Nick Grossman is a Partner at Union Square Ventures, a leading venture firm that has invested in companies like Twitter, Stripe, Coinbase and many more. Previously, he led an incubator for startups at the intersection of cities and data at OpenPlans.
We talk about his journey to VC and crypto, investing in collector DAOs, the future of VC, the USV anti-portfolio and more.
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NA: Thanks for coming on. And I'd love to start with your background and how you kind of find your way to venture capital.
NG: Yeah, sure thing. It's great to be here and happy to talk about it. I don't know that anybody has a super straight line into venture capital. I think a lot of people come from a lot of different directions.
Mine was not a straight line at all. I started out my career working in urban planning. I was always interested in cities and how cities get built and designed and changed. And my first job was working at urban planning, consulting firm, like helping cities, you know designed public spaces.
But I was always interested in technology and design and products, just like I was interested in cities and places and through a bunch of twists and turns, I ended up really focusing more of my career on the tech side. I was a self-taught developer. I did a lot of work, like local, small businesses and startups doing web development eventually ended up in a leadership position at a tech company in New York that was doing software development and sort of media focused on urban issues and urban infrastructure.
So it was kind of the connection of my two interests. I did that for about seven years and during that time I learned a lot about open source and open data and kind of I guess the politics of technology in addition to you know, the mechanics and issues of running a company. And after doing that, I ended up working at USV.
And my initial role at USV was not focused on investing. It was actually focusing more on the policy implications of startups and tech companies just as kind of like a side project and you know, over a period of time, I got more and more involved in the operating side of the fund and the portfolio.
As USV got more interested in crypto this is going back maybe 2012-2013. I realized that crypto is a kind of an amazing intersection of all my interests too because it takes the public infrastructure of like digital platforms and reshapes it as sort of an open public Democratic system as opposed to something controlled by a single company. And so that was conceptually like really this joining of my interest in cities and places and like governance process and open technologies and like the internet. And so, I really got drawn into that as we did as a firm and have been pursuing that line of inquiry among others for the past 10 years at USV.
NA: That's super interesting. Yeah. I think it's such a different journey, as you said, everyone has quite a different journey, but I guess urban planning to VC is quite interesting.
NG: Yeah. I think it is and I guess I think of interesting and maybe different I kind of think of all of it as public infrastructure, right? The streets that we drive on, the trains that we ride on, the power that we use, the utilities that we use are not that different than the switches and routers and packets and databases and apps that underlying digitalize. And so, you know, for me, it all kind of blends together as like a physical world infrastructure and digital world infrastructure and you know, looking for opportunities to build new and interesting and good things on top of it.
NA: Yeah. I think I'm getting ahead of myself here, but with your urban planning experience, how do you see DAOs and how they're kind of functioning right now?
NG: Yeah. DAOs are fascinating. You know and crypto in general, it brings a sort of democratization of governance to technology platforms and that predates DAOs and that was a very flexible term.
But if you think about DAO as a group of stakeholders, you know, governing a technical system it can be formed in any way. It can be formed to look like a company. It can be formed to look like a representative democracy. It could be formed to look like a direct democracy. It could be formed to look like loose chaos.
And so, I think there are many structures that can be implemented using the DAO. What's interesting is that you can implement any of those structures natively on-chain. Which just, I think opens up a lot of design space. You know, I think you could argue, people do argue that you know the financial side of crypto is just reinventing finance and using different words and that the kind of group organizing a part of crypto DAOs and governance is just reinventing the same governance concepts that were the bedrock of politics over the last of thousands of years. I think there's some truth to that.
To me, I think the just what's getting everybody so excited is that it never was possible before for a group to manage a technical system where that group wasn't either a company with like, you know, a closed corporate structure or like a really loose affiliation of contributors, say around an open-source project with no economics and no like binding stake. So, I think it's just kind of fascinating that there's this new space in the middle of those two things.
That's why I'm excited, I guess, but there's a lot to figure out.
NA: No, for sure. And I think as far as I've seen, USV has invested in about 3 DAOs, right now, can you talk about if an investment in a DAO, how it is different from an investment in a company and how you think about that?
NG: Yeah, I mean, I think there we’re still like figuring out the right way of describing the landscape of DAOs. DAOs fall into a couple of different buckets. There are DAOs that look more like investment funds. There are DAOs that look more like you know, sort of protocol governance there's, DAOs that look more like companies where they're building a product.
And so, we are members of each kind. And if you just take those three kinds of and the, I think the protocol DAOs and the product DAOs are kind of potentially very similar. And then there's also ones that look may be more social. So there are many kinds. We're part of collector investment DAOs, like Fingerprints and Flamingo.
And those are, they resemble investment funds in that the main activity is okay, let's build a thesis and let's go acquire some assets and be smart about what we acquire. It goes beyond what most funds do though because there are all kinds of activities around activating those assets and building.
You know, experiences around them and, you know, the culture around them. And so I don't think it's right to just think of them as investors. And then on the product and protocol side, you know, I think there are DAOs that well sort of resemble companies, building products, whether those are really wide open protocols or more narrowly focused products.
And I think the, you know, in each case, there's a question of like, what's the best way to organize people, to get the most benefit out of the DAO structure as something different than a traditional corporate structure. And I think that's still in the super early innings of getting figured out. But I think our, I guess our thesis on starting to invest into DAOs directly is both, this feels like the future and we want to understand it so, we want to be involved. We want to be hands-on and, I think there are going to be opportunities to unlock broader coordination participation, like community involvement, whatever you want to call it, leverage, you know, in a project to this, through this format that feels, I don't know about obvious, but that feels like the promise and we're excited to explore that.
NA: Yeah. And you compared some of the investment DAOs and USV has made a handful of investments into crypto funds earlier. Is there a similar kind of thinking when looking at the more investment DAOs and being an LP in a fund?
NG: Yeah, it's a great question and as an astute observation, you know, our mandate is not to invest in funds.
Our mandate is to invest in operating companies. And that's generally what we do. In our 2016 vintage, we made five investments in crypto hedge funds and venture funds. And that was as there was this explosion of investing in tokens, and our sense was that there's a new set of skills that is emerging among managers who are figuring out how to invest in tokens.
We want economic exposure to that, and we want to learn from folks who are really all in deep on that. That I think it was a very timely and good decision at that time, and then now in NFTs and with sort of collector DAOs and NFTs, it feels kind of similar where, this year was a breakout year, the end of last year and this year in terms of NFT was, and their cultural relevance and the sophistication of teams that are growing around to buy and hold them and collect and cultivate these things. And, you know, the level of depth and sophistication and know-how in these collector DAOs is just stunning.
And, so it's kind of the same story where we want economic exposure. We expect and hope, there's a lot of economic opportunities there. And we also, you know, want to be there to learn from the folks that are, you know, really doing this in a deep way. So, you know, who knows if we'll keep doing this in the future as other sorts of moments click but it's been a reasonable strategy for us so far and so a relatively small one, you know, in comparison to the whole fund.
NA: Yep. That's a great point. And I guess now being part of a handful of these DAOs and, you know, experiencing how they work, do you see any limitations or certain things that you're looking for, maybe from an investment point of view around DAO infrastructure and how things can really get better?
NG: That's a really good question. I don't think that we have a fully formed thesis yet on all the things that are needed or, you know, should be built. Lots and lots of teams are building out tooling around knowing who's working on what, how do you reward people you know, sort of reputation, communications kind of managing funds in a more elegant way.
How to handle decision-making in a more distributed and scalable way. I don't know that there's yet a playbook. That is there absolutely is not currently a single playbook. And I think a lot of teams are building a lot of pieces and I think over the next, you know, couple of years, we'll start to see the ones that really seem to click for different use cases.
You know, as an initial observation it can be hard to parse everything that's going on in a chaotic busy DAO, especially if it's a big one with a lot of more casual contributors and so I think making these things work is going to be the process of harnessing that scale for benefit while like cutting, figuring out how to cut the noise in a reasonable way.
And also, I think another vector is about how do you form in a group that is more transient than other kinds of groups where, you know, people are coming and going, it's not a company where someone's necessarily making a long-term commitment. It's not an investment fund where, you know, there's an eight-year vesting period, you know, as a GP to venture fund and I think that's another interesting challenge to solve.
So lots of challenges and I don't know what the answers are yet, but I can't wait to see.
NA: Yeah, but I do think with especially your background, urban planning would be a really interesting way to look at some of these things and see how it relates to, you know, real-life communities and cities. So, I'm looking forward to seeing what you do there.
NG: Yeah. Thanks. I'm excited about it too. And I kind of suspect that it will be a lot like local government where there's a handful of people who really have the time and effort and dedication to participate fully and deal with the hassle and the headache and the angst and all that.
And then there's going to be a lot of people who don't want to do that and want to, you know, just be a citizen and not a politically active citizen. And you know, I don't think we've figured out how to do local government in a really good way in the United States in a couple of hundred years. And so maybe, you know, may take a couple hundred years to get that governance right to.
NA: I wanted to get your thoughts on venture DAOs specifically, and, you know, there's always a lot of talk around how they would impact traditional VC models. What's your opinion around that?
NG: I mean, I think Venture DAOs have a lot of things going for them in that the people in them are really close to what's going on. And so, I think there's a real sense of what's relevant and what's important access and, you know, connection to emerging opportunities, the ability to be there early.
I think there's going to be the existence of more venture DAOs is definitely going to put pressure on the overall funding ecosystem. And, you know, make it probably harder for everybody including VC's and including other DAOs to put big checks to work into opportunities. We're already seeing that play out.
And then in a lot of ways, I think venture DAO is probably will have some of the same challenges to scale as venture funds, which is as you grow in size there's more pressure to put more money to work. The decision-making process on how do you do that can get a little bit more complicated.
You know, decentralizing the ability to invest and make decisions versus bringing everything into a big committee. Just like we were talking about a minute ago, you know, DAOs are kind of reinventing governance. I think a lot of venture dollars probably will end up rediscovering a lot of the challenges in traditional investment funds in terms of how to organize them, you know, effectively especially as they grow over time.
And this is one where, you know, the VC industry is constantly changing its model on how to do that too. It's an unsolved problem generally. So, I don't know. I welcome them. I want to work alongside them and, and invest in them and, you know, learn from them. And I think they will play an important part of the funding landscape going forward.
NA: Yeah. No, those are great points and taking a small step back from crypto and talking about USV in general, I've seen that USV makes, you know, a handful of investments every year.
How do you end up doing that? So, what are the key things that you're looking for when you see all these opportunities to come to that conclusion of this handful of investments?
NG: Yeah, so it's hard cause we see a lot of good things, especially now. The pace of quality opportunities that we see is kind of astounding.
The way that we always approach this is to have a thesis that we stick to and refine over time. And that we try and use that both to guide us as we go looking for opportunities and also to help filter out things that do and don't fit and over time I think we've had pretty good success using our thesis to quickly be able to say this is interesting, but it's not for us, you know, and we have to be totally comfortable that this approach means that we will say no to things that are like perfectly good, if not fantastic investments, but aren't the kind we're looking for and get comfortable saying no to those, you know, all day long.
That's been pretty important for us. And at the same time, you know, right now, it seems like everybody's pace is picking up and I think it's due to the effect of Zoom on fundraising. It’s just opportunities come faster deals get done faster.
And so, where we used to have a month or two months to evaluate an opportunity and meet a team in person you know, now maybe you have a day or a week or two weeks, you know if you're lucky and again what does it means for fundraising? It means that it's easier to get money quickly. It can be a little harder to sort of test out a relationship, you know in the process of making a match.
And so that has definitely sped our pace up. I think it's probably that everybody's pace picks up. Even though we continue to try to, you know, be deliberate and apply that thesis, that we've always applied to everything.
NA: Yeah. So, with that increase in pace compared to, you know, previously taking a few months and building a relationship, how do you come to that conviction to make quicker investments?
NG: We can always go the fastest when we've done work on a category. And so, if an opportunity comes in, that's interesting, but it's not an area that we've done dedicated kind of thoughtful research on it doesn't mean we won't do it, but it's harder for us to immediately jump on something.
Whereas if there's say a category that we've identified previously and spent time trying to understand and landscape and come to a more sharpened point of view on the kind of thing we're looking for there, then when we see it, it's like, Bam. Yes. Easy. And you know, that happened last week on the deal that, that we committed to that, you know, as we were talking to the entrepreneur and like understanding it better, all of a sudden, we're just like, oh my God, like this clicks, like this thing and this thing, and this thing, and this thing that have all been the things that we've been looking for in this category.
And it was like the easiest yes ever. So sometimes that happens that way. But usually only when we've had a chance to do work on our category, You know, prior to seeing this specific opportunity, right.
NA: And then within crypto, the work that you've been doing, is there something that you are looking for there?
NG: It's a great question. We've been spending a lot of time on sort of DAO infrastructure I think for obvious reasons. We're making investments there and we're still developing our thesis around that. We've been spending a lot of time looking at identity and authentication and all the infrastructure around that as web3 becomes more mainstream.
So, what is it going to take to get wallets into the hands of the next, you know, hundreds of millions of people, where's that going to come from? What are the pieces that are necessary to make that really smooth and good? So that's been a big area of focus. One other one that's a little more different, but I think interesting is we also have a dedicated climate fund and we've been starting to look more closely recently at intersections of our climate thesis and our crypto thesis.
So as an example there are a lot of efforts to represent carbon credits on-chain and use those as collateral, you know, in DeFi and other things like that. And that feels important to us. And so that's one where, you know, we've been kind of glancing at it for a while and we're starting to look more thoughtfully at it.
So, and then as we get these ideas kind of shaped up, you know, generally speaking, we like to make one or two, maybe three investments along each kind of general, you know, sub-theme.
NA: Fair enough. And then circling back to how you mentioned, you guys have gotten comfortable passing on some great opportunities. I guess just an interesting question is what does the anti-portfolio portfolio look like? Are there some highlights?
NG: Well, I guess if you, there's a couple of different ways of looking at the anti-portfolio like things that we, you know, wish we had invested in but didn't. Things that we pass on because they weren't in the thesis that turned out to be huge we don't even really count that as anti-portfolio, because if it's outside of our thesis, it's outside of our thesis, you know.
The classic USV anti-portfolio was like Airbnb. You know, we were in the pole position for the seed or Series A back in like 2011 and didn't see it. You know, we passed on Uber at the Series B this was us more on the web2 like mobile era.
I don't know if we've done a lot of work to look at an anti-portfolio in crypto.
I mean, so many things have, well, Solana maybe, I guess. Like we had plenty of opportunities to invest in Solana early on and didn't do it. And that has turned out to be, you know, a grand slam, at least from our financial perspective. So far, so, you know I think there will always be misses and we try and design our fund structure and our fund sizing such that it's okay if we miss things that turn out to be really big as long as we get some of them.
NA: Yeah, no, that's fair enough. What is it a secret obsession of yours that not many people know about?
NG: Oh, good question. No, the one, this is maybe not that interesting, but it is the, well I'll give you two. One was maybe not that interesting is sleep. I've just been super fascinated with sleep lately. I'm wearing an Oura ring, which I've had for about a year and reorienting my habits to like sleep better and feel better when I wake up in the morning has taken up a surprising amount of my attention. I guess is and then that one's kind of standard VC style, you know, quantify itself garbage, but I love boats. Maybe not everybody knows that about me. I have a little sailboat. I love, I've always loved being on the water and whenever my kids and I play 20 questions in the car with my wife the joke is that I always, that mine is always sailboat.
NA: I love both of those. How often do you manage to get out on the boat?
NG: A fair bit during the summer
NA: Okay, fair enough. And finally, what's the latest, publicly announced investment you've made and why did you make it?
NG: Oh, good question. Publicly announced we have a ton of stuff that hasn't been announced yet.
One that we made a couple of months ago was in Dune Analytics which is a crowd-powered analytics platform on top of blockchain. It's an amazing community of people who are building queries to analyze and understand what's happening out there in crypto and the thesis there was that, you know, there's just so much going on in so many directions that it can never hopefully be captured by any kind of central editorial entity and that the only way to possibly make sense of it all is to harness sort of crowd power to do it.
And they've built this just incredibly vibrant community wizards, building charts about every new thing that happened in crypto. Now they've launched a newsletter, that's kind of shed some light into it and like it's you know, it's been amazing.
So that that's one where I can't, I, we may have, I may have announced an investment that I made more recently, but there's like six or seven that are in the Q a that'll come out and the next and the next quarter. So
NA: Got it. No, super interesting. But that's all I had, Nick, thanks so much for coming on. Really appreciate your time and I had a great time talking to you about all this.
NG: Yeah. It's my pleasure. Thanks so much for having me, really appreciate it.
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Disclaimer: The Inquisitive VC is provided for informational and educational purposes only and is not intended to provide commercial, financial or legal advice. Nothing in this article constitutes an offer of securities or regulated financial products or financial services to any persons or a solicitation to buy or sell any tokens or securities or to make any financial decisions. Do not trade or invest in any project, tokens, or securities based upon this podcast episode. The host may personally own tokens or be an investor in projects that are mentioned on the podcast.
Nick Grossman - Union Square Ventures