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The firm added two institutional investors and a bevy of individuals to its second fund, but intentionally kept the fund size small to maintain its focus on early stage investing, says Partner Brad Burnham. The firm raised $125 million for its inaugural fund in 2004.
The firm plans to maintain its investment focus on Web services, but will adjust its investment criteria to reflect a Web 2.0 market saturated with well financed startups.
“The digerati, the geeks of the world, these people already have three or four plug-ins, they’ve got two tool bars and maintain several profiles on various sites already,” Burnham says. “Increasingly, new services and sites will have to displace something else. To break through the clutter a company will have to make a significant impact or be in a market that hasn’t yet been fully penetrated.”
Burnham says that he remains optimistic about Internet startups, despite the increasingly crowded market. “The other side of this coin is that the early adopter crowd has greatly expanded,” he says. “Obviously the generation that grew up on Facebook expects these services.”
Reaching Internet users who haven’t reached an application saturation point will require targeting specific needs, Burnham says. “The only distinction in our focus is that we’re going to be focused on services targeted on vertical markets in the mainstream, because we’re just on the cusp of some of these services.”
Union Square, which will stay focused on early stage investing, will selectively look at later, growth stage investments to back from its new fund. “We think there’s a chance to make a few later stage investments when a service as caught on,” Burnham says.
The firm has sold three of its portfolio companies to date. It sold online behavioral targeting company
With the close of the new fund, Albert Wenger was promoted to partner and Andrew Parker was promoted to associate. The firm is looking for an analyst to fill Parker’s old position. Burnham and Fred Wilson remain in their role as partners. —Alexander Haislip