"Collectively, We're All a Lot Smarter"

An interview with Fred Wilson, general partner of the New York venture capital firm Union Square Ventures.

On the wall of his sunlit, 14th-floor Manhattan office, facing his desk, venture capitalist Fred Wilson has a painting that contains five words: "What are you gonna do?"

In three-and-a-half years, what Wilson has done is turn his firm Union Square Ventures into a hot technology venture capital firm through savvy investments in Web 2.0 startups such as del.icio.us, Twitter, and Tumblr.

In the process, Union Square Ventures, a $125 million venture capital firm, has become something of a mascot for New York's technology venture capital community.

Portfolio.com sat down with the outspoken Wilson last Friday for an interview in which the only subject off limits was the next startup on the firm's list of investments.

"I can't talk about that," Wilson said, laughing.

Wilson, 46, prefers to stay out of the spotlight. He initially declined to be interviewed, saying, "I don't like to talk about myself. I like to talk about stuff that's happening, stuff that's going to happen, and the people who are going to make it happen."

When he did agree to sit down, Wilson, a Wharton graduate, said the financial turmoil spawned by the housing meltdown and credit crunch threatens to douse the red-hot venture capital market. However, there is a silver lining to a recession: smart venture capitalists will "take advantage" of any economic contraction by investing in startups at lower valuations.

Later, he predicted that beleaguered Web giant Yahoo will either be sold, or strike a major strategic deal in the next 6 to 12 months-and that Microsoft is the most likely suitor.

Wilson praised Facebook's 23-year-old founder, Mark Zuckerberg, but said he needs to follow the examples of Bill Gates, Larry Ellison, Sergey Brin and Larry Page, and bring in some experienced help if he wants to successfully take his company public.

Wilson, who was an early investor in TheStreet.com, also panned Rupert Murdoch's recent decision not to make the wsj.com free, calling the mogul's move "a mistake" that resulted from "short-term thinking.

Finally, Wilson hinted that micro-blogging Web site Twitter, the current star of his portfolio, is eyeing a potentially controversial monetization scheme, in which "sponsored messages"-read: ads-could be integrated into Twitter's feed of personal updates.

Portfolio.com: What effect will the housing meltdown and the credit crunch have on the venture capital market?

Wilson: It will have some impact, but I'm not sure how pronounced the impact will be. I think it will certainly impact the I.P.O. market. It might impact the mergers and acquisitions market. People are moving out of equities and into fixed income and "safe" investments. There has been a real "de-risking" of the market, which will certainly affect the I.P.O. market; there is no question about that. That will impact the late stage venture market, because the I.P.O. market drives the late stage venture market. And that will slowly impact the early stage venture market. And so it's going to have an impact. Valuations will come down. There will be less exuberance about venture capital investments. That's going to happen. What will probably take place is a flight to quality. Venture capitalists will want to invest more in the companies that look like they're going to be successful and be a little less willing to take fliers on things that are hard to really handicap. And all that's probably healthy. And that will probably cause some form of a shakeout, but I don't think it will be anywhere near what happened the last time around. As much of an "exuberant" time period as we've seen in the Internet sector in the last year, it isn't anything compared to what we had in 1999 and 2000.


Portfolio.com: Is the U.S. in a recession?

Wilson: I think probably, yes. It just feels like consumers are pulling back, banks are pulling back. That's generally the sign of a recession. Technically are we in a recession? We haven't had two down quarters of G.D.P. So no, we're not technically in a recession, but usually by the time we're technically in a recession, we're on the way out of it.

Portfolio.com: What effect would a recession have on Union Square Ventures?

Wilson: I think we have to be mindful of the overall macro environment that we're in. And if the financing environment changes, we'll take advantage of that and invest in companies at lower valuations than we would otherwise be paying. It will be less attractive to sell our companies, so we may choose not to do that, and we may choose to continue to finance them and grow them and develop them some more. It may mean that we finance our companies differently. We may finance them for longer periods of time, and take a more conservative approach to how we do the financing rounds. So I think we will have to adjust.

Portfolio.com: A lot of people are suggesting that we're experiencing a bubble reminiscent of the Internet boom and bust of the late 1990s. Do you agree?

Wilson: All markets have boom and bust cycles, and I think venture capital market has even more exaggerated boom and bust cycles. We have been in a boom cycle, like we were in the 1996-2000 phase. But back then the Web was brand new, and we didn't really know what to do with the Web. So we hatched companies and came up with ideas like, "Let's take something that exists in the world we understand and let's port it to the Web."

So we got Amazon-a store on the Web-and we got a lot of those kinds of companies where we took traditional concepts and applied them to the Web. Let's take a newspaper and put it on the Web. Let's take the Wall Street Journal and put it on the Web. You get TheStreet.com.

It wasn't really until we'd been working on the Web for 6, 8, 10 years when native things happened. Social networking is a native thing. Internet auctions, like eBay, are native Web businesses. Google is a native business. Now we have all of these things that are much more natural to the Web. We're doing smarter things in terms of the way we're constructing these companies and the way these companies are getting built.

That's not to say there aren't dumb things going on. There are dumb things going on. But I think collectively, we're all a lot smarter.

Portfolio.com: What's an example of a dumb thing that's going on now?

Wilson: I think a lot of the people who are trying to do video on the Web right now, and are trying to create shows on the Web by taking examples that come from the cable world. As in, "We need to create a show that people come back to every day at the same time and watch it." That's probably not the native way that people are going to do video on the Web. I watch my kids and the way they interact with YouTube for example, and that's a different way of watching video than the way they watch TV. They still like to watch TV on the TV, but video on the Web needs to be Web-video, as opposed to TV taken to the Web. So I think some of the people who are doing video on the Web right now haven't figured that out.

Portfolio.com: Are you specifically looking for New York-based startups?

Wilson: We want to be able to invest as close to home as possible, as often as possible. We have been living and working in the New York market for a long time and we know a lot of people here. So if we need to bring in a V.P. of sales or a C.F.O., here in New York we have a really good sense of who those people are, and we can be much more effective doing that. And the other thing is, we can see them. We can have breakfast with them once or twice a month. We can go to meetings with them, and help them in ways that it's harder to do if they're not here. So, we'd love to make every investment here in New York, if we could. We don't, but that would be a great thing if we could.

Portfolio.com: So basically, you just love New York too much to leave.

Wilson: I grew up in the business here in New York. After I got out of business school in the mid-80s, I started doing venture capital in New York and made a home here. And I've figured out how to do it here. In some ways it's better to do it here because in Silicon Valley there are 500 venture capital firms, 100 of which are household names in the technology industry. Here in New York, there are maybe 20 or 25 venture capital firms and maybe five are household names. And so when you can be one of them-and we are one of them-it's a competitive advantage.

Portfolio.com: So would you say you like being a big fish in a small pond?

Wilson: That has helped us a lot. Union Square Ventures in only three-and-a-half years old, and I think that we have established ourselves in our sector as one of the go-to firms across the entire country. And I think one of the reasons we were able to do that here in New York is we were able to quickly assemble a high quality portfolio and make a name for ourselves in a way that would have been a lot harder for us to do in Silicon Valley.

Portfolio.com: Do you see a cultural difference between the tech scene in New York and the tech scene in Silicon Valley? Are West Coast startups more engineering-based, given their proximity to big research universities like Stanford?

Wilson: I think that there is [a difference]. In Silicon Valley, everyone is in the business. So your kids go to school, and the other parents in the school are in the technology business. They're either venture capitalists or entrepreneurs or they work in portfolio companies. So it's a little incestuous. That's a positive and that's a negative. Here in New York you're going to have a much more diverse set of people that you might know. So you can get away from the business a little bit here in New York. It's much harder to get away from the business in Silicon Valley. Again, that's a good thing and a bad thing.

I don't totally agree about the engineering cultures being that different. Google has built an enormous engineering organization here in New York. I think there may be 500 or more engineers working for Google here in New York now. So there are a lot of high quality engineers here in New York, and the companies that we invest in here in New York have great engineering teams. Everyone says that [Silicon Valley has better engineers], but I'm not so sure that's true. I think that the differences have more to do with the kinds of people and what their everyday lives are like in the startups here in New York and the startups in Silicon Valley.

Portfolio.com: What's your view of Rupert Murdoch's decision not to make the Wall Street Journal's Web site free?

Wilson: I think it's unfortunate. Certainly anything that is news or opinion needs to be free on the Web, because the Web is this very fluid medium that is very much driven by links and the flow of visitors through a discussion via links. If you look at politics, for example, it's amazing how powerful the blogs are. The blogs are linking to the fact that the New York Times endorsed Hillary Clinton. The blogs swarm around that story. They link to it, they discuss it, and it amplifies that story. And that becomes a way that audiences are driven into that. If you're going to do content on the Web, and you're going to make people pay to see your opinion piece or your news piece, that kind of activity is not going to happen. And as a result, services that have done that have not really flourished on the Web.

People say, "The Wall Street Journal has such a profitable business on the Web." That's fine, but they could have such a better business on the Web if they embraced the way the medium is really designed to be used. And they're not doing that, so it's a mistake.

Portfolio.com: What do you think Murdoch was thinking?

Wilson: I think they literally ran the numbers and said, "We would have to cause our audience to grow ten times and we would have to sell ads at this price to replace all this revenue." But I think that's short-term thinking. I saw a stock analyst today who wrote a piece on TheStreet.com, and he was basically like, "Phew, the Wall Street Journal decided to stay paid, so you can still own TheStreet.com." People were concerned that if the Wall Street Journal went free, what would that do to TheStreet.com? What would it do to Marketwatch? What would it do to all these other services that are largely free?

I think they could have taken a lot of share. They could have been able to increase their audience and become a dominant voice, which would feed back into the other things they want to do. He wants to create a TV channel, he wants to create other businesses, but that's going to be harder to do with this niche audience that they have.

Portfolio.com: What is the ideal Union Square Ventures startup?

Wilson: First and foremost, we look for Web applications. Everything we invest in is a software application that is written for the World Wide Web. That could be anything from Google to a flash game, and everything in between. So it's really quite a large universe of opportunities. We don't do hardware, we don't do software or biotech or nanotech or green tech. We do Web apps.

Within that sector, we're focused on things that tend to be fairly disruptive. We like things that shake things up, because that generally brings a lot of heat and energy around the company. We find that is very useful. It's hard to go from an idea all the way to a big company, so if you're shaking something up sometimes it makes it a little easier.

We also like there to be some sort of data asset that builds up inside the company and the service. An example of that would be a business like Craigslist, which has all of this classified advertising that's contributed by the community. In our world, that's a data asset.

The other thing we really look for is a lot of technology leverage. The simplest way to think about that is if there are 50 employees and 40 of them are engineers, then there's probably a lot of technology leverage in the business. If there are 50 employees and two of them are engineers and the rest of the people are doing things where you have to hire more and more of them as the company grows, then that's probably a business that doesn't have a lot of technology leverage.

Portfolio.com: What kinds of entrepreneurs are you looking for?

Wilson: There are two kinds of teams we end up financing. There are experienced teams, often that we've worked with in the past, and we love to back those teams, and we'll do it as often as we can.

Oftentimes, it's a first-time entrepreneur, but in that case, it's typically somebody who has already built something, and it is starting to shake things up. And we're investing because we've already seen that the first-time entrepreneur has actually been able to get into the market and make something happen without us. And then we can come in and help build a team around them and help them build the business.

Portfolio.com: Do you think Facebook is going to try to I.P.O. this year?

Wilson: I don't think they're going to try to I.P.O. this year, but I do think they will to try to I.P.O. [at some point.] But I think they're smart enough and patient enough to realize that they need to build that engine of predictability around revenues and growth and really get the fundamentals of the business rock solid, because the last thing that anybody wants to do, particularly such a high-flying company, is to go public and blow a quarter early on, and then they become damaged goods, so I don't think they'll do that. I think they'll wait.

Portfolio.com: Do you think that Facebook C.E.O. Mark Zuckerberg has what it takes to take a potentially $15 billion company public? Or do you think Facebook should follow in Google's footsteps and bring in an experienced technology C.E.O. like Eric Schmidt before they go public?

Wilson: I think [Zuckerberg] can do it, but he's going to need some help. Bill Gates found [early Microsoft President and C.O.O.] Jon Shirley. Larry Ellison had a number of people over the years that have helped him run his company. It doesn't mean that Zuckerberg has to give up control of the company. Larry and Sergey have never given up control of Google. Everyone knows that. They just delegated certain responsibilities to Eric, and they've given Eric the ability to weigh in on every issue that matters to the company, and they've created a structure that works. I'm sure there are some frustrations at times, but it works, and it's made all of them fabulously wealthy. So I think absolutely Mark needs to do that. And I think if he's willing to listen to the people around him, including his board, his confidants, and his management team, he will do that.

Portfolio.com: What happens to Yahoo over the next 6 to 12 months?

Wilson: Well, it could very well be sold. Microsoft just had a great quarter and Microsoft has the exact same problem that Yahoo has. Together they could be 30 percent of the search market to Google's 70 percent. Divided, they're each somewhat marginalized, so certainly at a minimum, combining their search businesses makes an enormous amount of sense.

Or Yahoo could outsource its search business to Google, which would be throwing in the towel. I don't think they want to do that, but from a financial perspective, they could make a lot more money doing that. So they have to rationalize what they're doing in search, because it's unsustainable.

The other they have to do-and I think they're doing it-is they have to decide where they're going to fight and where they're not going to fight. They've gotten a little bit defocused in trying to do too much. They should pick four or five areas that they are going to be dominant in. They're dominant in email, so they have to continue to be dominant in email. They've got a very strong franchise in online photography, so maybe they should be dominant there. They've got some interesting things going on in online music, so maybe they should make a big play in online music. Places where they have great executives, great vision and great franchises already, they should invest in those. And the places where they don't, like social networking and search, maybe they should cede. They were trying to be everything to everybody, and that probably isn't sustainable anymore.

Portfolio.com: Do you agree with Yahoo C.E.O. Jerry Yang's recent push to make the site "the premier starting point on the Web"?

Wilson: Most adults I know start their Internet session at Google, and most kids I know start their Internet session at either Facebook or MySpace. So it just doesn't seem to me that it's a viable strategy.

Portfolio.com: How will Twitter make money?

Wilson: The centerpiece of Twitter is the Twitter timeline. It's you and all your friends and the updates you've made most recently. It looks very similar to the Facebook minifeed, and to me, the Facebook minifeed is the second most interesting attention aggregation point on the Internet, the first being the search engine result page. So if you own a powerful attention aggregation point on the Web, I think you can monetize that. Facebook has already started to do that by putting sponsored messages into the minifeed, and I think over time you'll see them do more and more with the minifeed as a place for monetization to happen. And I think if they're successful in that, a lot of people, Twitter included, will probably watch those moves closely and emulate them.

Portfolio.com: So you think Twitter might put sponsored messages in the Twitter-feed?

Wilson: Maybe not. But maybe that's not the most powerful idea. Maybe the most powerful idea would be if iTunes had a button that says, "I'm listening to this song right now," and when you click that, it goes into your Facebook minifeed and your Twitter minifeed. And maybe iTunes or the person who's trying to market the music in iTunes pays for the right to do that, because maybe when you do that someone clicks through and goes and buys the song, or listens to the song.

Portfolio.com: But wasn't that what got Facebook into trouble with Beacon, the company's social advertising system that broadcast users' purchases to their friends?

Wilson: I think there's nothing wrong with Beacon, other than the fact that it was launched as opt-out, instead of opt-in. So I think that users will absolutely want to broadcast certain things to their friends, and there are some things they're not going to want to broadcast to their friends. And they need to be able to control that at a very granular level. When they decide they want to broadcast that they think the new iPhone is the greatest phone ever, that's possibly a way for commerce to happen.

 

"Collectively, We're All a Lot Smarter"


Portfolio.com: Are you specifically looking for New York-based startups?

Wilson: We want to be able to invest as close to home as possible, as often as possible. We have been living and working in the New York market for a long time and we know a lot of people here. So if we need to bring in a V.P. of sales or a C.F.O., here in New York we have a really good sense of who those people are, and we can be much more effective doing that. And the other thing is, we can see them. We can have breakfast with them once or twice a month. We can go to meetings with them, and help them in ways that it's harder to do if they're not here. So, we'd love to make every investment here in New York, if we could. We don't, but that would be a great thing if we could.

Portfolio.com: So basically, you just love New York too much to leave.

Wilson: I grew up in the business here in New York. After I got out of business school in the mid-80s, I started doing venture capital in New York and made a home here. And I've figured out how to do it here. In some ways it's better to do it here because in Silicon Valley there are 500 venture capital firms, 100 of which are household names in the technology industry. Here in New York, there are maybe 20 or 25 venture capital firms and maybe five are household names. And so when you can be one of them-and we are one of them-it's a competitive advantage.

Portfolio.com: So would you say you like being a big fish in a small pond?

Wilson: That has helped us a lot. Union Square Ventures in only three-and-a-half years old, and I think that we have established ourselves in our sector as one of the go-to firms across the entire country. And I think one of the reasons we were able to do that here in New York is we were able to quickly assemble a high quality portfolio and make a name for ourselves in a way that would have been a lot harder for us to do in Silicon Valley.

Portfolio.com: Do you see a cultural difference between the tech scene in New York and the tech scene in Silicon Valley? Are West Coast startups more engineering-based, given their proximity to big research universities like Stanford?

Wilson: I think that there is [a difference]. In Silicon Valley, everyone is in the business. So your kids go to school, and the other parents in the school are in the technology business. They're either venture capitalists or entrepreneurs or they work in portfolio companies. So it's a little incestuous. That's a positive and that's a negative. Here in New York you're going to have a much more diverse set of people that you might know. So you can get away from the business a little bit here in New York. It's much harder to get away from the business in Silicon Valley. Again, that's a good thing and a bad thing.

I don't totally agree about the engineering cultures being that different. Google has built an enormous engineering organization here in New York. I think there may be 500 or more engineers working for Google here in New York now. So there are a lot of high quality engineers here in New York, and the companies that we invest in here in New York have great engineering teams. Everyone says that [Silicon Valley has better engineers], but I'm not so sure that's true. I think that the differences have more to do with the kinds of people and what their everyday lives are like in the startups here in New York and the startups in Silicon Valley.

Portfolio.com: What's your view of Rupert Murdoch's decision not to make the Wall Street Journal's Web site free?

Wilson: I think it's unfortunate. Certainly anything that is news or opinion needs to be free on the Web, because the Web is this very fluid medium that is very much driven by links and the flow of visitors through a discussion via links. If you look at politics, for example, it's amazing how powerful the blogs are. The blogs are linking to the fact that the New York Times endorsed Hillary Clinton. The blogs swarm around that story. They link to it, they discuss it, and it amplifies that story. And that becomes a way that audiences are driven into that. If you're going to do content on the Web, and you're going to make people pay to see your opinion piece or your news piece, that kind of activity is not going to happen. And as a result, services that have done that have not really flourished on the Web.

People say, "The Wall Street Journal has such a profitable business on the Web." That's fine, but they could have such a better business on the Web if they embraced the way the medium is really designed to be used. And they're not doing that, so it's a mistake.

Portfolio.com: What do you think Murdoch was thinking?

Wilson: I think they literally ran the numbers and said, "We would have to cause our audience to grow ten times and we would have to sell ads at this price to replace all this revenue." But I think that's short-term thinking. I saw a stock analyst today who wrote a piece on TheStreet.com, and he was basically like, "Phew, the Wall Street Journal decided to stay paid, so you can still own TheStreet.com." People were concerned that if the Wall Street Journal went free, what would that do to TheStreet.com? What would it do to Marketwatch? What would it do to all these other services that are largely free?

I think they could have taken a lot of share. They could have been able to increase their audience and become a dominant voice, which would feed back into the other things they want to do. He wants to create a TV channel, he wants to create other businesses, but that's going to be harder to do with this niche audience that they have.

Portfolio.com: What is the ideal Union Square Ventures startup?

Wilson: First and foremost, we look for Web applications. Everything we invest in is a software application that is written for the World Wide Web. That could be anything from Google to a flash game, and everything in between. So it's really quite a large universe of opportunities. We don't do hardware, we don't do software or biotech or nanotech or green tech. We do Web apps.

Within that sector, we're focused on things that tend to be fairly disruptive. We like things that shake things up, because that generally brings a lot of heat and energy around the company. We find that is very useful. It's hard to go from an idea all the way to a big company, so if you're shaking something up sometimes it makes it a little easier.

We also like there to be some sort of data asset that builds up inside the company and the service. An example of that would be a business like Craigslist, which has all of this classified advertising that's contributed by the community. In our world, that's a data asset.

The other thing we really look for is a lot of technology leverage. The simplest way to think about that is if there are 50 employees and 40 of them are engineers, then there's probably a lot of technology leverage in the business. If there are 50 employees and two of them are engineers and the rest of the people are doing things where you have to hire more and more of them as the company grows, then that's probably a business that doesn't have a lot of technology leverage.

Portfolio.com: What kinds of entrepreneurs are you looking for?

Wilson: There are two kinds of teams we end up financing. There are experienced teams, often that we've worked with in the past, and we love to back those teams, and we'll do it as often as we can.

Oftentimes, it's a first-time entrepreneur, but in that case, it's typically somebody who has already built something, and it is starting to shake things up. And we're investing because we've already seen that the first-time entrepreneur has actually been able to get into the market and make something happen without us. And then we can come in and help build a team around them and help them build the business.

Portfolio.com: Do you think Facebook is going to try to I.P.O. this year?

Wilson: I don't think they're going to try to I.P.O. this year, but I do think they will to try to I.P.O. [at some point.] But I think they're smart enough and patient enough to realize that they need to build that engine of predictability around revenues and growth and really get the fundamentals of the business rock solid, because the last thing that anybody wants to do, particularly such a high-flying company, is to go public and blow a quarter early on, and then they become damaged goods, so I don't think they'll do that. I think they'll wait.

Portfolio.com: Do you think that Facebook C.E.O. Mark Zuckerberg has what it takes to take a potentially $15 billion company public? Or do you think Facebook should follow in Google's footsteps and bring in an experienced technology C.E.O. like Eric Schmidt before they go public?

Wilson: I think [Zuckerberg] can do it, but he's going to need some help. Bill Gates found [early Microsoft President and C.O.O.] Jon Shirley. Larry Ellison had a number of people over the years that have helped him run his company. It doesn't mean that Zuckerberg has to give up control of the company. Larry and Sergey have never given up control of Google. Everyone knows that. They just delegated certain responsibilities to Eric, and they've given Eric the ability to weigh in on every issue that matters to the company, and they've created a structure that works. I'm sure there are some frustrations at times, but it works, and it's made all of them fabulously wealthy. So I think absolutely Mark needs to do that. And I think if he's willing to listen to the people around him, including his board, his confidants, and his management team, he will do that.

Portfolio.com: What happens to Yahoo over the next 6 to 12 months?

Wilson: Well, it could very well be sold. Microsoft just had a great quarter and Microsoft has the exact same problem that Yahoo has. Together they could be 30 percent of the search market to Google's 70 percent. Divided, they're each somewhat marginalized, so certainly at a minimum, combining their search businesses makes an enormous amount of sense.

Or Yahoo could outsource its search business to Google, which would be throwing in the towel. I don't think they want to do that, but from a financial perspective, they could make a lot more money doing that. So they have to rationalize what they're doing in search, because it's unsustainable.

The other they have to do-and I think they're doing it-is they have to decide where they're going to fight and where they're not going to fight. They've gotten a little bit defocused in trying to do too much. They should pick four or five areas that they are going to be dominant in. They're dominant in email, so they have to continue to be dominant in email. They've got a very strong franchise in online photography, so maybe they should be dominant there. They've got some interesting things going on in online music, so maybe they should make a big play in online music. Places where they have great executives, great vision and great franchises already, they should invest in those. And the places where they don't, like social networking and search, maybe they should cede. They were trying to be everything to everybody, and that probably isn't sustainable anymore.

Portfolio.com: Do you agree with Yahoo C.E.O. Jerry Yang's recent push to make the site "the premier starting point on the Web"?

Wilson: Most adults I know start their Internet session at Google, and most kids I know start their Internet session at either Facebook or MySpace. So it just doesn't seem to me that it's a viable strategy.

Portfolio.com: How will Twitter make money?

Wilson: The centerpiece of Twitter is the Twitter timeline. It's you and all your friends and the updates you've made most recently. It looks very similar to the Facebook minifeed, and to me, the Facebook minifeed is the second most interesting attention aggregation point on the Internet, the first being the search engine result page. So if you own a powerful attention aggregation point on the Web, I think you can monetize that. Facebook has already started to do that by putting sponsored messages into the minifeed, and I think over time you'll see them do more and more with the minifeed as a place for monetization to happen. And I think if they're successful in that, a lot of people, Twitter included, will probably watch those moves closely and emulate them.

Portfolio.com: So you think Twitter might put sponsored messages in the Twitter-feed?

Wilson: Maybe not. But maybe that's not the most powerful idea. Maybe the most powerful idea would be if iTunes had a button that says, "I'm listening to this song right now," and when you click that, it goes into your Facebook minifeed and your Twitter minifeed. And maybe iTunes or the person who's trying to market the music in iTunes pays for the right to do that, because maybe when you do that someone clicks through and goes and buys the song, or listens to the song.

Portfolio.com: But wasn't that what got Facebook into trouble with Beacon, the company's social advertising system that broadcast users' purchases to their friends?

Wilson: I think there's nothing wrong with Beacon, other than the fact that it was launched as opt-out, instead of opt-in. So I think that users will absolutely want to broadcast certain things to their friends, and there are some things they're not going to want to broadcast to their friends. And they need to be able to control that at a very granular level. When they decide they want to broadcast that they think the new iPhone is the greatest phone ever, that's possibly a way for commerce to happen.

Portfolio.com: What's your view of Rupert Murdoch's decision not to make the Wall Street Journal's Web site free?

Wilson: I think it's unfortunate. Certainly anything that is news or opinion needs to be free on the Web, because the Web is this very fluid medium that is very much driven by links and the flow of visitors through a discussion via links. If you look at politics, for example, it's amazing how powerful the blogs are. The blogs are linking to the fact that the New York Times endorsed Hillary Clinton. The blogs swarm around that story. They link to it, they discuss it, and it amplifies that story. And that becomes a way that audiences are driven into that. If you're going to do content on the Web, and you're going to make people pay to see your opinion piece or your news piece, that kind of activity is not going to happen. And as a result, services that have done that have not really flourished on the Web.

People say, "The Wall Street Journal has such a profitable business on the Web." That's fine, but they could have such a better business on the Web if they embraced the way the medium is really designed to be used. And they're not doing that, so it's a mistake.

Portfolio.com: What do you think Murdoch was thinking?

Wilson: I think they literally ran the numbers and said, "We would have to cause our audience to grow ten times and we would have to sell ads at this price to replace all this revenue." But I think that's short-term thinking. I saw a stock analyst today who wrote a piece on TheStreet.com, and he was basically like, "Phew, the Wall Street Journal decided to stay paid, so you can still own TheStreet.com." People were concerned that if the Wall Street Journal went free, what would that do to TheStreet.com? What would it do to Marketwatch? What would it do to all these other services that are largely free?

I think they could have taken a lot of share. They could have been able to increase their audience and become a dominant voice, which would feed back into the other things they want to do. He wants to create a TV channel, he wants to create other businesses, but that's going to be harder to do with this niche audience that they have.

Portfolio.com: What is the ideal Union Square Ventures startup?

Wilson: First and foremost, we look for Web applications. Everything we invest in is a software application that is written for the World Wide Web. That could be anything from Google to a flash game, and everything in between. So it's really quite a large universe of opportunities. We don't do hardware, we don't do software or biotech or nanotech or green tech. We do Web apps.

Within that sector, we're focused on things that tend to be fairly disruptive. We like things that shake things up, because that generally brings a lot of heat and energy around the company. We find that is very useful. It's hard to go from an idea all the way to a big company, so if you're shaking something up sometimes it makes it a little easier.

We also like there to be some sort of data asset that builds up inside the company and the service. An example of that would be a business like Craigslist, which has all of this classified advertising that's contributed by the community. In our world, that's a data asset.

The other thing we really look for is a lot of technology leverage. The simplest way to think about that is if there are 50 employees and 40 of them are engineers, then there's probably a lot of technology leverage in the business. If there are 50 employees and two of them are engineers and the rest of the people are doing things where you have to hire more and more of them as the company grows, then that's probably a business that doesn't have a lot of technology leverage.

Portfolio.com: What kinds of entrepreneurs are you looking for?

Wilson: There are two kinds of teams we end up financing. There are experienced teams, often that we've worked with in the past, and we love to back those teams, and we'll do it as often as we can.

Oftentimes, it's a first-time entrepreneur, but in that case, it's typically somebody who has already built something, and it is starting to shake things up. And we're investing because we've already seen that the first-time entrepreneur has actually been able to get into the market and make something happen without us. And then we can come in and help build a team around them and help them build the business.

Portfolio.com: Do you think Facebook is going to try to I.P.O. this year?

Wilson: I don't think they're going to try to I.P.O. this year, but I do think they will to try to I.P.O. [at some point.] But I think they're smart enough and patient enough to realize that they need to build that engine of predictability around revenues and growth and really get the fundamentals of the business rock solid, because the last thing that anybody wants to do, particularly such a high-flying company, is to go public and blow a quarter early on, and then they become damaged goods, so I don't think they'll do that. I think they'll wait.

Portfolio.com: Do you think that Facebook C.E.O. Mark Zuckerberg has what it takes to take a potentially $15 billion company public? Or do you think Facebook should follow in Google's footsteps and bring in an experienced technology C.E.O. like Eric Schmidt before they go public?

Wilson: I think [Zuckerberg] can do it, but he's going to need some help. Bill Gates found [early Microsoft President and C.O.O.] Jon Shirley. Larry Ellison had a number of people over the years that have helped him run his company. It doesn't mean that Zuckerberg has to give up control of the company. Larry and Sergey have never given up control of Google. Everyone knows that. They just delegated certain responsibilities to Eric, and they've given Eric the ability to weigh in on every issue that matters to the company, and they've created a structure that works. I'm sure there are some frustrations at times, but it works, and it's made all of them fabulously wealthy. So I think absolutely Mark needs to do that. And I think if he's willing to listen to the people around him, including his board, his confidants, and his management team, he will do that.

Portfolio.com: What happens to Yahoo over the next 6 to 12 months?

Wilson: Well, it could very well be sold. Microsoft just had a great quarter and Microsoft has the exact same problem that Yahoo has. Together they could be 30 percent of the search market to Google's 70 percent. Divided, they're each somewhat marginalized, so certainly at a minimum, combining their search businesses makes an enormous amount of sense.

Or Yahoo could outsource its search business to Google, which would be throwing in the towel. I don't think they want to do that, but from a financial perspective, they could make a lot more money doing that. So they have to rationalize what they're doing in search, because it's unsustainable.

The other they have to do-and I think they're doing it-is they have to decide where they're going to fight and where they're not going to fight. They've gotten a little bit defocused in trying to do too much. They should pick four or five areas that they are going to be dominant in. They're dominant in email, so they have to continue to be dominant in email. They've got a very strong franchise in online photography, so maybe they should be dominant there. They've got some interesting things going on in online music, so maybe they should make a big play in online music. Places where they have great executives, great vision and great franchises already, they should invest in those. And the places where they don't, like social networking and search, maybe they should cede. They were trying to be everything to everybody, and that probably isn't sustainable anymore.

Portfolio.com: Do you agree with Yahoo C.E.O. Jerry Yang's recent push to make the site "the premier starting point on the Web"?

Wilson: Most adults I know start their Internet session at Google, and most kids I know start their Internet session at either Facebook or MySpace. So it just doesn't seem to me that it's a viable strategy.

Portfolio.com: How will Twitter make money?

Wilson: The centerpiece of Twitter is the Twitter timeline. It's you and all your friends and the updates you've made most recently. It looks very similar to the Facebook minifeed, and to me, the Facebook minifeed is the second most interesting attention aggregation point on the Internet, the first being the search engine result page. So if you own a powerful attention aggregation point on the Web, I think you can monetize that. Facebook has already started to do that by putting sponsored messages into the minifeed, and I think over time you'll see them do more and more with the minifeed as a place for monetization to happen. And I think if they're successful in that, a lot of people, Twitter included, will probably watch those moves closely and emulate them.

Portfolio.com: So you think Twitter might put sponsored messages in the Twitter-feed?

Wilson: Maybe not. But maybe that's not the most powerful idea. Maybe the most powerful idea would be if iTunes had a button that says, "I'm listening to this song right now," and when you click that, it goes into your Facebook minifeed and your Twitter minifeed. And maybe iTunes or the person who's trying to market the music in iTunes pays for the right to do that, because maybe when you do that someone clicks through and goes and buys the song, or listens to the song.

Portfolio.com: But wasn't that what got Facebook into trouble with Beacon, the company's social advertising system that broadcast users' purchases to their friends?

Wilson: I think there's nothing wrong with Beacon, other than the fact that it was launched as opt-out, instead of opt-in. So I think that users will absolutely want to broadcast certain things to their friends, and there are some things they're not going to want to broadcast to their friends. And they need to be able to control that at a very granular level. When they decide they want to broadcast that they think the new iPhone is the greatest phone ever, that's possibly a way for commerce to happen.

"Collectively, We're All a Lot Smarter"

Portfolio.com: What kinds of entrepreneurs are you looking for?

Wilson: There are two kinds of teams we end up financing. There are experienced teams, often that we've worked with in the past, and we love to back those teams, and we'll do it as often as we can.

Oftentimes, it's a first-time entrepreneur, but in that case, it's typically somebody who has already built something, and it is starting to shake things up. And we're investing because we've already seen that the first-time entrepreneur has actually been able to get into the market and make something happen without us. And then we can come in and help build a team around them and help them build the business.

Portfolio.com: Do you think Facebook is going to try to I.P.O. this year?

Wilson: I don't think they're going to try to I.P.O. this year, but I do think they will to try to I.P.O. [at some point.] But I think they're smart enough and patient enough to realize that they need to build that engine of predictability around revenues and growth and really get the fundamentals of the business rock solid, because the last thing that anybody wants to do, particularly such a high-flying company, is to go public and blow a quarter early on, and then they become damaged goods, so I don't think they'll do that. I think they'll wait.

Portfolio.com: Do you think that Facebook C.E.O. Mark Zuckerberg has what it takes to take a potentially $15 billion company public? Or do you think Facebook should follow in Google's footsteps and bring in an experienced technology C.E.O. like Eric Schmidt before they go public?

Wilson: I think [Zuckerberg] can do it, but he's going to need some help. Bill Gates found [early Microsoft President and C.O.O.] Jon Shirley. Larry Ellison had a number of people over the years that have helped him run his company. It doesn't mean that Zuckerberg has to give up control of the company. Larry and Sergey have never given up control of Google. Everyone knows that. They just delegated certain responsibilities to Eric, and they've given Eric the ability to weigh in on every issue that matters to the company, and they've created a structure that works. I'm sure there are some frustrations at times, but it works, and it's made all of them fabulously wealthy. So I think absolutely Mark needs to do that. And I think if he's willing to listen to the people around him, including his board, his confidants, and his management team, he will do that.

Portfolio.com: What happens to Yahoo over the next 6 to 12 months?

Wilson: Well, it could very well be sold. Microsoft just had a great quarter and Microsoft has the exact same problem that Yahoo has. Together they could be 30 percent of the search market to Google's 70 percent. Divided, they're each somewhat marginalized, so certainly at a minimum, combining their search businesses makes an enormous amount of sense.

Or Yahoo could outsource its search business to Google, which would be throwing in the towel. I don't think they want to do that, but from a financial perspective, they could make a lot more money doing that. So they have to rationalize what they're doing in search, because it's unsustainable.

The other they have to do-and I think they're doing it-is they have to decide where they're going to fight and where they're not going to fight. They've gotten a little bit defocused in trying to do too much. They should pick four or five areas that they are going to be dominant in. They're dominant in email, so they have to continue to be dominant in email. They've got a very strong franchise in online photography, so maybe they should be dominant there. They've got some interesting things going on in online music, so maybe they should make a big play in online music. Places where they have great executives, great vision and great franchises already, they should invest in those. And the places where they don't, like social networking and search, maybe they should cede. They were trying to be everything to everybody, and that probably isn't sustainable anymore.

Portfolio.com: Do you agree with Yahoo C.E.O. Jerry Yang's recent push to make the site "the premier starting point on the Web"?

Wilson: Most adults I know start their Internet session at Google, and most kids I know start their Internet session at either Facebook or MySpace. So it just doesn't seem to me that it's a viable strategy.

Portfolio.com: How will Twitter make money?

Wilson: The centerpiece of Twitter is the Twitter timeline. It's you and all your friends and the updates you've made most recently. It looks very similar to the Facebook minifeed, and to me, the Facebook minifeed is the second most interesting attention aggregation point on the Internet, the first being the search engine result page. So if you own a powerful attention aggregation point on the Web, I think you can monetize that. Facebook has already started to do that by putting sponsored messages into the minifeed, and I think over time you'll see them do more and more with the minifeed as a place for monetization to happen. And I think if they're successful in that, a lot of people, Twitter included, will probably watch those moves closely and emulate them.

Portfolio.com: So you think Twitter might put sponsored messages in the Twitter-feed?

Wilson: Maybe not. But maybe that's not the most powerful idea. Maybe the most powerful idea would be if iTunes had a button that says, "I'm listening to this song right now," and when you click that, it goes into your Facebook minifeed and your Twitter minifeed. And maybe iTunes or the person who's trying to market the music in iTunes pays for the right to do that, because maybe when you do that someone clicks through and goes and buys the song, or listens to the song.

Portfolio.com: But wasn't that what got Facebook into trouble with Beacon, the company's social advertising system that broadcast users' purchases to their friends?

Wilson: I think there's nothing wrong with Beacon, other than the fact that it was launched as opt-out, instead of opt-in. So I think that users will absolutely want to broadcast certain things to their friends, and there are some things they're not going to want to broadcast to their friends. And they need to be able to control that at a very granular level. When they decide they want to broadcast that they think the new iPhone is the greatest phone ever, that's possibly a way for commerce to happen.

Portfolio.com: Do you agree with Yahoo C.E.O. Jerry Yang's recent push to make the site "the premier starting point on the Web"?

Wilson: Most adults I know start their Internet session at Google, and most kids I know start their Internet session at either Facebook or MySpace. So it just doesn't seem to me that it's a viable strategy.

Portfolio.com: How will Twitter make money?

Wilson: The centerpiece of Twitter is the Twitter timeline. It's you and all your friends and the updates you've made most recently. It looks very similar to the Facebook minifeed, and to me, the Facebook minifeed is the second most interesting attention aggregation point on the Internet, the first being the search engine result page. So if you own a powerful attention aggregation point on the Web, I think you can monetize that. Facebook has already started to do that by putting sponsored messages into the minifeed, and I think over time you'll see them do more and more with the minifeed as a place for monetization to happen. And I think if they're successful in that, a lot of people, Twitter included, will probably watch those moves closely and emulate them.

Portfolio.com: So you think Twitter might put sponsored messages in the Twitter-feed?

Wilson: Maybe not. But maybe that's not the most powerful idea. Maybe the most powerful idea would be if iTunes had a button that says, "I'm listening to this song right now," and when you click that, it goes into your Facebook minifeed and your Twitter minifeed. And maybe iTunes or the person who's trying to market the music in iTunes pays for the right to do that, because maybe when you do that someone clicks through and goes and buys the song, or listens to the song.

Portfolio.com: But wasn't that what got Facebook into trouble with Beacon, the company's social advertising system that broadcast users' purchases to their friends?

Wilson: I think there's nothing wrong with Beacon, other than the fact that it was launched as opt-out, instead of opt-in. So I think that users will absolutely want to broadcast certain things to their friends, and there are some things they're not going to want to broadcast to their friends. And they need to be able to control that at a very granular level. When they decide they want to broadcast that they think the new iPhone is the greatest phone ever, that's possibly a way for commerce to happen.

Visit Portfolio.com for the latest business news and opinion, executive profiles and careers. Portfolio.com© 2007 Condé Nast Inc. All rights reserved.