeah. So there’s been an evolution over time. I would say, you know, what we call Thesis 1.0 was that we invest in large networks of engaged users, differentiated by user experience, and those were investments like Twitter and Tumblr. And then we started to focus on companies that had less obvious network effects, so more data behind the scenes, companies like Sift, for example. And then we added to our thesis sort of infrastructure, and infrastructure investments included Twilio and MongoDB, Cloudflare. Stripe. There’s a whole bunch of infrastructure investments, infrastructures for building digital businesses.
Our current iteration, what we call Thesis 3.0 is about broadening access to knowledge, capital and well-being by leveraging existing networks and protocols, and building trusted brands. And each part of that thesis actually means something very concrete. So let me just pick one of them, building trusted brands. For us, a lot today is about is your business model fundamentally aligned with your customer or not?
The advertising model, as we have learned is not aligned with customers’ interests, right? If you’re YouTube, you want to serve the most engaging video so that you can show more ads. You don’t want to serve the most appropriate video, right? But if you have a subscription model, let’s say like Netflix, you want to show something that somebody actually really truly deeply is going to relate to, so that they stay as subscriber long term.
So each part of this thesis means something and we use the sort of high level thesis to then look for very concrete things. So for example, I said broadening access to capital, so we’ve done a lot in lending, like, how can we do better underwriting, better, cheaper, faster loans, for instance, to small businesses, investment, like a company like Funding Circle, or to individuals, like a company like Upgrade, in a way that actually helps people, so where you’re not dragging them into like a debt hole, but you’re actually helping them build up their credit score while you’re giving them — extending their credit.
RITHOLTZ: So 3.0 sounds a lot like World After Capital, I’m hearing some very similar themes.
WENGER: Absolutely. There’s a strong relationship between some of the ideas in the book and some of the ideas that inform our investing.
RITHOLTZ: We’ll circle back to the book in a little bit. Let’s talk about a couple of companies you invested in because I’m picking up a theme there, Meatable, Terra, Living Carbon, Marvel Fusion, Legendary Food, climate sustainability impact investing.
WENGER: Yeah. So those are all personal investments, not Union Square Ventures investments. But I made those investments in the run up to us forming a climate thesis, and now a Climate Fund. So those are all investments that go back a few years, when I sort of became really interested in what kind of opportunities come out of the climate crisis. The climate crisis, if we don’t get on top of it, none of the other stuff will matter. None of the money we’ve made will matter. It’s so big. It’s so much bigger than COVID, for example, in ways that I think people still don’t appreciate.
And so I made some personal investments first, and then we started talking to our LPs about it. And then during COVID, we raised the first Climate Fund, $160 million Climate Fund. We’re almost done investing that. And so the climate thesis is very simple. We want to invest in companies that either reduce emissions, draw down existing emissions, or help with adaptation.
So I’ll give an example of an adaptation investment. We invested in a company out of Australia called FloodMapp. And what they do is they predict where things are going to flood. They also measure the actual flooding. Floods are one of the biggest problems coming out of the climate crisis, and they’re here today. This is not some future problem. And mega floods in Pakistan, a third of Pakistan is underwater as we speak. I don’t think people understand how horrific the devastation there is.
RITHOLTZ: It’s the other side of the droughts that are everywhere. It’s what’s dry gets drier, what’s wet gets wetter.
WENGER: Absolutely. Talking about emissions reductions, we’ve made investments, for example, in our first ever investment in Africa, in a company called Shift EV. What Shift EV does is it takes existing delivery vans and retrofits them in a space of a couple of hours, from internal combustion engine to electric.
RITHOLTZ: A couple of hours?
WENGER: A couple of hours. Yes.
RITHOLTZ: Because if you want to take an old 911 and convert it to EV, it will take you about a year, assuming if you can get on the list. It’s that backed up for that shift itself.
WENGER: So they have completely industrialized this process.
RITHOLTZ: That’s amazing.
WENGER: You drive a minivan in and a couple of hours later, drives out as an EV.
RITHOLTZ: Wow. What do they do with the internal combustion engine and —
WENGER: That’s a great question. I need to ask Ellie what they do with that. I don’t know.
RITHOLTZ: I mean, it seems like that’s a lot of hardware to just throw away.
WENGER: I don’t know. Great question.
RITHOLTZ: Really interesting.
WENGER: And then I’ll talk about one of the drawdown investments. We’ve invested in a company called Brilliant Planet out of the U.K. What they do is they build ponds in the desert and they pump seawater in, and then they grow algae very, very rapidly, continues algae bloom, and it takes a huge amount of carbon out of the atmosphere.
RITHOLTZ: Algae in ponds —
WENGER: In the desert.
RITHOLTZ: — can move the needle?
WENGER: Yes. Absolutely.
RITHOLTZ: That’s quite fascinating. Two questions come out of this, one is structural and one is fund based. Let’s do the fund one first. So John Doerr had a climate fund started about 10 years ago at Kleiner Perkins. Some people have said it kind of lagged other similar era venture funds. Was he just early? How do you look at this in terms of not just having a positive impact on the planet but generating a return on investment?
WENGER: Yeah. The early green tech funds, they were too early in one sense. But in another sense, they were actually crucial to our having a shot at overcoming the climate crisis. Because if it hadn’t been for the investments, we wouldn’t have gotten on the cost curve, for instance, for solar PV, right? So the reason we have really cheap PV today, the reason we have really relatively cheap batteries today is because of some of the investments that were made back there. And there’s this pattern in the world where every big technological shift starts with a bubble, right?
WENGER: So when we had ships, we had the South Sea bubble, right? And when we had railroads, we had the railroad bubble. There was an automotive bubble. There was dot-com bubble, multiple bubbles in crypto. There was a green tech bubble. But, now, it’s a decade-plus later and all the things that they were rightly concerned about are all coming true. And we are now reaping some of the benefit, but we’re also now building on — we’re sort of standing on the shoulders of giants, as it were.
RITHOLTZ: And to clarify, I believe that fund doubled over 7 or 10 years, not like it was a sinkhole, but compared to what it could have done, had that money been invested elsewhere, it might have seen better returns. But it wasn’t — I don’t want to make it sound like it was total loss. So the second question is, you’re making seed investments, how does that work if you want to bring one of those seeds to your firm, to Union Square Ventures? And from a public market, that sounds like it’s a compliance and conflict nightmare. You guys approach it differently.
WENGER: In our LPA, we can write checks up to $100,000. So we can’t make massive investments in startups. So all of the companies you mentioned have a sub $100,000 investment. And then the only one where I’ve invested more is Marvel Fusion. We can invest more once the fund has passed on something. So if the fund says we’re not doing this, then we can invest.
RITHOLTZ: Got it. Interesting. So along those lines, there are some venture firms that don’t really seem to care a lot about valuations and others seem to focus on a little bit. How do you fall in that spectrum? Is valuation significant, or is it, hey, we’re going to make 100 investments and if two or three workout, the valuations are irrelevant?
WENGER: No, we’ve definitely always been disciplined on valuation, and we’ve let a number of things go. Sometimes we let them go and they do great, like, “Well, we could have made money if we had invested.” And sometimes you’re very happy at that. Our approach is we’ve always kept our fund sizes small, so we don’t need to be in everything that’s out there. Our latest funds are — our core fund is $250 million. So these aren’t big funds in the scheme of things when you have other firms that raised $3 billion. $8 billion, $15 billion per fund. And as a result, if we think the price is too high, we can just find something else.
RITHOLTZ: So let’s talk a little bit about some of those bigger funds, and I guess we’ll hold Softbank off to the side because that was really aberrational. But do you end up when you have lots of $10 billion and $20 billion venture funds, with too much capital chasing to a few good deals? How does this impact the whole ecosystem that’s out there?
WENGER: Largely, it’s great for us because we’re early stage investors. So it means there’s lots of money to come in and fund later rounds of the companies we’ve invested in. So we haven’t really spent much of our time worrying about it. And then every once in a while, these firms go. We’re going to go really early and some of them do spread money early. But we find, because we’re thesis-driven and because we are opinionated, on deals that we’re really interested in, we can win those deals.
Sometimes they’ll take a small check from somebody else along for the ride, but they know that we work with early stage companies that we roll our sleeves up, that we’re involved, and that we have a thesis. And you know, we take the approach we’d rather disagree with the founder and then not invest than sort of like — be like, “Oh, well, whatever it is you want to do.” Like, we have a thesis as to why we think this is interesting. Let’s talk about this. If it’s aligned, great. And obviously things may change after we’ve invested. We’re not like stubborn, you know. But let’s talk about why we are excited. And if that aligns with you, that’s great. If it doesn’t, let’s go separate ways, right?
So we take a kind of — I call it a high alpha approach investing. We’d rather have really upfront conversations about what we like and don’t like than sort of get married as it were. And actually, it’s harder to get rid of VC than it is to get a divorce. So like we think it’s good to have these conversations up front, right?
RITHOLTZ: What about follow-up rounds, or some firms that will do a seed round, and then participate in an A or B round? Is that something that Union Square does?
WENGER: Well, we reserve a lot of funds for follow-on, and we have a very sort of, I think, sophisticated reserves methodology that we’ve honed over many funds cycles now, where we actually built kind of a Monte Carlo analysis of the portfolio to see how much money we think we need to keep in reserve. But eventually, when the valuations get too high, the rounds get too large, we don’t follow on. We have a separate vehicle called the Opportunity Fund, where we sometimes write bigger checks into late-stage rounds in some of our portfolio companies, but not always.
RITHOLTZ: So let’s talk a little bit about this book, “The World After Capital,” starting with what is technological nonlinearity? I liked that phrase.
WENGER: The basic idea is that every once in a while in humanity’s history, we invent things that radically change what we, as society, have as a binding constraint on us. So let me make that very concrete. For hundreds of thousands of years, our ancestors were foragers. They were hunter-gatherers. They would go out and find things, and eat berries and kill little squirrels. And then roughly 10,000 years ago, we had a bunch of inventions. We figured out that you could plant seeds, that you could irrigate them, that you could domesticate animals, that you could use the dung from the animals too as a fertilizer. We figured all those things out and we got agriculture.
And the constraint shifted from how much food can you find to how much land — arable land do you have. And when that constraint shifted, we changed just about everything, about how humanity lives. Like, we went from being migratory to being sedentary. We went from very flat tribal societies to very hierarchical agrarian societies. We went from being, clearly, like polygamous, polyamorous, whatever you want to call it, to being monogamous-ish. We went from having religions where, you know, everything was a spirit, a tree, a rock, everything had a spirit, and then we went from that to theistic religions where there was some different number of gods.
Then fast forward to a couple 100 years ago, we had sort of the enlightenment. With the enlightenment, we had sort of big scientific breakthroughs and we figured out how to dig up stuff out of the ground and burn it and create energy, and make heat and electricity and all those things. And the constraint of it again shifted from, you know, how much land do you have to how much physical capital can you create? How many machines can you build? How many buildings, roads, railroads, et cetera?
RITHOLTZ: That’s really interesting.
WENGER: And we changed everything yet again. And so now the point of the book is, guess what? We have to change everything yet again, because capitalism, this is why the book is called “The World After Capital,” capital is no longer the binding constraint. Instead, it’s human attention.
RITHOLTZ: Human attention, so that’s the third great shift is. So we went from agricultural scarcity to having enough food.
WENGER: We went from forager to agrarian, so from food scarcity to land scarcity, then we went from land scarcity to capital scarcity. And now, we’re going from capital scarcity to attentional scarcity.
RITHOLTZ: Capital is no longer scarce. So now attention is the new scarcity, which there’s a line in the book that really caught my eye, attention is time plus intentionality. Explain that.
WENGER: Yeah. So speed just tells you how fast you’re going. Velocity tells you how fast you’re going towards something, towards some destination.
RITHOLTZ: Speed plus direction.
WENGER: Speed plus direction is velocity. And the same is true for attention. Time just tells you how much time has elapsed, you know, two hours. Attention is what was your mind and your body doing during those two hours. Were you, you know, just scrolling Twitter, or were you like working on a solution to the climate crisis?
RITHOLTZ: So you say something about these transitions that really jarred me. Previous transitions like agriculture emerged over thousands of years and was incredibly violent. Industrial Age lasted over hundreds of years, and also involved lots of violence and bloody revolutions, and two World Wars, which raises the obvious question, what sort of violence is the next transition based on attention scarcity potentially going to involve?
WENGER: Well, at the moment, the leading candidate is the climate crisis. We have known about it for literally hundreds of years, actually, and we have refused to do enough about it. And so now, we have entered the state where we’re getting extreme heat events. We’re getting extreme drought events. The food supply is definitely in question. Something that we have taken for granted for many years now. We’ve taken for granted that you can go to the store and buy food. Unless we really course correct very hard, very dramatically, and by dramatically, I mean, the level of government activation that we had in World War II. In World War II, we spend roughly 50% of GDP on the war effort. We need to spend roughly 50% of GDP on the climate crisis for several years sustained in order to actually avert it.
RITHOLTZ: So that suggests that you don’t think there’s going to be some technological magic bullet going to appear out of nowhere?
WENGER: Well, if you look at World War II, the government went to Ford and said, “We need you to build airplanes, not cars.” And actually, there’s a chart in my book that shows that output of cars dropped. We need to get to a similar point where we’ll say there’s certain things we’re just not going to do for a while because we need to do these other things.
There are great technologies. We don’t need to invent some magic bullet that doesn’t exist. We just need to build a lot of what we already know how to build. Like, we need to build a lot of nuclear power plants. We need to build a lot of these ponds in the desert that can draw down carbon. There’s 1001 different things that we need to build. We just need to take our physical capital and point it at that. And when you do that at that scale, incredible things become possible.
So, during World War II, Ford Motor Company built a plant, it was called the Willow Run facility. And in Willow Run, they built the B-17 Liberator bomber. Now, that’s a four-engine bomber, with lots of gun turrets to defend against fires. At peak production, they finished — they finished one of these every hour.
WENGER: They finished a complete airplane every hour. And my point is once we decide to take our attention, and allocate our attention to what the real problem is, we can redirect our physical capital. We have plenty of physical capital. People say, “Oh, you can’t build nuclear power plants fast enough.” That’s if you built them in peacetime mode. If you built them in wartime mode, you could build them very rapidly.
RITHOLTZ: So when you say this requires a substantial commitment of capital, let’s put a dollar amount on that. Are you talking —
WENGER: Half of GDP. I’m saying half of GDP.
RITHOLTZ: So you’re saying $10 trillion?
RITHOLTZ: Just in the U.S. alone?
RITHOLTZ: Now, we just passed a climate bill, arguably, that was a couple of billion dollars, $100 billion maybe over 10 years. And it was like pulling teeth, it was a miracle it just managed to skate through. And that’s a fraction of a trillion dollars. How you’re going to get 10x or 100x? Do things have to get much worse before they get much better?
WENGER: Yeah. I mean, there’s a book about the climate crisis called “Ministry for the Future,” by Kim Stanley Robinson. And the book starts with a devastating heat event in India, where tens of millions of people die. I don’t know what it takes. But I can tell you, it’s only going to get worse, it’s going to get a lot worse. And at some point, hopefully, people — enough people will wake up and say, “No, no, we really actually have to get into a wartime footing.
RITHOLTZ: So up till now, a huge swath of the population has been asked my grandkids problems, what wakes them up? Is that sort of events? I mean, you see what’s happening in California. You see what’s going on in lots of the United States with droughts. It seems like people are starting to pay attention.
WENGER: Oh, absolutely. Yale does an incredible survey of climate attitudes. And it is very clear that even in the U.S., which has been lagging on this, a significant majority of people believe that the climate crisis is real, that is caused by humans, and the government should do something about it. So I actually believe this is going from a kind of a losing proposition for politicians to a winning proposition. And I think politicians need to be much more into it.
Most of them still aren’t willing to acknowledge the full extent of this crisis. And the physics of this crisis are extraordinary. So because of all the CO2 we’ve put in the atmosphere, the amount of heat that we’re now trapping that used to radiate out into space, do you know how much heat it is? It is four Hiroshima-sized nuclear bombs every second.
RITHOLTZ: It’s insane. I read that in your book and I was like, no, no, he must mean every week. Every second?
WENGER: Every second. Now, imagine for a moment you had alien spaceships above Earth, throwing four Hiroshima-sized nuclear bombs into our atmosphere every second.
RITHOLTZ: That would put us on a wartime footing?
WENGER: And what will we do? Yeah. We would drop everything, right? We would be like, “They’re trying to kill us. We have to get rid of them.” I mean, we made a movie about it called Independence Day.
RITHOLTZ: Four nuclear bombs every second?
RITHOLTZ: And it’s just —
WENGER: Of every minute of every hour of every day, it’s a mind-boggling amount of heat.
RITHOLTZ: So there’s a couple of other things in the book I wanted to touch on. You mentioned alien visitors. We’ll hold off on the Fermi paradox discussion because nobody wants to hear me babble about that. But one of the things I thought was kind of interesting is the transition of the nature of scarcity. You’re right, it changes the way we measure human effort. It makes it more difficult, and we need increasingly more sophisticated ways of providing incentives to sustain unnecessary level of effort. Flash that out a little more.
WENGER: So if you think of hunter-gatherers, right, I mean, you can see the results of effort immediately.
WENGER: Like, you go to the forest, you either come back with something or not.
WENGER: So it’s very easy to create incentives. Like, if you don’t find something, go back hunting and come back with something.
RITHOLTZ: Or you’ll go hungry. Right.
WENGER: When you go to agriculture, you have these, you need to see, you need to take care of it, and you don’t know how big a harvest you’re going to get. So you need a little more sophisticated incentive, and a lot of those incentives were often provided by a religion. Religion is sort of saying you have to apply yourself to this backbreaking work. This is the work of the Lord, et cetera. And then when we went over to capital, now it gets even more complicated because you might not see results of some effort for many, many years. I actually think when I say more sophisticated incentives, in the book, I talked a lot about just freeing up humans to pursue their interests, to make it so that you can freely allocate attention.
And I’m always very inspired by mathematics. Like, you can’t get rich as a working mathematician, basically. I mean, yes, if you wind up going to Wall Street, you can. But if you actually keep working as a mathematician, that’s not a — you know, there’s also no patents. And you know, the only thing math works on recognition by peers, and there’s some prizes. There’s like the famous Fields Medal, and there’s some other prizes. And yet, the amount of math that’s been produced over the last, you know, few decades is just mind-blowing extraordinary. And I believe we need to bring that type of model to many, many more parts of the economy and parts of activity.
So in a way, what all of “The World After Capital” is about is how can we shrink all the explicitly incentivized economic activity, where there’s an explicit, okay, you go to work and you get paid a wage kind of thing. And here’s a market transaction, how can we shrink that and make room for things that are super, super important, but cannot have prices, cannot be economically incentivized? Let me give concrete examples of that. Obviously, we’ve talked about the climate crisis. But let’s talk about death from above. Like, every million years or so, the earth gets hit by something very large out of space. That’s very, very bad when it happens. But there’s no market for allocating resources to that. There’s no supply and demand for it. So we, as humanity, need to decide that this is a real problem and we ought to be working on it.
RITHOLTZ: Now, aren’t we tracking various large observed asteroids and doing some stuff?
WENGER: We are, but the amount of effort we’re putting into this relative to the size of the problem is minuscule. The number of people who sort of truly globally work full time on this is a tiny fraction of the people we actually should have. And we’re also not working sufficiently on like what will we do if we detected one that’s clearly headed for us, right?
RITHOLTZ: Well, you send Bruce Willis up and —
WENGER: Exactly. Yes.
RITHOLTZ: — he takes it, right?
WENGER: Yeah, he does.
RITHOLTZ: I mean, it’s not unknown. We know the regular major extinction events. There’s a real interesting theory that as the sun goes around the galaxy and passes over and above the galactic plane, that affects the asteroid belt and —
WENGER: The famous Oort cloud is where a lot of these objects — yeah.
RITHOLTZ: Right, which is full 360 around the —
WENGER: Yes. So we know all of this. And here’s the interesting thing. When we went from the agrarian age to the industrial age, we didn’t get rid of agriculture. This agriculture today, right, we all eat food that’s grown in agriculture. But what we did is we shrunk how much human attention is required to do agriculture, and we took it from being like 80% of human attention to like sub 10%.
RITHOLTZ: It’s less than 2% in United States. It’s tiny.
WENGER: So what I want to do is, let’s do the same with the rest of the economic sphere. I’m not an anti-capitalist. I’m not a degrowth. Person. I’m not suggesting we should get rid of markets. I’m just saying we should compress market-based activity from absorbing much of human attention to absorbing maybe 30% of human attention, and we should free the rest up to work on these incredibly important thing. Some of them are threats, and some of them are opportunities, right, opportunity to cure cancer, opportunity to create incredible wildlife habitats, restore those wildlife habitats, opportunity to travel to space. I mean, all these opportunities that we’re not paying attention to because they’re not — again, they’re not really market price based and can’t be market price based. There’s just no prices for them.
RITHOLTZ: So the conclusion of the book had a list of action goals, which was not what I was expecting in a book on venture capital and “The World After Capital;” mindfulness, climate crisis, democracy, decentralization, improving learning, and humanism. Address whichever those you feel like.
WENGER: Well, these are all core components of how to have a — hopefully, a transition that’s not a violent transition, right? These are all about how could we get out of the industrial age into the knowledge age without some cataclysmic event, without a world war, without killing billions of people through the climate crisis, right? They’re also all components of what a knowledge age society might look like. Right?
So let’s talk about mindfulness for a second. We’re constantly assaulted with new information now. You know, our brains evolved in an environment where when you saw a cat, there was an actual cat. Now, there’s an infinity of cat pictures. So if you don’t work on how you — how much you are in control of your mind, external sources will control your mind. So mindfulness, which is a much abused word, but it has become much more important in a world where we’re constantly assaulted by information flows, right?
Let’s talk about humanism for a moment. Humanism is about recognizing that humans are the prime movers on this planet. We are the ones who have brought about the climate crisis. We are the ones who put a theory to solve it, or wind up getting wiped out by it. And it’s about this idea that, you know, with great power comes great responsibility. And so, we are responsible for the whales, not the whales for us.
There is — at the moment, because we’re in this transition period already, and because things are going so poorly for so many people in this transition, there’s no a flight back to religion, there’s a flight to populism. And a big part of the book is about, no, there is a secular alternative way of thinking about society that embraces science, that embraces progress, that embraces humans and all types of humans, and that recognizes that we are first and foremost human, and only secondarily are we American, or Russian, or male or female or something else. You know, these are all secondarily. But primarily, we’re humans, and humans are fundamentally different from all the other species on the planet.
RITHOLTZ: Quite fascinating. So let’s talk about the current state of the world for venture capitalists. We’ve seen valuations come way down for public companies. They’re pretty reasonably priced these days, about 16 times for the S&P 500. That’s historically, more or less, average. Where do you see the state of the world in early stage valuations? How are they holding up? A year ago, late stage valuations had gone just bonkers. Tell us a little bit about what’s going on today.
WENGER: The correction always, basically, is a trickle-down type of correction. It happens very rapidly in the public markets. Then you still get some high-priced private rounds that either were in the works, or they have a lot of structure. In the later stage markets, you know, there’s a headline number. But then nobody talks about all the war in coverage that’s behind the scenes. And then the early stage valuations tend to sort of lag behind all of that. But we’re seeing early stage valuations come down. And as a firm, we’ve always been disciplined on valuations. So we just let a lot of things go where we just thought it was —
RITHOLTZ: Are they down off the peak, or are they cheap and attractive?
WENGER: The down of the peak, whether they’re cheap or attractive, I think, you know, time will tell. But we are back in a situation where, you know, there are seed deals getting done that’s below $10 million, certainly below $20 million, and you know, seed rounds that have a reasonable size. So you know, for a while we were seeing these $10 million, $20 million, $30 million seed rounds.
RITHOLTZ: It sounds pricey.
WENGER: Yeah. And that’s not happening anymore. But at Union Square Ventures, we’ve also always tried to basically be at the next era, at the next thesis and evolve our thesis before everybody else gets there. And once everybody else gets there, try and evolve our thesis. And so, for example, in the Climate Fund, we’ve made any number of reasonably priced investments, very reasonably priced.
RITHOLTZ: So I always assumed it was tied to the public markets. But sometimes you just don’t realize, when you have a good couple of years in a row in the public markets, like we saw in the 2010, pretty much straight up through 2021, you see that impact and what people are looking for, what sort of deals get done, and valuations generally.
WENGER: I always find it relatively surprising how much private early stage valuations are tied to public markets because our holding —
RITHOLTZ: That’s the exit, right?
WENGER: But our holding periods are 5, 8, 10 years. And so, like, what’s the current public —
WENGER: And so there’s a couple of different explanations. One, obviously, is just investor sentiment, right?
WENGER: You know, when investors are like bearish because of what they’re seeing in the public markets, they take a bearish attitude towards their own investing. We try — at Union Square Ventures, we try to have a pretty steady pace as one way of contracting our own sort of — you know, whatever our own emotions may be about the public markets.
There is, however, another effect that sometimes is underestimated, which is that the people who give money into venture funds, so these are pension funds and endowments, and so forth, they have a certain whip from the public markets, because when they’re feeling flashed on the public markets then their private allocation, you know, as a percentage of their overall portfolio, they have a certain target in mind. Then when the public markets come down a lot, all of a sudden, they’re overallocated, so they want to pull back.
So there is a mechanism by which the current public markets transmit into the private markets. There’s a real financial mechanism. There’s a psychological mechanism and a real financial mechanism by which some transmission, some contagion basically happens from the public market into private market. But it doesn’t make very much sense. Like, if people were sort of more cognizant of both that emotional reaction and this mechanism, they’d be like, “Well, yeah, but innovation is happening at some pace. In some area, there’s some innovation and we should be funding that innovation.”
RITHOLTZ: So I’m just making notes, investors are irrational.
WENGER: Deep and profound insight right here.
RITHOLTZ: Right. There you go.
WENGER: You’ve never heard this one before.
RITHOLTZ: So to put that into a little context, 2020, 2021, very founder-friendly deals. Now, it seems like a little more investor-friendly, a fair assessment or not quite there yet?
WENGER: Well, when it comes to founder-friendly versus investor-friendly, there’s a lot more to deal than valuation. There’s all the other terms. And while I believe we will see a correction on valuation that’s pretty significant, I don’t think we’re going to go back to where venture capital was 20 or 30 years ago, that had all these super draconian terms. Certainly, even at the early stage, even at the early stage, there were all these like — there were redemption provisions in the early stage deals. I don’t think that’s going to come back.
We are not fans of structure in latest stage deals. Like, just to give a good example, when I was still on the board of Twilio, Twilio had the option of doing a totally clean, no structure round and call it $1,000,000,001. In a highly structured round with like — you know, we’re going to have a full ratchet into an IPO at a $1,000,000,005. And I was — you know, some of the other investors at the table really wanted the $1,000,000,005 number because it’s a big headline number. And I talked to Jeff and I said, “It doesn’t make any sense.”
WENGER: You don’t actually know what your deal is until many years. Like, just take the deal where you know what the deal is today and you know what the deal is a year from now, and two years from now, because it’s not going to change based on circumstances.
WENGER: And so Jeff took the clean deal, and that enabled Twilio to go public when the IPO window reopened. Whereas at the $1,000,000,005 deal, they wouldn’t have been able to go public. And that worked incredibly well for Twilio to become a public company.
RITHOLTZ: Really interesting. So since we’re comparing early stage investments to the public world, lately, everybody has been looking at different sectors the past year. Energy has done well, technology not so much. Within venture, do you see that same sort of segmentation, different sectors have different —
WENGER: Well, we were basically the first sort of venture firm to have a dedicated climate fund. And now, many of the venture firms are following suit, either adding a climate pocket to their existing funds, or a climate thesis or, you know, some people call it sustainability fund. Ours is very focused on climate. So for instance, we don’t deal with water waste. It’s strictly about atmospheric carbon. So there’s a lot money rotating into that sector.
There’s still healthy sort of activity around Web3. So you know, Web3, there’s still —
RITHOLTZ: Crypto, blockchain, all that?
WENGER: Yeah. There’s still healthy sort of activity. I do think that certain kind of software companies that had found it very easy to raise money, I think they’re finding it a lot harder, just because people have looked at it and said, “Wow, I think we’ve reached some stage of normalization in this market.” You know, like, not everything in this market is going to be a $50 billion outcome. There’s going to be many, much smaller outcomes, and so we need to adjust accordingly. And also, many of these markets had just too many companies raised venture capital doing basically more or less the same thing.
RITHOLTZ: So it was easy to raise money for a fund today, a little more challenging, even if you’re a pretty decent sized VC with a 10, 20-year history. Are they having difficulty going back to their clients saying, “Hey, we’re doing another billion dollars?”
WENGER: You know, I think that we will only see a year from now, or two years from now. There were a lot of funds that have put out a lot of money very, very rapidly, and we’ll see just how big the hangover is. But we won’t know that for some time.
RITHOLTZ: So some of the folks who give advice to founders like Chamath and Jason, and the crew with the All-In Podcast, they’ve been talking about — preaching really about cutting costs and reducing your burn rate, and get ready for a tough year or two. How do you see this environment? Is that good advice, or do you really have to, you know, go all out and get more funding as opposed to trying to make a more modest burn rate last longer?
WENGER: There’s very little one size fits all advice that makes sense.
WENGER: Nonetheless, we held a call early this year for all of our portfolio companies. And we said this really is a big adjustment and it’s not a one or two months’ blip. This is a long-term adjustment. And it was great because we had some CEOs in our portfolio who had managed through the implosion of dot-com bubble, and they spoke about just how difficult the funding environment can get.
So generally speaking, we did a lot in ’21 because we saw this coming. To me, the biggest sign of the bubble really was — that we really were reaching the tail end, was all these incubation efforts that were being raised. And I knew this because I had raised money into an incubator in ‘99, towards the end of the dot-com bubble. And I think when investors think, “Oh, I don’t even need the entrepreneur, I can just start the company myself,” that’s kind of when you know that it’s gotten too easy, right? And that’s not going to lie.
So in ‘21, we took a lot of liquidity. We sold a lot of things that we were able to sell. And we told all of our portfolio companies to raise money. And so —
RITHOLTZ: Last year, this is —
WENGER: ‘21. Yeah. Well, it’s best to do things before.
RITHOLTZ: Sure. Sure.
WENGER: Right? So as a result, we have very few companies in our portfolio that need to raise. We have some, but we have very few. And then, you know, at the beginning of this year, we told everybody who had raised successfully, “You got to make this money lasts much longer than you thought when you raised it.” And so, yes, absolutely.
You know, companies were operating with very inefficient growth. Because it was easy to fund inefficient growth, you could be burning $1 million, $2 million, $3 million, $4 million a month. And you know, if you were growing 405%, 50%, 60%, that was good enough. That’s not going to be the case. So you’re either growing very fast, or you have something very compelling, in which case you can raise money, or you are growing, you know, 20%, 30%, but you are growing very, very efficiently, right? So being in the sort of 50% growth, but you’re super inefficient, that’s going to be a really tough place to be.
RITHOLTZ: All right, so before I get to my favorite questions, I have two questions I’ve been sitting on sort of from the book and some from your blog continuations that I want to hear where you go with this. And the first one is a quote from the book, “Malthus could not foresee the scientific breakthrough that enabled the Industrial Revolution.” I think you let him off the hook a little too easy. It’s just an abject failure of imagination. And you are in the imagination business. The Malthusians, weren’t these folks just unable to imagine any sort of progress or technological development?
WENGER: Well, we have had more progress and more technological development than people were able to imagine. I think, conversely, we’re now in the opposite trap. We can’t imagine that things could get really, really bad. We can’t imagine that the climate crisis could disrupt our food supply to the point where billion people starved. We simply can’t wrap our head around this idea. So I think we’re in the opposite trap at the moment. We’ve been so used to the success of progress, and we’ve so neglected the engines that produce progress, that I think we’re in the opposite trap at the moment.
RITHOLTZ: What are the other engines? Is it early stage investing from governments when the project has a 10 and 20-year ROI that the private sector won’t do it?
WENGER: It’s foundational research. We’ve not had a true breakthrough in science since quantum mechanics. It’s a hundred years ago. So general relativity and quantum mechanics are hundred years ago. Now, we’ve made some progress in biology. Biology, we’ve had some really good progress. But you know —
RITHOLTZ: You’re talking fundamental science not technology.
WENGER: Fundamental science.
RITHOLTZ: Like, I immediately think of semiconductors was a giant —
WENGER: Oh, no, incredible progress. But fundamental science, we’ve not had a true big unlock in a hundred years. Now, I think when we talk about engine of progress, this is also how hard is it to start a business? How many regulations do you have to comply with? How expensive is it to comply with those regulations? We’re also talking about — we’re still subsidizing oil and gas globally, to the tune of trillions of dollars.
RITHOLTZ: Yes. Yes.
WENGER: Subsidizing oil and gas, it’s crazy.
RITHOLTZ: Which by the way, helps to explain why so many people have an incentive to either question the impact, the source or the reality of climate change.
RITHOLTZ: There’s forces that work there.
WENGER: And so, I believe we’re in this sort of opposite trap today. And you know, people like to make fun of Greta Thunberg. But young kids, young activists understand the severity of the climate crisis in a way —
WENGER: — in a way that most adults don’t seem to be willing to accept.
RITHOLTZ: Right. I don’t think climate change is going to impact my life. You know, I’m 60. I’m going to run out the clock.
WENGER: You’re not.
RITHOLTZ: Someone your age —
WENGER: The reality is you’re not. You’re not going to escape. You and I are not going to escape this. It’s here, it’s now and it’s only going to get worse.
RITHOLTZ: I don’t doubt that for a second, but —
WENGER: And here’s the thing, I think —
RITHOLTZ: I challenge —
WENGER: We could live in this amazing, incredible future. Like, wouldn’t you rather live in a city that has mostly electric or all electric cars in it? Like, the air would be so much better. Wouldn’t you rather live in a world that has huge — like, think of all the Midwest, instead of growing corn to feed cows —
WENGER: — super inefficient. If we can grow the meat of the cows in the vast instead, we could have like incredible forests. We could have incredible wildlife areas. Like, we could have this amazing, incredible future. We could have energy reserve. If we build more nuclear power, electricity could basically be almost free. So we have this amazing thing we can go. Instead, we’re headed for this complete disaster and we’re mostly like, “eh.”
RITHOLTZ: I think that’s a fair assessment. I think you definitely have that. And I certainly see people my generation, absolutely think it’s not going to impact them or minimum impact, it’s really the grandkids’ problem.
WENGER: Yeah. And it’s just — that’s totally, utterly wrong.
RITHOLTZ: All right, one other curveball I have to ask you about, which involves Yuval Noah Harari, who says in Sapiens, “All value systems are based on equally valid, subjective narratives, and humans have no privileged position as a species.” You say he’s wrong. Explain.
WENGER: Not just wrong, it’s completely dangerous because it opens the door to absolute moral relativism. It’s sort of like, well, if you believe that, then, you know, the ISIS narrative is just as valid, you know, and I just think that’s wrong. And I do think there’s an objective thing, which is humans have knowledge. And by knowledge, I mean, I can read a book today that somebody else wrote in some other part of the world a thousand years ago, right? No other species on the planet has this.
I mean, other species have amazing things about them, but none of them has knowledge. And that puts us in a privileged position. By the way, privilege comes with obligation. That’s usually what it used to mean. Today, we think of privilege just it lets you do whatever you want. But it used to mean that you had real obligations, right? And I believe because we have the power of knowledge, we have real obligations to other species. Other species don’t have much of an obligation to us, but we have an obligation to them.
RITHOLTZ: And the interesting thing about what you said is not only does no other species have the ability to access anything, anybody has written, anytime in history, pretty much this is the first generation that had access in that way, across — pretty much across the whole board.
WENGER: Well, this is the amazing thing about digital technology, right? We could use it to make all the world’s knowledge accessible to everybody in the world. And great things could come from that, right? So there’s some people like Elon Musk and others who are like, “Oh, my God, the population is going to, you know, decrease a lot and that will be bad.” I’m like, no, we have 8 billion people at the moment, peak population. The present trajectory might be 11 billion, although if we don’t get on top of the climate crisis, it will decrease actually rapidly.
But we’re making such poor use of it. Why? Because so many people don’t have access to knowledge, don’t have a shot. I always love the story of Ramanujan, the famous mathematician, who used to send a letter to Hardy. And Hardy was like, “We should bring this guy over to England and he would have been a very productive mathematician.” There are Einsteins, and Ramanujans, and Elinor Ostrom, and Marie Curies all around the world today, and we’re not giving them — so we’re vastly undertapping human potential. And we can use digital technology to change that and to give everybody access. And that’s one of the things, one of the great opportunities that we have in this transition to the knowledge age.
RITHOLTZ: Quite, quite fascinating. So let me jump to my favorite questions that I ask all of my guests, starting with, tell us what kept you entertained over the past couple of years. What have you been watching or listening to?
WENGER: I really don’t watch much. At the moment, the only thing I watch with any kind of regularity Sabine Hossenfelder’s YouTube series called Science Without the Gobbledygook.
RITHOLTZ: I’ll take a look at that. I’m a giant fan of YouTube Premium, and I’m always astonished that people I know who are YouTube junkies won’t spring for the 8 bucks a month to pull out commercials and distractions. But YouTube is just an endless rabbit hole.
WENGER: Well, YouTube is an example of the best and the worst of the Internet all in one place, right? There’s so much amazing knowledge like Sabine’s videos, Veritasium. I mean, you could learn almost anything from how to fix your dishwasher to how — you know, the theory of general relativity works. At the same time, YouTube is also this place where tons of people, you know, become radicalized or redpilled, or whatever it is, because the algorithm — the algorithm has the wrong objective function, right? Its objective function is engagement. It’s not lifting people up.
RITHOLTZ: Tell us about some of your mentors who helped shape your career.
WENGER: I was super, super fortunate when I was an early teenager. We talked about this, when I first fell in love with computers. I lived in a relatively small village in Germany. And there was one computer science student there who was maybe 10 years older than I was. And he just spent time with me, and he gave me his books, and he gave me his floppy disks with software, and he helped me sort of understand all this. And I’m forever grateful to (Anstur Guenther), wherever you are in the world.
RITHOLTZ: That’s really interesting. Have you spoken to him anytime recently?
WENGER: No, because I haven’t been able to find him. Basically, he seems to have disappeared.
RITHOLTZ: Well, if you’re listening, reach out to Albert. Tell us — we mentioned a number of books. Tell us about some of your favorite and what you’re reading right now.
WENGER: Favorites, I would say David Deutsch, “The Beginning of Infinity” is definitely one of my favorites.
RITHOLTZ: I just ordered that because of you.
WENGER: I’m reading at the moment, a book by Ada Palmer called “Perhaps the Stars.” It’s the fourth book in a series called the Terra Ignota Series. She’s a professor at the University of Chicago.
RITHOLTZ: What sort of advice would you give to a recent college grad who is interested in a career in either entrepreneurship or venture capital?
WENGER: Develop a mindfulness practice, you know, whatever works for you, whether that’s yoga, running, for me, it’s conscious breathing. I just think it’s such a superpower not to get hijacked by your emotions. It’s a true superpower. And the more humans can cultivate it, the more we can achieve.
RITHOLTZ: That’s really, really intriguing. And our final question, what do you know about the world of venture today that you wish you knew 30 or so years ago when you were first getting started?
WENGER: There will always be another bubble.
RITHOLTZ: There will always be another bubble. That’s amazing. Just human nature can’t be avoided.
WENGER: It can’t be avoided.
RITHOLTZ: And what should we do in anticipation of during and after bubbles?
WENGER: We should acknowledge that they will come, that they’re part of how we operate, that you can make money before, during and after.
RITHOLTZ: There you go. Really, really fascinating stuff. We have been speaking with Albert Wenger. He is managing partner at Union Square Ventures. If you enjoy this conversation, well, be sure to check out any of our previous 400 or so discussions we’ve had over the past eight years. You can find those at iTunes, Spotify, or wherever you get your favorite podcasts from.
We love your comments, feedback and suggestions. Write to us at email@example.com. Sign up for my daily reading list at ritholtz.com. Follow me on Twitter @ritholtz. I would be remiss if I did not thank the crack staff that helps put these conversations together each week. Sarah Livesey is my audio engineer. Sean Russo is my head of Research. Paris Wald is my producer. Atika Valbrun is our project manager.
I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.