Valuation over Ownership

Union Square Ventures goes against the grain

The most successful venture capital firms are not household names. They are not financial institutions, each one is typically just a handful of people who hope to strike it big. Union Square Ventures (USV) is no different.

A general rule of thumb with startups is that out of 10: 3 may fail completely, 4 may stay alive and nothing more, 2 may perform well and 1 may be a home run success. USV has seemingly bucked this trend over the last 10 years, with 7 billion-dollar exits to their name.

Twitter, Etsy, Tumblr, Indeed - household names that represent some of the largest companies in their markets, all part of the USV portfolio.

The partners of USV have a unique talent for getting in early with companies that change the digital landscape. Part of this is their mentality to remain valuation-focused in their investments, rather than ownership-focused as many other VC’s tend to be. If the valuation of a startup doubles, VC’s tend to double their initial investment to maintain their level of ownership across investment rounds. Partners at USV attempt to have a different approach.

“We take the total amount of capital we have invested in a company and divide it by our total ownership. We like that number to be as low as possible relative to the current value of the business.” -Fred Wilson (Partner at USV)

In the technology age, it is easy for the valuation of a startup to be inflated beyond the traditional measures of a companies’ value. This can be a trap for investors, in which it is difficult to gauge the worth of a company without traditional assets (property, cash, commodities) or with large amounts of debt. Having a valuation-driven investment strategy is a method of holding yourself back from doubling down on a potentially risky investment. Instead of raising more capital to meet a higher asking price, USV actually likes to invest less, contradicting almost everything we think we know about investing. This allows them to maintain a confidence in their portfolio that isn't tied to the hype of a single startup.