Sramana Mitra: What are your thoughts on the Unions Square’s analysis of the unicorn phenomenon? How are you thinking about unicorns?
Rebecca Kaden: We want our companies to be as big as possible. What piece of it are you curious about?
Sramana Mitra: I’m sure you want all your companies to be as big as possible, but some very unhealthy models and practices have developed in the industry around trying to get as big as possible. For example, flushing companies with capital without figuring out a lot of the unit economics or fundamentals is a rampant practice right now in the industry. How do you view all that?
Rebecca Kaden: USV tends to be very thoughtful. We, in general, don’t do companies that are going to require massive amounts of capital. We tend to trend towards capital-efficient companies that are largely software-based. We’ve stayed away from that trend and yet seen very strong growth in much of our portfolio anyway. We don’t believe that funding is the only way to grow a company.
That being said, we can criticize a lot of things and yet, in certain instances, it looks like it works. We have to think whether we are criticizing because it’s uncomfortable and different or we’re criticizing because it’s not creating a great company. Uber raised a lot of money without knowing the unit economics, but it looks like that probably worked. Now, it’s a very large dominant business. It’ll probably have a very strong IPO.
It’s not the trend of business growth that we focus on here. But I think we have to be a little careful in saying it’s unhealthy if we have to understand really what that means. So, I do think it’s important to have strong business fundamentals early in unit economics, and it’s generally the things that we trend towards. A decade ago, it was a lot about structural dependability and network effects. The platform had product defenseability as they scaled. It was very hard to compete with them because the network grew and it was hard to get user mindshare.
With many of the growing companies right now, that’s actually not true. There’s actually nothing as structurally defensible about the businesses. A lot of them take the path of capital defenseability which is, “We’re going to outraise the competitor.” We’re going to have a better balance sheet. We’re going to outspend our way to being hard to compete with. That is uncomfortable for a venture. It’s definitely a newer trend, but there are categories in which it’s working. I try to admire companies that have achieved scale and understand them. I think there is a place for it in the overall ecosystem.
Sramana Mitra: The viewpoint is very well taken that there’s a place for a certain kind of companies – a certain style of companies that can defend with capital. There are a couple of points that I want to make that are counter to that. One is, we’re seeing death by overfunding scenarios by following that strategy. We’ve covered it quite a bit.
We also have to show that we can aim for blitz scaling, but blitz scaling also leaves a lot of cadaver in its wake because it’s a very high-risk strategy. Part of the risk of that strategy is that very often people stop being successful in raising money. You can’t succeed if you die along the way.