Hit products like the iPod, the iPhone and the iPad are fueling Apple’s logic-defying growth. The latest entry — the iPad, introduced in April — is on track to deliver $15 billion to $20 billion in revenue in its first full year of sales, estimates A. M. Sacconaghi, an analyst at Sanford C. Bernstein. At that size, if the iPad were a stand-alone company, it would rank within the top third of the Fortune 500.
We founded Union Square Ventures in 2003 to invest in the applications layer of the web. Over the last seven years, we have refined that investment focus. We now invest almost exclusively in Internet services that create large networks. Some might think this focus is narrow. We don’t see it that way at all. We believe the irresistible economics of Internet networks will ultimately transform the entire global economy. We continue to be very excited by the opportunity to invest in that transformation.
Early on, we recognized that investing in web services was different than investing in chips, routers and enterprise software. The start-ups are more capital efficient. Differentiation is more about user experience than proprietary technology. Defensibility is more about network effects than patents. We have designed our small, collegial, partner driven firm specifically for this new opportunity. Smaller fund sizes allow us to invest only as much as an entrepreneur needs and our successful portfolio companies can have a big impact on the funds’ returns.
Since 2004, the opportunity to invest in networks has evolved. In 2004 the entire market capitalization of the social media sector was probably less than $100M. Today a single company in that sector is valued at over $50B. The amount of venture capital focused on the sector has exploded. Networks that did not exist in 2004 now consume a huge chunk of users’ time and attention, making the launch of new networks more challenging. The opportunity to invest in networks has changed, and once again we are changing with it.
Today we can publicly announce the formation of the Union Square Ventures Opportunity Fund. This fund is meant to complement our core funds, not take us in a new direction. We will continue to be obsessively focused on the leverage of large networks and their resulting transformation of the global economy. The availability of this additional investment vehicle will allow us to 1) continue to invest in our most established and successful companies, 2) invest in more established networks that have been funded initially by others, 3) invest in special situations like the spin out of a network of scale, and 4) respond to attractive opportunities as the broader market continues to evolve.
The Opportunity Fund will be roughly the same size as our 2008 core fund. Our core funds will continue to define our business. We are very conscious of the risk that this additional pool of capital will cause us to drift towards later stage investing. To avoid that we have constructed this pool of capital to provide additional capacity only when we need it. We have told the investors in the Opportunity Fund (almost all of whom are investors in our core funds) that we are not committing to put the entire fund to work. And we are charging fees only on the capital that is actually invested. We believe these choices will result in a strong alignment of interests with our investors.
We are also thrilled to welcome John Buttrick to our firm as a partner in the Opportunity Fund. John has been a friend, advisor, and investor in USV since the very start of our firm. He is a highly skilled public and private markets investor who was a top deal lawyer before leaving the legal world for the investment world a decade ago. John’s experience with larger, more complex transactions will add a new and valuable dimension to our firm.
For entrepreneurs, this means that if you are leveraging the economics of Internet-based networks to transform some aspect of the global economy, Union Square Ventures can be a partner, whether you are just launching your service, funding rapid growth, or spinning your business out of a larger entity. We can work with you if you need $250,000 or $25,000,000. We can invest in New York, San Francisco, London, or Berlin, and most places in between. We hope you’ll think of USV as stage-agnostic, highly-focused investors who can add value to your company. That’s how we see ourselves. With the Opportunity Fund, we are better equipped to deliver that offering to you.