Fred Wilson of Union Square Ventures lost a lot of money in the dotcom crash. Everyone did. But not everyone spent the next three years trying to earn it back. Ultimately, by scrambling and salvaging with his portfolio companies, he managed to make more money than he lost, he told an audience at PandoMonthly in New York this evening. That, along with his massive advocacy of New York’s tech scene, is why he’s been dubbed the “godfather” of New York’s tech scene.
After the crash, many of the people he worked with had stopped returning his phone calls. Others stopped showing up for board meetings. There were plenty of founders who simply walked away from their companies. Several of his biggest deals were huge disasters — he lost $25 million in famous flame-out Kosmo.com, for example.
Working through that became the most formative experience in his entire career, he said. He learned about the kind of people he wanted to do business with in the future. “There are founders we worked with who are still working at companies that we invested in in ’98, ’99, and I have incredible amount of respect for them,” he said.
The result of spending 2001 through 2003 saving 36 bubble-era investments? A dozen of them didn’t survive. Another dozen were stabilized and sold for a small amount of money. The last dozen, including comScore, went on to create almost as much value as the companies which had sold during the bubble, Wilson said.
In that time, he also learned about what works and what doesn’t work on the Web.
For one, taking an offline business and porting it to the Internet doesn’t work. It doesn’t take advantage of the inherent advantages of the Internet. The New York Times on the Web — Wilson had invested in NYT’s digital arm — is not a good investment. Craigslist or Ebay, on the other hand, take advantage of the Web’s architecture. They are two-way networks. ”These are the kinds of business architectures that make sense,” Wilson says.
That’s supported in his thesis around ecommerce investing. He doesn’t like ecommerce businesses which acquire inventory, mark it up, and sell it online. “It has low margins, high capital costs, and high customer acquisition costs,” he says. He does like ecommerce sites like Etsy or Kickstarter, which are marketplaces that benefit from network effects.
The other thing he learned is a more common dotcom-era lesson: Lean, lean, lean. “Spend very little money on the seed and A round,” he said. “Money doesn’t buy success in the startup world,” he said. “Doing a $10 million seed round makes no sense. People were doing those back then.”
Despite his label as the “godfather” of NYC tech, Wilson says he sees himself as more of a consigliere figure. “I like to be the person the founder calls when he wants advice and counsel,” he said. “I’m as deeply invested in their company as they are, and so I can give them advice that is constructed in a way that would be helpful to them.”
Silicon Valley came out of the dotcom bubble with a little more resilience than New York, Wilson said. That’s because the Valley was on its third or fourth generation of startups at the time. Now it’s on its sixth or seventh. Each generation of companies grows and sells, creating growth, wealth, and talent. “Each generation multiplies on itself,” he said.
New York, on the other hand, was in its first generation of startups when the bubble happened. Thousands of companies were formed in an environment with no roots system to absorb a massive speculative bubble. The city had one company — Doubleclick — that ended up going public and selling to Google. Now there are something like 25 ex-Doubleclick CEOs in New York.