Value Investing

NYU Stern investment newsletter: EVALUATION, May 2015 issue

NYU Stern is pleased to present the fourth issue of EVALUATION, NYU Stern’s student-run investment newsletter. For this issue they elected to focus on an area of the private markets that is witnessing intense activity of late: Venture Capital Investing.

Inside you will find detailed insights from experts in a sector where valuation runs high, but information runs low – including Union Square Ventures’ Managing Partner, Brad Burnham and SoftBank Capital’s Matt Krna. The PDF also has a special section featuring NYU’s very own Valuation expert, Professor Aswath Damodaran. In addition, the newsletter features student investment write ups, including long Masco, short Youku and short CAR Inc. (HKSE: 0699 HK).

Partial excerpt followed by the full letter in PDF.

Brad Burnham – Managing Partner, Union Square Ventures

Brad Burnham is a managing partner at Union Square Ventures. Brad began his career in information technology with AT&T in 1979. He held a variety of sales, marketing and business development positions there until 1989 when he spun Echo Logic out of Bell Laboratories. As the first AT&T “venture”, Echo Logic was a catalyst for the creation of AT&T’s venture capital arm, AT&T Ventures. When Echo Logic was sold in 1993, Brad joined AT&T Ventures as an Executive in Residence. He became a Principal there in 1994 and a General Partner in 1996. At AT&T Ventures, Brad was responsible for 14 investments including Audible and Classic Sports Network. Brad co-founded TACODA in 2001 before joining Fred Wilson to create Union Square Ventures in 2003. Brad has a BA in Political Science from Wesleyan University. He is married with two kids and lives in New York City.

NYU Stern investment newsletter: EVALUATION, May 2015 issue

EVALUATION (EV): You started your career in information technology with AT&T. How important was that early experience both on the technology and business development side?

Brad Burnham (BB): It was formative but it wasn’t critical from the perspective of building relationships back then that are important to me today. It certainly taught me a lot about how the tech business works. Also, it taught me a bit about how large organizations work. This has indirectly been helpful since I now work with young companies who compete with large organizations. I understand what large companies’ motives are and why it’s sometimes very difficult for the large firms to compete with start-ups. Even though large companies have all the assets in the world, including market presence, capital and products, there are complex internal organizational dynamics in large companies that make it difficult for them to react to startups.

EV: How do you source new potential venture investments? Could you briefly walk us through the investment process?

Brad Burnham: I think the venture capital business has changed over the years. In the past, it was much more opportunistic, much more of a filter feeding process. You basically built a set of relationships, which yielded a certain amount of deal-flow, and then picked the best of those deals for your portfolio. When we formed this fund (Union Square Ventures) we took a very different approach. We were very thesis driven and we knew what we were looking for. We went out looking for those particular deals, and began talking about those deals on our blog, which was a revolutionary idea in 2003-2004. Then, those specific deals started coming to us as a result of the conversations we were having. We don’t have a typical process, and I think a lot of venture firms have evolved towards something that is more thesis-driven and more focused than historically so.

EV: Venture capital is inherently a high risk, high return business. In a portfolio you have a number of singles, in addition to one or two home runs that more than pay for the strikeouts. Could you walk us through one of your home runs? What about one of your strikeouts?

Brad Burnham: I’ll first talk about Indeed.com as a home run because it also allows me to talk about deal sourcing. It is important to understand the difference between Web 1.0 and Web 2.0. From our perspective, Web 1.0 was a bunch of offline businesses moving online. For example, Craigslist is really a 1.0 implementation of a classified advertising business. If you look at Monster, Career Builder or Hotjobs in the employment space, these are businesses that have long existed offline in the newspaper world.

Moving them online cut costs, but did not fundamentally change the business. We started to think, “Gosh, there isn’t really a 2.0 implementation of employment advertising. What would that look like?” We decided that it had to look like “Search” because in the 1.0 implementation you just put the ads online, pay for the posting, and save the cost of printing, trucks, and distribution. The 2.0 model should flip that around, and employers should put the ads online, and somebody should be searching across all those ads. So, we went looking for that business. After tapping our network to find our guys (Indeed.com founders), we tracked them down and started what was a 6-month long effort to invest in their company. After some convincing, we led a $5 million investment in the company, which turned out to be all of the primary capital they ever took. They built a business that they sold for reportedly over $1 billion to a Japanese company called the Recruit Corporation from our initial capital base – so that was a huge home-run in terms of the returns on that initial investment. I think it worked really well because it was a 2.0 implementation competing with a lot of 1.0 implementations, and also because the founders were very complimentary.

See full PDF below.