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The first investor in Twitter, Fred Wilson has a 30+ year track record of discovering new opportunities in technology. With Web2, he invested in Etsy, Tumblr, and Kickstarter, among many others. Today, Wilson is focused on Web3, a new technological architecture that will take creators and companies to entirely new types of business models. One of his latest investments is Dapper, an NFT start-up that returns the idea of scarcity to digital assets. Its last round valued the company at nearly $8 billion. Of course, Wilson was the first money in.
As interesting as the blockchain is to Wilson, he and his firm Union Square Ventures are also investing heavily in climate change and sustainability solutions. He believes the tools to solve our planet’s needs already exist: it’s the global urgency to attack the problem that’s still missing.
Learn more about Fred Wilson and how he sees the future unfolding in a permissionless world, for businesses, founders, and technologists:
Signal Conservation Part 1: Fred Wilson
Signal Conversation Part 2: Fred Wilson
Welcome to another Signal Conversation. This is a special one for me. My friend, my colleague and investor Fred Wilson, joins us. Fred’s been a venture capitalist for 35 years, and he is currently a partner and a co-founder of Union Square Ventures. Previously, he founded Flatiron Partners. He hails from MIT, where he has a Bachelor of Mechanical Engineering, and then also has an MBA from Wharton. He lives in New York City, where he’s chair of the New York City Department of Education, CS4All Capital Campaign, and co-chair of Tech:NYC. But more importantly, Fred is the most decent forward-looking, forward-thinking venture capitalist in the business, and he has an uncanny eye for where the puck is going in both technology and consumer platforms. Fred was the first investor into companies like Twitter, Etsy, Coinbase, and the NFT platform Dapper among countless others. His time and advice is invaluable. Entrepreneurs seek him out. It must be dozens or scores of them daily, seek his wisdom, as do investors and policymakers. We’re very fortunate to have him with us today. So thank you, Fred, for joining us.
Thank you, John. It’s a pleasure.
So I want to start kind of broad. Our audience here are generally executives in larger companies that are in more traditional markets. They may not even have a point of view on what the role of venture capital is, in our economy. How do you answer that question? What’s the job that venture capital does?
Our job is to support entrepreneurs at the earliest stages of their company formation process. I think real venture capital is early stage venture capital. Today, it’s a much bigger industry than that. But I always think of venture capital, as the first year or two of a company being formed and providing capital to that. Then being an advisor, board member, confidant, of those founders, and the management teams that they create, over a five to 10-year period, generally speaking. So our role is to really support entrepreneurship and in the innovation economy. And if we do it, we’re rewarded with financial returns. But I really think that entrepreneurs are our customer, and helping them succeed is the role that we’re supposed to play in the world.
And your firm in particular, is driven by what is now well known in the industry, you guys helped coin this term, you’re driven by an investment thesis, or several investment theses. What is the investment thesis? What’s your current investment thesis?
We’re looking to continue to back founders and companies that are using the power of the internet, the power of large networks that get built on the internet, to provide new services. And the verticals that we’re most interested in are financial services, education and wellness. But we do go out a little more broadly than that. But those are sort of our core areas that we like to invest in.
And you also have a new climate fund, don’t you?
We do. So that’s a new thesis for us that we developed about two years ago. We think that the climate crisis is going to require both adaptation, society’s going to have to adapt to living on a warmer planet, and also mitigation, trying to reduce the amount of warming as much as we possibly can. And so our thesis there is to invest in companies that are either working on the adaptation dimension or the mitigation dimension.
Are you encouraged by what you’re finding in those markets as it relates to innovative startups who might be able to help us with this sustainability crisis?
Yes. The last two years as we’ve been deploying our first Climate Fund has been a real education for me. One of the great things about venture capital is that we get to meet with scientists and entrepreneurs and technolologists and we learn a lot. It’s great. It’s like going to school every day. I’m pretty convinced that society has all the tools that we would need today to certainly adapt to, but ultimately mitigate the climate crisis. It’s really just a function of our collective will to do it. And that, of course, is hard. Because it’s one of these problems that is years out. And so when people don’t feel the urgency, they don’t make changes to attack the problem. So we’re investing aggressively in the sector, and many others are, too. I do think a lot of innovation has already come to market and will continue to come to market, in and around climate. But it would be better if society had more urgency and more will to attack the problem. And of course, I think both of those are increasing at a pretty good clip right now. But we need a lot more.
You are really early to the crypto space. As a matter of fact, I credit you for sort of turning me on to crypto because I’ve always followed your blog. And I would suggest anyone watching this go to AVC.com. Fred’s blog. Fred is sort of the OG of the venture capitalists who writes out loud, thinks out loud on his own site. But you were very early in the crypto space, and it has seen a renaissance in the past couple of years. And you’ve been right in the center of it with many of your new investments. Tell us your origin story. How did you come to crypto? Why did you think it was important? Why did you invest early?
For me it was really pattern recognition. When I first read the Bitcoin white paper back in 2011. I didn’t fully understand it. But I was struck by how similar the architecture of Bitcoin and ultimately, all the various Web3 assets are to the original architecture of the Internet. It was about a network that nobody would own, no company would own, no person would own, that anybody could effectively set up shop on. Back in the early days of the internet, anybody could connect a server to the internet and publish a webpage and be in business. And with Bitcoin, anybody could mine Bitcoin, and be a participant in the growth of the Bitcoin network. And that architecture has been adapted in many, many ways over the last decade or so. But the idea of this sort of permissionless network, that’s not controlled by any entity, and anybody who wants to start a business could join and, and participate in the growth of that network, just seems so familiar to me, John. I think you would have recognized it, too. I happen to take the time to read the paper and think a little bit about it. And at that moment in time said, this is going to turn into something very important. And it’s taken quite a while, frankly, and we’re not even all the way there yet. New architectures and new ways of doing things, sometimes take quite a while to get adopted by society. And certainly that’s been the case with crypto and Web3. But I do feel like we’re getting a lot more momentum now. And it’s feeling more and more inevitable.
Yeah, I agree with you. I think a lot of the folks in the audience may be scratching their head, and even asking the question, so I’ll ask you. How do you define Web3? What is this new architecture? What are its characteristics?
I like to tell a story. So lots of times, I’ll be in on the board of a company and the board will say we need to get smarter about Web3. And they’ll turn to me and say, Fred, explain Web3. And I always tell them the story, because I think it’s in many ways, very enlightening. I was the first investor in Twitter. And when we invested in Twitter, there wasn’t really much to Twitter, there was a back end, and a website that went down all the time. Lots of people built mobile and web applications on top of Twitter that allowed anybody to use the Twitter backend. That was called the Twitter ecosystem and it actually flourished for a number of years. And there were hundreds of different Twitter clients and Twitter applications that were more popular than Twitter’s own applications. Then there was an attack on Twitter where an entrepreneur tried to acquire a lot of those third-party applications, and forked Twitter and take it over effectively. And the Twitter board reacted very aggressively to that attack and locked down the Twitter API, and removed people’s ability to do that.
Essentially, Twitter said, ‘Well, we were open, but where you now we need to close it off, right and build sort of a more of a walled garden approach to so we can protect our core business.’
And that was a shame because a lot of the innovation evaporated, and Twitter became a siloed monopoly, just like Facebook and Google and Amazon and Apple and all the other big Web2 monopolies. Interestingly that happened right around the time that Satoshi [Nakamoto] wrote the Bitcoin white paper roughly, same time 2009, 2008, 2010, somewhere in that time period. Had Twitter been built as a Web3 protocol, what it would have done is it would have put its data assets on a public blockchain. So my tweets and your tweets would have been written to a public blockchain. There would have been a token, like Bitcoin or Ethereum, that would be issued to everybody who used it. And the Twitter company that built the Web3 version of Twitter would own a lot of those tokens, and the investors in that company would be rewarded, not by revenues or profits, but by the ownership of those tokens. And Twitter would then have been able to continue to allow this open ecosystem to flourish, and would not have been concerned in any way by a fork or some sort of attack on the network, because the network would have been open to anybody. And the economic incentives would have been just aligned around the the token, as opposed to trying to execute a more traditional business model. I realize that’s a little abstract. But I think it’s a very important story, because that’s what people are trying to build now in Web3. We don’t yet have a Web3 version of Twitter, although I think we will someday. But if you look at the architecture of the businesses that are built on Web3, they start with an open data system. The data is written publicly to a blockchain. It’s open source software, and anybody can build a business on top of these protocols. And everybody’s interests are aligned around a shared ownership of a token, as opposed to needing to control the network and control the business and extract profits in a more traditional way. So I think that’s a little bit abstract, but I think it gets to the core ethos of Web3 versus Web2.
And it’s interesting how closely it mirrors, as you pointed out earlier, the original design of the internet itself. Open protocols, data permissioning, but a public sort of RSS feeds. All these original ideas of the internet that flourished until recently, seem to be taking root again, in this Web3 movement.
Well, the thing that the people who architected the original internet, didn’t know how to do, because it was an unsolved computer science problem at the time, was to share a database. And that’s really the problem that Satoshi figured out with his consensus algorithm. So what Satoshi figured out was how to make a database operate in public. And there’s some consensus about which reads and writes are legitimate in which or not. That’s the mining in the case of Bitcoin or proof of stake in terms of other blockchains. There’s a consensus mechanism and a consensus algorithm that allows that to happen. Now the problem with with public blockchains is they’re not as performant as databases are. So we still have a lot of work to do to try to make public blockchains work at the kinds of transaction speeds that databases like SQL and MongoDB and other scaled Web2 databases work at. And that’s part of why I think we’re not all the way there yet. But I think these are totally solvable problems. There are lots of people who are working on solving them today. I’m very confident that those will get solved. And then we’ll be in an era where the data on the internet is secured, and shared in a way that it traditionally has not been. And new business new models and new business architectures will emerge, that I think will eventually replace these large siloed monopolies that we have today. That’s a 10- to 20-year thing, right? I’m not suggesting to anybody here that they should go sell their Google stock, or their Facebook stock or their Amazon stock just yet. But I do think that those monopolies are ultimately at risk to this new architecture.
And we’re back for Part 2 of our conversation with Fred Wilson. So as you look to make investments on that kind of a time horizon, first of all, what’s interesting is that a lot of the economics of many of these projects are such that there’s a lot of money to be made in the short term, some of which might be considered contrary to the overall goals that we’ve been talking about. But as you look to invest in these kinds of new businesses and new architectures, what do you find particularly compelling right now? What’s interesting at the moment, and worth paying attention to, particularly if you’re talking to a lay audience who may just be getting into this.
What I’m always looking for are things that you can do with a new architecture that you could not do with an old architecture. Go back to the early days of the internet, the first thing we did was took things that we already knew, like a newspaper, or a stock market, or we call it a brokerage firm, and we put them on the internet. So we got things like E-Trade and NewYorkTimes.com. But it wasn’t really until what you coined Web2, didn’t you come up with that name, John?
I think it was Tim O’Reilly, with me, I. I guess I’m the popularizer.
So it wasn’t until we really got Web2 that we got the ReadWriteWeb. All of a sudden, we started to realize, that putting things up on the internet is not the really the thing, because you really aren’t creating anything new, you’re just delivering an older thing in a better package. But all of a sudden, with Web2, we got things that you could never really do before, things like Facebook, and things like YouTube and those sorts of things, which were really about letting everybody be a content creator and letting everybody be a seller on Etsy, or whatever it might be. All of a sudden, the user was the producer of the thing, as opposed to the consumer of the thing. That had never been possible before in an analog world. That’s what the internet really made available to people that the traditional software systems couldn’t do. So the thing that I look for in Web3 are things that we haven’t figured out how to do. When I saw NFT’s, for example, back in 2016, before they even coined the term NFT, I was fascinated by the idea that you could create something that was unique, truly unique. A digital asset that was unique. We all lived through the MP3 era, and we saw how something that used to be scarce, like music, all of a sudden became completely commoditized by virtue of the fact that it was no longer scarce. We went through this period of 20 years, where all media is now screwed, because there’s no way to make media scarce. We tried things like DRM, and there’s all these sort of like clunky technologies that we try to put the genie back in the bottle with digital media, and it just didn’t work. So we had these business models like Spotify and things that sort of acknowledged that anybody had access to music. Then I saw NFT’s and I said, ‘Oh my gosh, here’s how you make a digital asset scarce using cryptography and blockchains.’ I got very excited about the fact that here was something that you could use a blockchain to do that we had not been able to figure out how to do before. That’s led to my investment in Dapper, and a few other things as well. And so I want to see more of those emerge. I can’t point to a lot of good examples of that, which is unfortunate, because that means we’re still super early in this journey. But that’s what I want to see is founders, entrepreneurs, technologists, coming up with ways to use this set of technologies that we call Web3 to deliver new experiences that have never been able to be delivered to customers before.
Last question for you, Fred. Given that our audience, a lot of folks at P&G, their partners, vendors and the ecosystem of a large, influential company like P&G, what advice would you give them about how to think about crypto and Web3? How can they think about innovation generally, and embracing it in a way that makes sense for a more traditional business?
I think it’s always hard for a company. I’m on the boards of some companies that now are quite large, obviously not anywhere near as large as P&G, but have billions of dollars of revenue. They often look at these things, and they’re like, those things are too small. They’re not going to move the needle for me, I can’t buy this company, because it’s too small, I can’t start this project, because it’s too small. If it if it can’t deliver a billion dollars of revenue in three years we can’t justify that investment. It’s totally rational behavior. As a board member of companies like that, I’m one of the people saying that. And yet, I’m in the business of backing two or three founders who are starting a company that is not going to have revenue for two years. So I see both sides of it. I think that big companies can do and should do it, these are not new ideas, but I am a big fan of them. I think they should have a venture arm that invests in leading edge companies, not because it’s going to necessarily deliver enough financial return to move the needle for their shareholders, but so they have a group of people inside their organization who are doing what I do every day, which is meeting with founders and seeking new ideas. It may also make sense to have parts of the organization that are designed to do smaller scale things, R&D efforts, or innovation divisions, where the objectives are different. They’re not about scale businesses and things like that. They’re just about being a participant in the innovation economy. Like I said, those are not new ideas. But I think that all big companies today seem to be doing some flavor of that, and I think that that’s what they need to be doing. Because sometimes some thing comes along, and very quickly impacts their business. One of the things that mobile phones allowed us to do were build applications that knew where you were. Never before, did we have the ability to have software that knew where you were. Entrepreneurs quickly built things like Uber and Lyft. Those businesses have really transformed transportation. I mean, really, truly have transformed transportation. So if you were in the travel business, if you were in the rental car business, if you were in the auto OEM business, all of a sudden, you look at that, and within the span of two or three years, you are starting to feel it in your core business. So sometimes innovation can come along, that can actually impact you quite quickly. I think that’s why you’ve got to be set up to react to those things. And being blind to them or unable to react to them is obviously a very dangerous place to be.
Exactly. Well put. Fred Wilson, thank you so much for joining us for this fascinating Signal Conversation. I wish we could go on for hours and I know we could. But we have to stop now. So again, thanks so much for joining us.
It was my pleasure. A lot of fun.