Risky Business

In twenty years of covering the startup industry, this may be a first: A top VC advises people don’t follow in his footsteps. Specifically, Union Square Ventures Fred Wilson talks about his route to venture capital and how he succeeded by timing, luck, and taking longer to learn parts of the business than he may have if he’d had operating experiences.

He also talks about the ascendancy of the New York ecosystem, as a man with one of the most valuable front row seats. We talked about the ups and downs of several of his largest investments, including Twitter, Tumblr, Foursquare and Zynga, and he addresses the dangers of a lot of corporate venture capital groups… and putting too much time in building hype.

---

Fred Wilson: I was a slow starter. It took me at least 10 years to become halfway decent at venture capital. I made the mistake of getting into the venture capital business at a young age, which I think is a terrible idea. I think the venture capital business is an old man’s or an old woman’s business.

I think that when you’re young you should be building companies, and building products, and actually making something. I made the mistake of getting into an old person’s business at a young age, and it took me a long time to even have any idea about what I was doing.

I also made the mistake of not working in industry, so I didn’t come into the business with any relationships, any contacts. I didn’t know any industry sectors all that well, and I got lucky because after being in the business for about 10 years, really getting nowhere, the Internet came along.

I was just at the point where I knew enough about the venture capital business, had been hanging around the business, that I knew how to find a deal, convince an entrepreneur to take some money from me, and nobody knew anything about the Internet business in 1994. There wasn’t an Internet business in 1994.

My strategy was, let’s invest in anything that says the word Internet on it.

That’s what we did. It was nuts, but the reality is I started a venture capital firm in ’96, and we really had no idea. We had no investment thesis. It was like gold had been discovered in California and we were going to go mine gold.

That was about as complicated as it was. Invested in 55 companies and a bunch of them were successful. A bunch of them weren’t, and then the Internet blew up and we were out of business, basically.

Smarting from that, in 2002 and 2003, I said, “Hey, let’s do that. I’d like to do that again. That was a lot of fun. Didn’t like the way it ended.”

Sarah Lacy: You made money though.

Fred Wilson: We did. We made a lot of money, and we gave a lot of it back.

One time on paper, I was worth as much in 1999, in 2000, as I am now. The difference is back then it was on paper.

I learned a really valuable lesson. In 1999 we sold Geocities to Yahoo, and I had all this high-priced Yahoo stock. I think Yahoo was in the hundreds.

My wife said, “Let’s buy a townhouse in New York City.” We sold enough Yahoo stock to buy the townhouse in New York City and renovated. A year later that was our entire net-worth because everything else had gone to zero.

I learned a lesson which is, you take a high-priced Internet stock and you trade it for New York real estate.

I’ve been making that trade consistently now.

Sarah Lacy: Frequently funded by Yahoo.

Fred Wilson: We sold companies to a bunch of companies, but Yahoo has been very, very good to me. I think I’m wearing purple somewhere.

I absolutely should be. If I’m not, I’m embarrassed.

Sarah Lacy: How did you even get into venture capital, to begin with? Most people don’t just waltz into the business. It’s something that selects you.

Fred Wilson: While I was in college [at MIT] I met my wife and she said, “I’m going to New York.” I was like, “New York? Could we go somewhere there’s actually some technology jobs?” She said, “No. I want to work in fashion. New York is a fun place to be.”

I followed Joanne to New York. I worked in a software job for two years writing software, and I didn’t really love doing that. I figured out that New York was a money town. I put two and two together and I said, “Well, if I want to work in the technology business in New York, I should be working on the money side of the technology business.”

I did some reading and I realized that there was this thing called venture capital, and then I went and knocked on every venture capitalist door that I could find, not just in New York, Boston, Silicon Valley. Everybody at that time back then, this was in 1983, ’84, said that you needed to have an MBA to work in venture capital, which is not the case anymore thankfully.

I went and got an MBA. In my application to business school, I wrote, “I’m going to business school to go into the venture capital business.” The summer between my first and second year of business school, I talked my way into a venture capital job at a firm that I ended up working for, for 10 years that most people have never heard of here in New York called Euclid Partners.

That’s how I got in the venture capital business. Once I got in, I never left. I can’t recommend that path. In fact, I don’t recommend that path, but that was my path.

Sarah Lacy: A lot of people feel like VCs who don’t have operational experience are lousy board members. Like: How can they tell you to lay someone off when they haven’t had to do it? Do you feel like that’s been a detriment for your career?

Fred Wilson: Definitely. I’ve had to make up for it.

A great story, my friend, Jordan Levy, who’s now actually a VC, I invested in his company in 1991. I went to the first board meeting. I was 30 at the time, and I start spewing advice like all of us in the venture capital business do.

He says, “Whoa, whoa, whoa! Stop! You know nothing about this business. You’ve never run a business. You have no idea what you’re talking about.” This was in Buffalo, New York, and he said, “Unless you come up to Buffalo for a week and do every single job in this company, I will refuse to listen to anything you say.”

I was like, “OK.” Picked a week, went up there, and did every job in the company. Then at least he was willing to listen to me. He didn’t actually take much of my advice.

It was a detriment for me. A lot of people, every one of my partners, has had operating jobs, has worked in startups. If you don’t do that, it is a much longer learning curve.

It has one benefit though, which is that I have never run a company. I’m never going to run a company. I would never ever feel like I could do a better job than the CEO is doing myself. I might think that there’s somebody who could do a better job, but I’ve never felt that I could do a better job.

I’ve been on a lot of boards with VCs who come from operating jobs, and they think that all the time. They say that to me. “I could do that person’s job so much better.” That’s actually a destructive thing. When someone who’s on your board is thinking, “Move aside. I could do your job better,” that’s not good.

I do think the one benefit of having not had an operating job in my career is that I have a lot of respect for the job that the CEO’s doing, and I don’t personally feel that I could do it better.

Sarah Lacy: That’s interesting. Have you ever fallen so in love with an idea or with a company that you considered leaving venture capital and working on it?

Fred Wilson: No. Never.

Sarah Lacy: You love being the board member, the money guy?

Fred Wilson: I guess so. The only reason I’m hesitating is that I don’t necessarily think of myself as the board member, the money guy. Obviously, that’s how the world thinks of me.

Sarah Lacy: How do you think of yourself then if it’s not as the money guy?

Fred Wilson: I don’t know why we’re using all these mafia references, but I like to think of myself as the consigliere.

I’ve always used that term. I didn’t make it up for this conversation tonight.

I like to think of myself as the person that the entrepreneur, the CEO, calls when they want advice and counsel, and that they trust and they listen to, and that I’m as deeply invested in the success of their company as they are. I can give them advice that is, how do I put it, constructed in a way that would be helpful to them and their company.

That’s what I like to think of the role I play. I think I’ve gotten pretty good at that over the years. It is something you can learn how to do. You don’t have to have an operating job to get good at this. Some of the best VCs of all time have come out of the investment world.

Ben Rosen, who was the founder of a venture capital firm called Sevin Rosen, who probably played the PC era better than anybody, maybe even including John Doerr, was a Wall Street guy. There are examples of people who are straight-up investors who’d be great in the venture business, but it isn’t the most common thing you see.

Sarah Lacy: I want to talk about the dot-com-bubble days. You were still in New York in those days, correct?

I moved to the Valley in ’99 so I experienced the peak of it out there. It seemed like it was even more crazy and speculative here. At least in the Valley, you did have a lot of real tech companies like Sun Microsystem, Cisco, companies that were maybe wildly overvalued but were grounded in some sort of real technology. Then you had the Pets.com layer on top of that.

Here, you had things like Cosmo.

Fred Wilson: We financed Cosmo at my last venture capital firm, but that’s OK. I wear that one proudly. You’re right. What I always talk about is that startup communities, startup hubs, grow in generations. Silicon Valley is maybe on it’s sixth, or seventh, or eighth generation.

A generation would be 1, or 10, or 30, or 50 companies grow up at the same time, become successful, go public, get sold, create a lot of wealth, create a lot of talent. That wealth and that talent then gets reinvested in the next generation. The way I think about it, each generation multiplies on itself.

The first generation of Silicon Valley would be something like a Fairchild Semiconductor or maybe HP. One or two iconic companies, and then 3 or 4 in the next generation, and then 8 or 10 in the next generation. It just multiplies and multiplies.

Somehow, in the current generation that we’re in in Silicon Valley, maybe there’s 50 or 100 iconic companies that are going to do this. I think about a tree growing up, flowering, putting down seeds.

New York was in its first generation when the bubble happened. There were no root systems. There were no established companies. There was nothing, and yet there was this massive speculative bubble. Literally, thousands of companies got formed in an environment where there were no support system. There was nothing real yet going on.

We did get one company out of that, DoubleClick, that ended up being worth $3 billion, sold to Google. Kevin Ryan said that there’s something like 25 CEOs now in New York city that were employees of DoubleClick in the late ’90s.

It happened. The same thing actually happened here in New York, but this speculative bubble thing, which is not common of everyone, not every generation of startup hubs go through that.

That definitely created this really unnatural, bizarre situation where everybody was making money on essentially fake companies. Most of them were fake companies. There weren’t many that turned out to be real companies.

Sarah Lacy: What did you think about at the time? Were you just laughing and like, “I don’t know. This seems to be working. Let’s keep funding this stuff”? Did you really have an investment thesis where you thought this was a new economy, and this was the new way companies were, and this is rational?

Fred Wilson: I didn’t think it was rational because I do, actually, have a background in finance. I do think about things like fundamental value. I was taught in business school that companies are worth the present value of the future cash flows. How could a company be worth $20 billion who wasn’t making money and may never make money? I didn’t think it was rational.

Everybody got caught up in the fact that, “Hey, we put $1 in today, and we took $10 out a year later. Boy, let’s do that again.”

That’s what happens in these kinds of situations is that everybody’s making money, and so more and more people want to get in the game. You want to keep doing it. I was certainly cognizant of the fact that at some point this whole thing was going to end badly.

We were selling companies as fast as we possibly could. In 1999, we had 55 investments in the history of Flatiron Partners, which was the first firm I started. I think in ’99, we sold 12 of them. We were trying to sell them as fast as we could. Then we turned around and kept making new investments. We took a lot of money out.

Then when the music stopped, it’s like a game of musical chairs. Then we realized, “Oh shoot, we’re not sitting.” That’s when it got pretty ugly pretty quick.

Sarah Lacy: What was the talent like in New York then? Were these people who were just momentum chasers? Were they mercenaries, or was there really good talent?

Fred Wilson: There was some good talent. There were some people who were starting companies for the right reasons and a lot of people who were starting companies for the wrong reasons.

There were also a lot of people who were coming into these companies who had never worked in startups and had worked in banks, and brokerages, and ad agencies, and big media companies, and stuff. They were coming into startups, and they didn’t know how to work. They didn’t know how to do things lean.

You’d hire a VP Marketing who had been a VP Marketing at some big Fortune 500 company, and they’d come in, and they’d say, “OK, I need a $5-million-ad budget, and I need a 20-person marketing team.” We’d actually give them that.

It was crazy. Why we would do that. That was the problem was that there wasn’t an endemic startup talent pool and an endemic startup culture.

Now, we have that finally. Now, fast forward 15 years, or 20 years, or however far back you want to go, there are teams who have now been through three, or four, or five startups here in New York City. People have all learned the lessons, and know how to work lean, and do things in a startup-y way. Back then, it wasn’t like that at all.

Sarah Lacy: How did the bust impact you on an emotional level? In the Valley there was a lot of anger and somehow, people felt betrayed that they had believed in something. They felt stupid that it came tumbling down, and it was mocked. Did you go through any of that?

Fred Wilson: First of all, I didn’t lose faith in the Internet. We made more money for our investors at Flatiron than we lost by a lot. I felt very badly that we lost $25 million in Cosmo. We had a few other situations where we lost tens of millions of dollars, and I felt really badly about that.

My reaction was to take what was left of that portfolio and try to salvage as much value as we could out of that. I really dedicated three years of my life, 2001, 2002, and 2003, into doing that.

We have 36 companies in our portfolio when the bubble burst. A dozen of them we shut down. A dozen of them we got stabilized and then sold for some money but not a lot of money. A dozen of them went on and turned out and creating almost as much value from 2005 to 2010 as we had created in ’96 to 2000. Companies like comScore and Mercado Libre and a few others turned into really big companies.

That was the most formative experience of my entire career. What I learned doing that triage and figuring out which companies we could double down on, and which companies we had to shut down, and which companies we should try to salvage was really, really valuable for me.

Learning and watching how people behaved during that period, there were some people who were really irresponsible who just stopped returning your phone call. People who you had invested with, who were on the board, all of a sudden they disappeared.

They wouldn’t even come to board meetings anymore. “We wrote off our investment. We don’t want to hear from you anymore.” Founders who basically walked away from their companies.

Then there were other people who stuck with it. There are entrepreneurs that I work with today who are still working at companies that we invested back in ’98, ’99, and of course I have tremendous amount of respect for them.

That was an incredible learning experience for me. I spent a lot of time thinking about the mistakes we made and what worked and what didn’t work and what kinds of companies worked and what kinds of companies didn’t work and what kinds of investment strategies worked and why they didn’t work. I feel like I came out of it much, much stronger.

When we started Union Square Ventures, we quickly made a bunch of great investments. I think a lot of it was from that learning that I had. Not just the learning I had, Brad went through a very similar experience.

Sarah Lacy: What were the specific learnings in terms of how did it translate into deals that you then…Give us an example.

Fred Wilson: A few things.

The Internet is a two-way medium. If you look at most of the investments that worked that we made in the ’90s, they were businesses that actually took advantage of the architecture of the Internet. The things that didn’t work were the things that people were just taking an offline business and porting it to the Internet without taking any native advantage of the Internet.

Taking “The New York Times” and putting The New York Times on the Internet doesn’t really take advantage of the Internet. But something like Craigslist takes advantage of the Internet. eBay takes advantage of the Internet. It’s a two-way system.

Brad and I started to realize that this sort of distributed network model where everybody’s kind of up here in the system and it’s a two-way network, or in many ways it’s an infinite- way network, are the kinds of business architectures and techno architectures that make sense. That’s one thing we learned.

Another thing we learned was lean. Spend very little money in the seed round, in the Series A round, and get a long way before you really step on the gas, that money doesn’t buy success in the start-up world. Doing a $10 million seed round makes no sense. We did that a few times in the late ’90s. That’s another thing we learned.

Then the other thing I learned was not who you invest in so much as who you invest with matters a lot. You have to be very careful in picking your co-investment partners, things like that.

I should go back and pull it out. We wrote a whole marketing document for our first fund that has a lot of these lessons learned in it.

Sarah Lacy: When you say who you invest with, are there partners and firms that you just won’t do business with?

Fred Wilson: Mm-hmm.

Sarah Lacy: What if someone new enters the game?

Fred Wilson: I would say that I’m open-minded to working with anybody, but I want them to demonstrate to me or to our firm that they’re going to be the kind of partners that we want to work with for the long haul. People can demonstrate that in many ways. There’s just a values system about what’s expected of an investor.

I really feel that we’re in the service business. The entrepreneur is the customer. The people who give us money are our shareholders. We’re in the business of trying to make entrepreneurs successful. We’re not in the business of trying to make money. Making money is the byproduct of making entrepreneurs successful.

There are a lot of people in the venture business who are in the business of making money. That’s how they think about things. Everything is about how much money am I going to make as a result of this decision? It’s not about how do we make this entrepreneur successful and how do we make this company successful?

That’s what I talk about the value system. Someone has to prove themselves to us, to me anyway, if I’m going to go in a deal with somebody. I have made since then a few mistakes. For example, investing with corporate venture capital firms, corporate investors. Never ever, ever, ever going to do that again. Never ever, ever!

Never!

Sarah Lacy: What happened?

Fred Wilson: They suck.

Because they’re not interested in the company’s success or the entrepreneur’s success. Corporations exist to maximize their interests. They can never be mensch-y or magnanimous. It’s not in their DNA. They aren’t investors.

Now, there are a few, like Intel and Google, who have basically approached the business almost like VC firms. They can be OK. I think Google may be a very good co-investor. We haven’t invested with them very much, but the behavior that I see from them feels like the kind of behavior that a good venture capital firm would demonstrate.

I just think corporations are very bad partners. They should not invest in your company. They should buy your company. That’s how you should think about a corporation. They’re your exit. They’re not your financial partner.

Sarah Lacy: Was there a particular bad experience you had?

Fred Wilson: Lots. I’m not going to talk about it.

You know what happens is the entrepreneur says, “I can get a better valuation if I take the money from XYZ Corporation.” This is one of the few places that I think I will throw myself in front of the entrepreneur and say, “I can’t let you do this, not with me on your board. If you do this, I’m leaving.”

I don’t really want to do that, but I just have had so many bad experiences, consistent bad experiences time and time again. I used to say, “OK, if you really want to do that, I don’t advise it, but I understand you’ll dilute less.” Then again it happens.

Sarah Lacy: You have all these strong feelings about how you want to do your job. What happens when the entrepreneur disagrees with you?

Fred Wilson: They usually win. It’s their company.

It has helped over the years that I have made some good investments and gained a reputation for being decently good at what I do. I think that entrepreneurs are more willing to listen to me if I really get animated about something.

Still, I am constantly finding that the way that I would want a company to do something isn’t the way that the entrepreneur wants to do it. We have to accept that. It’s not our company. It’s their company.

Now, there does come a time when the company is not succeeding or the management team is revolting and there are certain moments of crisis when the board has to act and they have to make a change.

It shouldn’t be because the investor is uncomfortable with the entrepreneur. It has to be that there’s some larger problem. It shouldn’t be that I don’t like the CEO. It has to be that the CEO is demonstrably failing, and therefore we need to act. It happens. But it doesn’t happen that often.

We, I think like many in the venture business, stick with entrepreneurs and management longer than we probably should just because I think people who are good in the business understand we’re in the business of serving the entrepreneur.

If that’s your client and the way you’re serving the client is by tossing that other company, that’s not particularly good service unless it is.

Sarah Lacy:  One of the biggest problems that entrepreneurs is not firing quickly enough. Do you think it’s the same problem for boards?

Fred Wilson: Absolutely. There are many times in my career where the management team has literally come to the board and said, “We’re leaving if you don’t make a change.” If you let it get that bad before you make a change, you probably should have moved much sooner. But it’s very, very hard to do that.

Because oftentimes this is the person who birthed the company, this is the person who envisioned that there was a market, and developed a product that met a need in the market and created the conditions for the company to be successful and potentially created a lot of value for us in the process, so that’s a tough thing to do to a person who did all that.

Sarah Lacy: Two of your most high-profile companies have gone through a lot of turmoil, Etsy and Twitter, really uncommon stories to go through as much change as they have, particularly Twitter, ousting two founders, and to still be that highly valued. In both of those cases, what was so unique that those companies weren’t just derailed by that?

Fred Wilson: Great products. Just to be fair to Jack and Ev and Rob Kalin, they were all great leaders for those companies. In each situation, there were challenges that they struggled with. New leaders came on board and dealt with those challenges I think in hindsight better than they were dealing with them.

I think that the changes that were made in those companies have been beneficial. Those are all…The thing that’s really tough about that is that I certainly think Rob Kalin is an amazing entrepreneur and I think everybody knows that Jack and Ev are great entrepreneurs.

All three of them are in my Hall of Fame, anyway, and yet none of them are running those two companies anymore.

It also is a time that a company might benefit from leadership that’s different than the founder. Twitter is a really good example of a company that may have had the right leader at the right time.

You look at it, and you say that was chaotic, but in the early days, Jack did an incredible job of putting the right team around the right product, and getting something that was what was now turned into, obviously, a hugely important service.

Ev came on board and built a company, and then Dick came on board and built a business. I think each of them maybe was the right leader for the right time.

Sarah Lacy: It was not obvious to people in The Valley that Dick was the right guy to be the CEO. A lot of people felt like he was a great COO — but there’s a big difference between the two — and didn’t think he would be visionary enough, or enough of a product guy. Why did you guys feel he was the right guy for the job?

Fred Wilson: He was there.

Sarah Lacy: That’s all it takes to be the CEO of Twitter?

Fred Wilson: There’s something about, when you have a situation where you feel like a change needs to be made, that it’s easier to promote somebody from within, than go out and do a search. That creates a tremendous amount of turmoil inside the company, and you want to minimize that amount of turmoil.

It’s shocking to everybody. One day, you show up and you say, “Rob Kalin is no longer the CEO of the company. The board has invited Chad Dickerson to be the CEO of the company.” Everybody is like, “Huh?” Then it’s over, and everybody, go back to work.

Think about the other scenario, where you say, “So-and-so is no longer the CEO of the company. We’ll be running a three-month search for the new CEO of the company.” That’s not good. I don’t think.

Sarah Lacy: Chad was even a less likely pick.

Fred Wilson: Very much so. The story about Chad, I don’t know if it has ever been told. I’m not even sure I should tell it, but it’s such a great story.

The COO of Etsy was a guy named Adam Freed. Adam is an amazing person. Adam came from Google, and he was the COO of the company. When it was clear that Rob was leaving the company, we offered the job to Adam. Adam said, “You got the wrong person. Your CEO is Chad.”

I said, “Why is that, Adam?” and he said, “He runs the biggest piece of the company. He is the best manager in the company. He is Etsy through and through, and he is beloved in the organization. I don’t have any of those qualities.”

I’ve never seen it done before. I’ve never seen anybody…I’m sure it’s happened many times in business, but it’s never happened to me, where you offer the number two person in the company the CEO job, and they say, “No, you got the wrong person. That person down the hall is the person that you should be hiring.”

I thought it was amazing move, because Adam was clearly putting the interest of the company ahead of his interest. That’s that story.

What are you going to do? That’s what we did [hired Chad]. You think the board is all powerful, and wise, and like the Wizard of Oz or something. No, you’re trying to do the best you possibly can in a bad situation.

Sarah Lacy: How do you fire a founder?

Fred Wilson: Ideally, you’d want it not to be a surprise. Whenever somebody leaves a company, you want it not to be a surprise. Usually, it’s not a surprise. Usually, there has been a lot of tension, a lot of problems, a lot of challenges. Everyone is well aware of them.

When the decision is finally made, it’s usually a little anticlimactic. If you just walk in and say to somebody, “You’re out of here,” and they had no inkling of that, that’s bad.

Sarah Lacy:  What’s the difference between what happened with Twitter and what happened with Tumblr? Both of them, in some ways, had similar visions, similar things they were trying to solve, scratch similar itches with people. One became much larger.

Fred Wilson: The difference is that Tumblr was outdated, is outdated. Marco, who helped David — Marco Arment, who is a pretty well-known developer, and David, built Tumblr for the first 18 months, all by themselves.

The day that the sale to Yahoo was announced, Marco wrote this amazing blog post. I’m not particularly emotional, and my eyes welled up when I read it, because it was just beautiful. What he said was that Tumblr is a one-person product. What he meant by that was that Tumblr was basically David.

That wasn’t true at Twitter. I like to think of Twitter as The Beetles. You have Jack, who is either John Lennon or Paul McCartney, and Ev, who is either John Lennon or Paul McCartney, and then Biz, who is George Harrison, and Jason Goldman, who is Ringo Starr.

That was Twitter. It was four people, in my mind, who really made Twitter happen. Very few people realize the impact that Jason had, but I really feel like he was the fourth founder, even though he’s never really been credited as that.

You could imagine a Twitter that didn’t have Jack, if it still had Biz, and Ev, and Jason, which is what happened after Jack left the company. You could imagine a Twitter that didn’t have Ev, because Jack came back.

The difference was that Twitter, because it was founded by a group of people, as opposed to a single person, there’s a lot of Ev in Twitter, and there’s a lot of Jack in Twitter, and there’s a lot of Biz in Twitter, and there’s a lot of Jason in Twitter. Whereas in the case of Tumblr, it was very, very hard to imagine a Tumblr without David.

Sarah Lacy: What about Zynga, another really high-profile company of yours, that had a rough time in the public markets?

Fred Wilson: Zynga is a games company. Unfortunately, that is a hits business. Zynga had a string of hits, and was making money hand over fist, and they haven’t put out any huge new games. They’ve been mostly working off of sequels, and trying new stuff, but nothing’s Farmville-style success. That’s probably the primary reason that the stock has struggled.

People talk also about the transition from Web to mobile. That’s also a big factor. To me, it’s the games business. Facebook had to make that transition from Web to mobile, but they didn’t have to make that transition from Web to mobile in a period where people were basically done with Farmville, and waiting for the next thing.

What you got from Facebook two years ago is what you get from Facebook today. It’s more of an evergreen type of business than the games business, which isn’t like that.

Sarah Lacy: Would you do another game company, having been through that?

Fred Wilson: We made such a good return on Zynga that, if someone could say, “You’re going to make 75 or 80 times your money,” I’d do another games company, yeah, definitely.

I don’t think Zynga’s done. I’ve known Mark for a long time. I’ve known Mark since he was 25 years old. I met him in ’93 or ’94, when we were both figuring out that this Internet thing was going to be big. You cannot bet against Mark Pincus.

Whatever people think of Mark, and I know there is people out there that think he is a bad guy, I love Mark. He is a friend of mine, and he is really, really smart. I would never bet against him.

Sarah Lacy: What do you think people get wrong about Mark Pincus?

Fred Wilson: It’s partly what they get right about him. Mark’s just tough. He is tough, and he is opinionated. He is hard on people.

I’ll tell you a story about Mark. I really love Mark. His first company, I put the seed money into a company called Freeloader back in ’95. Mark used to call me every night. This was when we had three little kids. We had three kids under the age of five.

He used to call me at night, and it’ d be like the witching hour. It’d be like 8:30 at night.

I’d get on the phone, it’d be Mark, and he’d want to talk to me about the five things that were going on that day. Kids would be screaming and crying, and everything, and he is like — I swear to god, he said this. He said, “Fred, every time I talk to you on the phone, it’s like a fucking ad for condoms.”

He’s got two beautiful girls who he loves. People grow up. Anyway, he’s just tough. He is tough, and he is smart, and he can be abrasive. That rubs a lot of people the wrong way.

He’s got a lot of himself in Zynga. He’s got his dog’s, his beloved dog, who I knew, his name is on the company. I just don’t see him letting all that go to hell. I wouldn’t bet against him.

Sarah Lacy: While we’re going down the list of current, Fred Wilson “greatest hits,” the other big company in New York is Foursquare. Once again, super hyped up, turning down big acquisition offers, huge valuations, seemed like it was going to be the big consumer, Web hit out of New York. A lot of reports that they’re struggling now too.

Fred Wilson: When the story is out that you’re having a hard time, people are going to write that story a lot, and that’s just the place they’re in. The thing that they have done that people don’t realize they have done is they’ve really pivoted…They did something similar to what Twitter did. Back in 2008 and 2009, we realized at Twitter that 10 percent of Twitter’s users wanted to tweet. Most of Twitter’s users wanted to read tweets, not actually make tweets.

Once Twitter reconstructed the product to be more about consumption as opposed to creation and they talked about that and they also put stuff in the product to make that work better, they really took off. Foursquare has really done the same thing. It’s not really about the check-in anymore. It’s about maps with people in them.

You don’t get maps with people in them from Google, and you don’t get maps with people in them from Apple, and you don’t get maps with people in them from Nokia. You get maps with people in them from Foursquare, but what they haven’t done a good job with is talking about that.

The product is maps with people in them, and what’s really interesting is they have, say, 12 million people around the world who are putting their data every day into Foursquare’s maps. There’s 12 million people that are doing it in Foursquare. There’s another 300 or 400 million people that are doing it in Instagram and Vine and Flickr.

Foursquare has an API that’s the most used GeoAPI out there, and so there’s all these other social apps where people are doing the exact same thing — they’re putting their lives through Instagram photos or Flickr photos or Vines — into Foursquare’s maps with people in them.

Until they can get through that transition about what they are and so that people can understand what they are, the stories are going to continue to get written that Foursquare’s struggling.

Their usage is up 50 percent since the beginning of the year. That’s not a company that’s imploding, but yet that’s the story that people like to write.

Sarah Lacy: What do you think about the role of hype? We’ve gone through several companies now, Tumblr, Twitter, Foursquare, Zynga, all very hyped at different times, then all have struggled with that hype at times.

What do you do now when you see one of your companies getting hyped?

Fred Wilson: It’s a drug. As the entrepreneur you can’t resist it, but it will bite you in the ass every time. If you choose to build your company on hype, then you’re going to have to live with the consequences.

Sarah Lacy: What do you think is one of the most under-hyped companies in your portfolio?

Fred Wilson: Indeed.com sold for a $1.4 billion last year. Nobody even mentioned it. There are lists out there of the companies that have sold for a billion dollars or the companies that are worth a billion. There’s lists of companies out there that are worth a billion dollars. Nobody even includes Indeed on the list.

Nobody ever wrote about Indeed. The best execution I’ve ever seen in a startup in my entire career. Unbelievable. It’s awe inspiring what they did.

They built a service that 100 million people around the world use every month to find a job. It’s an awesome thing. People are finding jobs on Indeed. Employers are finding people on Indeed.

They built Google for jobs with economics that are just like Google’s search business. They raised two and a half million dollars of venture capital and sold it for a $1.4 billion, and nobody ever writes about it.

Sarah Lacy: Why does nobody ever write about them?

Fred Wilson: The founders didn’t want any hype.

Sarah Lacy: They didn’t need it, clearly.

Fred Wilson: They built a product. They built a product that people love. They didn’t need any hype.

Sarah Lacy: Let’s talk a little bit about how the venture business is changing. You’ve written a lot about a topic that I’m super interested in, too, which is that really, this asset class has not outperformed the market since the ’90s. Since I’ve been covering venture capital, there’s been talk of a venture capital shakeout that never really happens.

I hear all the time, in frequently the same firms, for years and years, “Oh, they can’t raise another fund,” and somehow, they do raise another fund. Everyone saying, “This industry can’t deploy $30 billion profitably,” and yet more and more money keeps wanting to come into this asset class.

There’s an interesting paradox that’s happening when it comes to venture capital, where everyone keeps saying, “This isn’t sustainable. We shouldn’t put more money,” but they’re talking about everyone else, because they want to keep putting more money into it.

How does that get solved? Is it getting solved?

Fred Wilson: I don’t think it’ll get solved, because I think that…Let’s see how I put this. The venture capital business is a business where the rich get richer and the poor get poorer, with some exceptions. Every once in a while, someone cracks into the elite group, but the best deals go to the best firms. It has always been that way.

If you are a firm that is considered to be one of the best firms in a sector, then the best entrepreneurs in that sector are going to want to work with you, and they’re going to come talk to you.

Now. that doesn’t mean that you win every one of those deals because there are other firms that are considered as good as yours and you have to beat them. You have to beat them to the deal, get there before they do, or if you’re in a truly competitive situation, you’ve got to convince the entrepreneur that they really want to work with you as opposed to them.

Those firms are the ones who produce all the returns in the venture business, and the rest of the firms in the venture business, as a whole, produce no return. That’s the way it always has been, and I think that’s the way it always will be, with the exception that every once in a while, someone comes along with something new or different and cracks into that group. Mark and Ben, being I think a classic example of that, with Andreessen Horowitz.

Sarah Lacy: And you guys did.

Fred Wilson: We did. We made a bunch of great investments in a short period of time that got us there.

In three months, in 2007, we did Zynga, Tumblr, and Twitter. Twitter, I think we convinced Jack and Ev to take our money over a couple of other firms. So that one, we said what they wanted to hear and got the right to lead that round.

They did this great thing, I really recommend this. I’m not sure that every entrepreneur can get away with it, but this is what they did. I called up Ev and I said, “I think you should spin Twitter out of Obvious Corporation, and I’d like to finance that.” He said, “Would you come to San Francisco? We’d like to talk to you about that.” I said to Brad, “We’ve got to get in on a plane, we’ve got to go to San Francisco.”

We got on a plane and went to San Francisco, we sat with Jack and Ev and they asked us a ton of questions, “Should we do this with the product, or this with the product? Should we do deals with mobile carriers, or not? Should we do this or not?” It was about an hour-and-a-half, and they were basically interviewing us.

They already knew what they wanted to do, and they were figuring out which venture capital firm would be most comfortable letting them do what they wanted to do, and I think we just said what they wanted hear. Got back on a plane, flew back to New York, I called up Ev and he said, “We like what we heard, send us a term sheet.” We sent him a term sheet and we got the deal, so that’s how we got Twitter.

Zynga — what happened was Mark said, “I’m doing this thing. It’s poker on Facebook.” I said, “It sounds great. I’ll do it at this valuation.” Mark said, “That’s a ridiculous price. I would never take money at that price, I’m going to get it from somebody else.”

He went and talked to a bunch of people in Silicon Valley and they ultimately weren’t going to give him a better price, so he called me back up and he said, “The price that you offered me is pretty much the price. I know you and I trust you and I like you, so I’ll take your money.” So that one we won because I had known Mark for a long time.

And then, Tumblr, we just got to real early, it was here in New York. Our friends at Spark and us — the two firms saw it before anybody else did, so we got that. I don’t know. I think we were in the right place at the right time, we had our eyes wide open.

We knew what we should be investing in, we made those investments and I think that propelled us. We’ve made a bunch of good investments since, and so people still think that they should be talking to us when they go out and raise money.

If we just make a bunch of crappy investments the next five years, we’ll get ourselves out of that group quickly, which I hope we don’t do but it could happen.

Sarah Lacy: How big of a mistake was it for Twitter to not get with Instagram?

Fred Wilson: Huge. Enormous. If they had had Instagram, they would be better than Facebook. They’d have tweets, they’d have photos, and they’d have videos. I think that would be the trifecta that would kill Facebook.

It was genius for Zuckerberg to see that. He had what Twitter didn’t have, which is he had the currency. “I’m going public. You’ll have public stock in six months,” and Twitter couldn’t say that. Also, Twitter wasn’t carrying the valuation that Facebook was, so he had something Twitter couldn’t give him and he was able to get that deal.

Sarah Lacy: Is that what it was, or did someone at Twitter fuck up?

Fred Wilson: I think that’s what it was. I just that think there wasn’t a price Twitter could pay that Facebook couldn’t match, and Facebook could pay with currency that Twitter couldn’t match. I think there was just no way Twitter could win that deal.