Rebecca Kaden – Thesis Driven Investing

**Patrick O'Shaughnessy** (0:04)
Hello, and welcome everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

**SPEAKER_3** (0:24)
Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.
Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

**Patrick O'Shaughnessy** (0:49)
My guest today is Rebecca Kaden, a partner at famed venture firm Union Square Ventures. USV is known for their thesis-driven investing, which is the topic of our conversation.
Rebecca walks us through the evolution of USV's thesis into its third generation. And from there, we explore many of the most interesting and exciting areas of business technology and learning. Please enjoy our conversation.

**Patrick O'Shaughnessy** (1:11)
So, Rebecca, this is going to be really fun. I think because you guys are a thesis-driven investment firm, which is different from a lot of the firms kind of your peer group that I've talked to recently, we could start at the very top with, because you penned it, Union Square Ventures' third iteration of its broad investment thesis. And then we're going to go down each of the little rabbit holes beneath that, but let's start at the top.

**Rebecca Kaden** (1:33)
Awesome. Well, thank you for having me. This is so fun. So, USV is a thesis-driven firm, which really just means that rather than think of venture as a coverage-driven model of how many companies are out there and how many we can see, how can the partnership come together and think about ideas and things we believe in and aggregate that into a thesis that we think can shape our investing strategy? The firm started with that in 2003, and it's worked well both because I think it produces good results, but one thing that I like to point out is it works well, I think, because also it's a group of people that likes it. It's thinkers, and they think it's fun, and we enjoy coming up with these thesis ideas together. So, to talk about Thesis 3.0, it actually helps a lot to start with 1.0. So, 1.0, which was published towards the beginning of the firm, but just as all the others, when we publish it, it's as much a reflection of the ideas that we've already been investing in for some time as it is about where we're going. Because what happens is the thesis kind of comes together organically or through a series of conversations. We realize it's guiding our thinking and investing, and then we publish it out to the world because we believe that putting ideas out there can only help everyone, including ourselves.
1 was about large networks of engaged users, network effects.
Now, network effects is a pretty obvious thesis. Quakes term, yeah. That's been largely adopted by many investors, entrepreneurs, and the internet at large. But in 2003 and 2004, it was less obvious.
The belief was that equity value would amass towards where there were large networks of engaged users and that platforms would grow off of that. That turned out to be true and led to great investments that USV made at the time, long before I was here, in businesses like Twitter and Indeed and Etsy. But what happened was two things. One, the team realized that there was opportunity to see that same kind of network effect in vertical networks that they were seeing in horizontal networks. But also that the opportunity got less and less with every horizontal network built because these network effects are very strong and they were creating an internet of centralized platforms that were very hard to compete with.

**Patrick O'Shaughnessy** (3:50)
Can you just define horizontal versus vertical just so I'm sure that I have it right?

**Rebecca Kaden** (3:54)
So horizontal is something like Facebook, where the core network effect is the business.
Vertical is something like a financial services platform or an education platform that has a network effect to it. I think about Duolingo as an example there. Duolingo has a core network effect, meaning with every additional user, the platform gets stronger in various ways, but it's an education business. The network isn't the thing. So that's how I think about vertical versus horizontal.
So because those centralized platforms were growing so quickly and becoming such a dominant force on the internet, Thesis 2 emerged, which was, could you see those same tendencies in vertical networks, as well as the underlying infrastructure to build and create those networks? And by that, that led to investments in things like Twilio, MongoDB, Stripe, Cloudflare. You're seeing the kind of infrastructure of the internet be built on both the consumer and the SaaS side, both horizontally and vertically.