Exclusive Interview with the co-founder of Union Square Ventures: Brad Burnham
Brad Burnham is the co-founder and managing partner of Union Square Ventures (USV), one of the top returning venture capital funds in the world. Brad graduated from Wesleyan University with a Bachelor of Arts degree in Political Science in 1977. He had worked for AT&T in his early career, and was a former executive of both Echo Logic and AT&T Ventures. Since joining SUV, Brad has invested a lot of well-known platforms such as Tumblr, Stack Exchange and Coinbase. In the following interview, he shares his insights on crypto economics and the future of blockchain market.
Bianca: What do you think about blockchain when you first heard about it?
Burnham: I first heard about bitcoin when I first heard about blockchain in 2011. So, I was thinking more in terms of currency than blockchain. It took a while for me to understand the technology underneath the currency. And, I found the technology was very novel and profound. But, it is probably not fair to say that I fully understood how profound that technology was in 2011. At that time, I only thought blockchain was a really neat implementation of some cryptographic ideas.
Bianca: What kind of potential are you seeing in blockchain as a technology? Why?
Burnham: Let me show you a sense of scale. The internet is not an open public communication media. I think we can agree that the Internet has profoundly changed the media industry and perhaps the way humans exist on the planet. So, it is a pretty profound consequence. Blockchains are open public data stores if you think about the way technology architectures are built. You start with communications, on top of those are data, and maybe on top of those are the applications or user experiences. But, as you move up the stack, I think the implications are possibly even more profound. The Internet opened up the market for a wave of innovation which gave us everything from Tencent to Facebook. I am more concerned about the degree of dominance those big dominant players have become. And, I think blockchain is the key to actually unlocking another wave of innovation. So, I think it is really important.
Bianca: What's your focus in terms of investment? Is blockchain a focus of yours now?
Burnham: Yes, I would say it is my primary focus. To talk more broadly, my focus is on supporting decentralized emergent bottom-up innovation. I believe that to support this kind of innovation, you have to be permitted to get access to markets. The Internet did that for a while, and then markets began to be consolidated again. And, I think blockchain will open it up again. So, my investment focuses more on decentralization than blockchain specifically. If someone came up with another mechanism for allowing that kind of decentralization, I would be really excited about it. And, there are a couple of people working on it right now. So, it is more about open access to markets, decentralized innovation, and the opportunity for individuals to participate in the value they create.
Bianca: When did you start focusing on decentralization? Why do you think it is important?
Burnham: My partners and I started focusing on decentralization when we began to be concerned about the consolidation that we see with the applications on the Internet. As investors, when we were investing in Tumblr, Tumblr was able to get to a global audience of more than 20 million people with three or four employees. That was a phenomenon only possible in the early days of the Internet. The days without real gatekeepers on the Internet. Tumblr could be used pretty much anywhere in the world by anyone. Then, we start to see companies such as Google, Apple, Facebook, Amazon, Tencent, and a couple of others becoming vertically integrated. A lot of services on a single platform have a very strong relationship with a single individual user. It becomes more difficult to launch new small technologies. Since I am a huge fan of decentralized innovation, I started thinking about what would open up the market again for another wave of innovation. I believe blockchain is the secret to that.
Bianca: Before our interview, you mentioned that you witnessed a lot of what happened in the past two to three decades. Do you have a feeling that the present is very similar to the early 90s or the dot-com years?
Burnham: Yes, the present is closer to the early 90s if you think of the dot-com years as the late 90s. There is a certain amount of speculative fervor today that feels a little bit like the late 90s. But, I think it is actually closer to the early 90s in terms of the maturity of the technology. I mean, browsers are essential before the Internet could be a broad-based consumer phenomenon. But, browsers and broadband communication were not created until the late 90s. So, I think the equivalent here is that before individuals can see a lot of decentralized applications built on top of blockchains, they have to acquire cryptographic wallets to put in their pocket. We are nowhere near that today. So, I think that it is going to take a while for blockchain to become a mainstream phenomenon.
Bianca: Even though the technology is not mature enough today, a lot of money is rushing into the space and a lot of VC investors are looking into it. Do you think there is a strong sense of “fear of missing out” existing in the space now?
Burnham: Yes, I do. But, I think it is also driven by a concern that the things which were working for venture capitalists in the past are not going to work today. If you look at what happened to Snap, the creator of Snapchat and Snap Stories, as the last consumer-facing web service to get to a global scale. They have around 170 million users. When Facebook introduced Facebook Stories which was essentially a direct analogy for Snap Stories, they got 370 million users on Facebook within a few months. So, it is very difficult for a small company with a really interesting innovation in the consumer web space to get to a global scale without attracting one of the dominant platforms, which decides to use its distribution power making the innovation available within its service and its promotional power to promote its alternative. It is very difficult to get one of those businesses to scale. At the same time, the challenge for investors is that it is becoming more expensive to invest in consumer-facing web services. The upside from those services is becoming less. So, I think a lot of the reasons that investors are looking elsewhere beyond the web and beginning to look at blockchain is because it does not look like they are going to be able to generate venture capital returns out of additional investments in web services.
Bianca: When you see one deal or one project, what is your criteria? How do you judge if it is a good project? And, how do you decide to invest in a project?
Burnham: A lot of it has to do with our conviction around the need for the protocol that is being offered. First, we will see if the project can solve a problem in the marketplace. Second, we will acknowledge what is the issuance model. If you have a protocol that is being offered by a core development team, and for instance, they are keeping 80 percent of the tokens to themselves and selling 20 percent of the tokens to the market, that does not feel good to us because it feels like it is essentially not creating the right incentives. When you are building an open network, you want the participants in that network to feel deeply committed to and have an economic interest in that network. If the network is held too tightly, the participants would not have commitment and interest. So, we care about the issuance model. Then, we have to care about crypto economics. What is the incentive structure in the network? What is the game theory in the network that creates the incentive for people to invest resources, time, money and potentially computes resources in supporting that network? Do we feel good about those crypto economics? You have to go beyond that to look at something like velocity. Because if you create a token, you assume that it is going to appreciate. Since there is a limited supply of tokens, as more people come to the network, there is upward price pressure on the tokens. If the tokens can either be reused for an infinite number of times or velocity can be very fast, then it would not create that upward price pressure. So, there needs to be a consideration about velocity in crypto economics. Finally, we care a lot about the teams. We will see if the teams have the technical chops to execute the implementation, and if they have done anything that demonstrates the capability to deliver a protocol to market. Take one protocol application for example. If the team had already built a deliberate Inter-Planetary File System (IPFS) before they launched Filecoin, it was very clear that they knew how to build a decentralized protocol. With our support, they could track a lot more open-source development to that project. This gave us a lot of confidence that they were able to do the same for Filecoin.
Bianca: For bitcoin, most people keep them for the value but not as a kind of payment vehicle. Do you think it is more about that we are not ready in terms of technology? Or, do you have another explanation?
Burnham: I think there are two key explanations. One is that the technology is still immature. The issues around scaling and performance are real. The second is that the infrastructure is not deployed broadly among users. If you go back and think about the Internet before broadband, video made no sense. Video was not an application that people could have deployed. It is also true that from 1993 to 1995, there was no technological infrastructure for encoding video and shipping it around the internet because of the absence of broadband. There was no consumer to receive it. Similarly, if I do not think too much about the technology behind my browser, it will just be a browser extension, something on my desktop or on my phone that allows me to access to these new services. The whole problem of private keys and cryptography is too complicated for most individuals, including me, will go away. It will be masked in an application on a device. Before we started seeing real consumer applications take off, I think we will have a similar period as from 1993 to 1998. It would be similar to how the browser getting distributed when the applications get probably distributed. And, it would be like having broadband when blockchains get scalable and efficient.
Bianca: USV is behind a lot of technology giants like Twitter. Do you think people will create new versions of these technology companies such as Blockchain Twitter in the blockchain age?
Burnham: On one hand, I really hope so. That is because I do believe that decentralized immersion and bottom-up innovation are what move society forward. Also, they create the most wealth for the most people and distribute the wealth most broadly. On the other hand, I think people underestimate soft network effects. This is something that Andreessen Horowitz has been very thoughtful about in terms of why these things sustain themselves even if they do not have a data monopoly. So, if you implemented an alternative to Twitter that was fully decentralized, would it displace Twitter overnight? We look at a computer language Java, C, or something similar. Arguably, there is no network effect in those languages. I do not control the data. But, because my friend down the street knows it, I can call him or her with a problem, it makes easier for me since there is a lot of training courses around it and a lot of jobs available for that skill. There is a kind of soft network effect that I think people underestimate. So, the question of looking at what sustains a network is not just about if there is a real lock-in with a data network effect, but also if there is this kind of soft network effect. I think the next generation will also have soft network effects. Although there will still be some consolidation, I hope it will be held in check by the ability to fork a network. If too much rent is being extracted by the owners of the platform and not distributed more fairly by the creators and consumers, I think there will be the possibility of forking. But, it is not as easy as many people would like to think.
B: In recent years, more regulations are executed because of scams around exchange businesses such as hacking. Since USV is investing in Coinbase, what do you think about the exchange business now?
Burnham: First, I think that exchanges are probably the most interesting place to introduce regulations effectively. I think that Coinbase has always been a leader in working with regulators and has been trying to make sure that they are complying with the existing regulatory regime as much as possible. They are a good example for others for being responsible. But, one of the things happens as a result of that is they have a limited number of tokens that they can exchange on Coinbase. On the opposite extreme, there are some really interesting possibilities of fully decentralized exchanges. There may not be a company or a jurisdiction that anybody can go after. But in between, there are exchanges in different regulatory regimes with different amounts of oversight. If I were coming into this market, I would want to be in a very visible and well-regulated exchange. So, I think the fully decentralized exchanges will grow to the degree that regulators overregulate the existing regulated exchanges, and it will force some responsible regulations since people will try harder. Also, people will make sure that they are doing their best to be compliant, and not wanting all of the transactions to move to a completely unregulated decentralized exchange.
Bianca: You mentioned that Coinbase is missing some opportunity because they have limited tokens that they list. In your opinion, is that beneficial for them in the long term, or are they missing some of the market share?
Burnham: There is no question that they are missing market share in exchange for trying to be responsible. Obviously, the number of tokens that they list is a small fraction of the number of tokens that are traded on other exchanges. But, that is a tradeoff. People who want exposure to the asset class are probably going to be more comfortable with an exchange like Coinbase than they would be in a fully decentralized exchange, or one of the exchanges that exist in the jurisdiction with relatively limited regulation. As you pointed out, these exchanges have been hacked and will probably be hacked again. So, there is some security associated with limiting the number of tokens that people are trading.
Bianca: When people talk about the Internet, people will think about giant companies in the U.S. But, for blockchain companies, it is very decentralized. It is everywhere around the world. Do you think the U.S. is losing its edge in this game?
Burnham: I think that the U.S. risks pushing all of this innovation offshore if they do not understand what they are regulating. If the only tool you have is a hammer, you think that everything in the world looks like a nail and you come after everything with that, then the risk of killing all of the innovation in the U.S. potentially exists since companies have already very broadly distributed over the world. Today, a very significant amount of that innovation as well as crypto thinking are taking place in the U.S. But, since there will be jurisdictional competition among countries to attract these innovations and new infrastructures, I think the U.S. needs to be very thoughtful about not overregulating but really understanding the nature of what they are regulating.