← How I Invest with David Weisburd
How I Invest with David Weisburd
E108: What is the Future of Venture Capital? w/Charles Hudson
00:39:04
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- [00:00]
Charles
The best founders that I work with are kind of stubborn. It actually takes work to convince them to change their mind. I always ask myself, can we get on a pre seed company? Can we get a 200x gross cash on cash return from this investment? So if we get in at 5, can we get out at a billion? I also just try to pay attention to what my friends who don't work in technology are thinking and talking about. As much as I love talking about AI and LLMs and all the greatest like new technological advancements, talking to my friends about cultural trends and the things that they're excited about for me is highly informative.
- [00:35]
David
How much of good storytelling is explaining how you're going to do the blocking and tackling versus painting a large picture?
- [00:40]
Charles
A lot of what I try to explain to people is.
- [00:50]
David
So tell me about Precursor Ventures.
- [00:51]
Charles
Yeah, so Precursor Ventures. I started the fund in 2015 after a stint as a general partner at Unquote Capital. The big aha for our fund was when I was looking at the landscape, I noticed one thing. Many of the repeat founders I met or founders who were friends with VCs socially or professionally were having a really different experience raising funds and raising capital than founders who were from outside of that ecosystem. So if you were a founder who didn't go to Harvard or Stanford, didn't come out of Y Combinator, wasn't a next door neighbor or best friend with the vc, and if you didn't have product traction, it was pretty tough to get anybody to give you the time of day. So I felt like there was a real opportunity to back those founders. And during my time at unqork, we'd met a lot of founders that fit that profile and they'd been really great investments for us. So I wanted to start a firm that was really dedicated and focused on finding these founders.
- [01:38]
David
Just to play devil's advocate, there's been some studies that a lot of these unicorns come out of these ecosystems. It doesn't have to be Stanford or Harvard. It could be OpenAI or Uber or Facebook in previous generations. How do you know that you're not adversely selecting yourself by going after people that are outside the network?
- [01:55]
Charles
David, you wouldn't be the first person to ask me that question. As you can imagine, a lot of limited partners when I was getting started with Precursors said, aren't you just going to end up with adverse selection? So a couple things I've noticed. One is many of the most iconic, impressive founders I've met were first time founders and when we say first time founder, we mean someone who hasn't had a significant exit before. They might have dabbled in starting a company before, but the thing that we're backing them to do is their highest and best use. So. So we're big believers that people doing it for the first time can build iconic companies and we've seen that happen before. So that's not to say that repeat founders aren't successful. This is more of an and or an or in my mind. The other thing we've noticed is we live in a world where I think the premium for backing repeat founders is untenable. For most seed stage funds, the premium that some of those really experienced, highly pedigreed folks are able to command is a function of the supply and demand for capital. And there's a lot of money chasing Engineer 1 or 2 from OpenAI or Engineer 1 or 2 from Stripe. And being early at a company doesn't necessarily mean you're going to be an amazing founder. It just means you were early at that company. So I guess we challenged the premise that the only way to find great founders is to cherry pick either repeat people or people who were very early at well known companies.
- [03:05]
David
What about everyone talks about serial entrepreneurs, but there's also serial startup employees, somebody that was. It doesn't have to be OpenAI but at a startup. How important are those factors for success as a foundation founder?
- [03:16]
Charles
One of the surprising things that we found at Precursor is we've done a huge study on all of the founders that we've backed, the ones that have been successful and the ones that haven't. The biggest predictor of success is previous startup experience and with the with some ability to reflect. I'm actually not that surprised once you looked at the data and that's because I think what happens is when you're trying to build something from scratch from zero to one, having been in an environment where that happened before is really helpful. Having been at a big company like a Google or a Pinterest or an Amazon for the entirety of your career, you probably never saw low resource 0 to 1 ever. And trying to figure out how to do that can be really hard. So we have a huge bias towards people who have previous startup experience. Even if that startup wasn't one that they started and even if it wasn't one that was wildly successful.
- [03:59]
David
Talk to me about the compounding benefits of being in multiple startups. What's the perfect amount of startups to be part of before you start a company?
- [04:06]
Charles
Something like probably two or Three is probably the optimal number. Going back to the same study that we did internally, the average age at founding for a founder in our portfolio is 34 years old. And I think a lot of people I talk to have this notion that oh, you're doing pre seed. These must be new grad founders or people who just graduated from college or early in their career. We tend to find it's mostly mid career people. And I think with one startup you only know one way to do things. You have one set of relationships. You've seen one VP of engineering, one VP of sales, you've seen one of everything. I think when you work at multiple startups, you get to see multiple different ways that companies can be built and scaled. And I think equally as importantly, you build a network of startup founder types and other people that you can work with across multiple companies. I think it's really helpful to have a broader pool of experiences and people to draw upon when you're trying to start a new company.
- [04:54]
David
You're investing in first time founders. What kind of valuations are you looking at?
- [04:59]
Charles
Yeah, so about 60% of the people that we back are first time founders. So we will back some people that have done it before. And the beauty of our model is many of the first time founders we meet were able to invest in their companies at mid single digit valuations. So think, you know, four to six million dollars post money valuations. So maybe not as good as some of the top accelerators, but certainly a significant discount to what we see at seed.
- [05:20]
David
How does that play into your portfolio construction?
- [05:22]
Charles
I was telling my friend, I think every fund has some kind of threshold thing you have to get over if you're going to say yes. And for us it's portfolio construction. So our typical funds, if you look at it, our first fund had 83 companies. Our most recent fund has about 100 companies in it. So we're typically 80 to 100 companies and those companies are chosen over a two to three year investment period. So think kind of like 25 to 40 companies a year depending on the year. For us, we're generalist and we're investing primarily in companies that are just the founders. So think two people, idea stage, pre launch, pre product, market fit. So I'd say about as risky as you can get. Unless you're going to go pre idea.
- [05:58]
David
You have 80 to 100 portfolio companies, you're investing when there's only two founders, what kind of value add do you provide to the startups and how do you scale that?
- [06:06]
Charles
When I started the Fund. A lot of people said, aren't these founders going to need a lot of help? How can you possibly support 80 teams per fund? It's been interesting to learn what these founders actually need from us. What they don't need is they don't need me as a virtual co founder, they certainly don't need me as a virtual product manager and they don't need me as their head of HR or the person who's going to go out and recruit those first couple of engineers for them. I find what they need from us is help with fundraising. Almost by definition, most of the founders that we meet have fairly underdeveloped networks of VCs or even fellow founders who can help them get the meetings they need to both close the round that we join and also get ready for the next round. So consistently founders have told us we've made a difference in their fundraising both when we commit to that pre seed round and helping get ready for that seed round. In addition, one area where I think we've made a big impact with founders is giving them a ready built founder community that they can plug into. And we have over 750 active founders in our portfolio today. So when we onboard a new founder, if that person is the only person in their social or professional circle who's starting a company and they've never done this before, we can plug them into a community that can give them everything from moral support to tactical advice on which banks or service providers to work with or how to handle tricky situations with founders.
- [07:20]
David
What do the most talented first time founders, where do they struggle in fundraising and how do you help them?
- [07:26]
Charles
Boy, the biggest point of friction I find is I think some of the founders I talked to who are doing it for the first time. In some ways they are over advised and they consume too much information on the Internet. They come to me and say, well I read this article that says I have to be at a million in ARR to unlock some magical milestone. I tell them it just isn't true. That's really not how this works. And I spend most of my time instead of trying to work just on the pitch deck in the slides, trying to put the, trying to put the founder in the shoes of the investor. And what I remind him is hey, I'm a pre seed investor, I'm going to make a lot of investors. A seed investor is going to make far fewer investments than we would make at Precursor. And remember, these people are trying to underwrite a couple of things.
- [08:08]
David
How much of good storytelling is explaining how you're going to do the blocking and tackling versus painting a large picture. And how do you balance those?
- [08:15]
Charles
It's funny, we find a lot of founders that we work with tend to gravitate towards one of those two poles. They either want to get so far in the weeds and talk about what the next 12 month product roadmap looks like that you miss out on the big vision, or they want to tell you what the terminal end state of the company looks like, which is oftentimes this beautiful huge company and there's no narrative about how you get there. So a lot of what I try to explain to people is building a big company is a series of hops and you want to go from one hop to the next hop. And those hops need to be logical, large and meaningful. So a lot of what I tell people is, okay, you're this early product market fit company. We have some revenue, we have some customers. The next big thing we need to prove is that we can scale what's largely probably been founder led sales or founder driven growth. We need to show that we can turn that into something that's more scalable at small scale. If we can show that we can scale it at small scale, then we can show that we can scale it at larger scale. Once we get to larger scale, hopefully that will create the surface area where we can release multiple new products above and beyond the core product that we use to start the company. And so some of this is about tying all these things together in a narrative arc where you're not asking people to make these gigantic leaps. From today we're going to launch the product and tomorrow we're going to be at 100 million in ARR. There's a lot of steps that have to happen along the way and we try to help people understand how to stitch those steps together in a story that feels achievable but also exciting.
- [09:30]
David
And in reality, do you see that companies kind of stick to their plan?
- [09:35]
Charles
We've had a couple of companies that have told us they had really ambitious plans and they've achieved them. If I think about Bobby baby, Laura laid out a really ambitious revenue ramp for that company and she's one of the few people who've achieved it essentially on schedule and on time in most cases. The most important thing I tell companies is let's figure out what it would take to get to 100 million in ARR. Let's use that as a simple frame. Is 100 million in ARR enough to go public these days? It used to be probably isn't. But at 100 million ARR, you have a real substantial company. And the best way to figure out how to get to 100 million in ARR is to look at the fundamentals of your business. How much do we charge customers? How many customers are there out there today? How much do we think the number of addressable customers will grow over time? And how many of those will we get? And oftentimes I tell people, the question I'm always asking is how hard do I have to squint to see the picture? If we're in a fast growing market without a lot of established incumbents, oftentimes you don't have to squint that hard to see how you get to 100 million in revenue. In other cases I'm like, boy, this might be a market where the total opportunity for Everybody. It's only $400 million a year. For us to get to 100, we need 25% market share from scratch. That takes a lot of squinting to see how that works. What I tell people is your ability to Predict the next 18 to 24 months is probably pretty reasonable. Beyond that, doubtful.
- [10:51]
David
How do you go about ascertaining the total addressable market or the TAM for a brand new market?
- [10:58]
Charles
Going back to my core belief is if you can figure out how to get to 100 million in revenue in the foreseeable future, which to me is five to seven years in the future, usually the only way to get there is either you have a really moribund market where the startup is going to release a product that really is revolutionary and it's going to shake things up, or there's a brand new market. And truthfully, part of this is hunches. It's looking at trends, it's looking at tailwinds and saying, hmm, this feels like something that consumers are more interested in now than they used to be. And if that continues to be the case, this is going to go from something that's a niche behavior to something that people are really passionate about. I've invested in a handful of companies, particularly on the consumer side, where there's some macro trend in consumer behavior. It could be more climate consciousness, it could be a greater desire to use clean and natural products. I think you can usually tell yourself a story about some trend or tailwind that will hopefully make the market bigger in the future.
- [11:53]
David
I had Mike Maples on the podcast and he mentioned that a lot of the top entrepreneurs pivot, looking back at kind of his biggest wins. Do you ever invest in a startup that you think is a bad idea. But a great founder.
- [12:05]
Charles
We have had terrible luck with that strategy. David. I've learned a lot from Mike Maples and I have other peers who I know are like, it's all about the founder. The idea doesn't matter. We haven't found that that works for Precursor, it doesn't work for me. And there have been a handful of people where we've told them, I really like you, I like what you're building. I really wish you were working on something else. If you find something else different than this idea, I would gladly take another meeting. And the reason why I think maybe it hasn't worked for us is most of the rounds we do at Pre seed are a million dollars in size. That's actually not a lot of money to experiment if you don't have some notion for what you want to build. Now, if you raise three or four million dollars as a seed round with no clear idea, I actually am okay with that. That probably works better. You've got enough money and time that if the first couple things you work on don't work, you could still keep together a team of four or five people. As you pivot through ideas, do you.
- [12:56]
David
Find that there's a correlation between founders who are open to feedback and their eventual success?
- [13:01]
Charles
I walk all the founders be back through this little two by two matrix that somebody taught me a long time ago. Which one axis is did it work out in the end? And the other axis is, did you listen to what I said? Did you take my input? And what I tell founders is the most important thing is to end up in the it worked out category. So if it worked out, I always tell them, if it worked out and you took my advice, everybody's super happy. If you take my advice and it doesn't work out, human nature as a VC is to explain away that that advice was merely a suggestion, not a directive. And I find if you take my, if you don't take my advice, then it doesn't work out. Everybody's frustrated, but who cares? The big point is it didn't work out. So I would say on average, the best founders that I work with are kind of stubborn. It actually takes work to convince them to change their mind. And I think that's probably the right balance for most founders because they're far closer to the problems that they're working on than most VCs are. The places where I think VCs tend to have better advice is sometimes when you're not in the company, if a Company's not on track. Sometimes it's more obvious to you as an outsider than it is someone who's fighting to make the company successful.
- [14:02]
David
You're on your fifth fund now, so you should start seeing some results. Tell me about your first two funds, and how are those panning out?
- [14:09]
Charles
Yeah, so the theory for the first two funds was pretty straightforward. You know, we made 83 investments out of the first fund. This was a fund we started investing in in 2015. It's kind of crazy. 40 of those 83 companies are still alive and active. We've returned about a third of that fund. We had one really good outcome. The New York Times acquired the Athletic, and we were the first outside investor in that company. So feels good to have delivered some DPI from the first fund. But I still think most of the good news for that fund is still yet to come. Look, I just think, to be honest, precede is the longest hold possible that most LPs are going to experience. It's like taking your seed portfolio and tacking an extra 18 or 24 months onto the hold if you hold everything to maturity. And I think if we're going to do that, we have to believe as a firm that we can give people forex net funds at a minimum. Otherwise we're holding onto their money for too long and we're not giving them a good enough return. So I'm really confident Fund 1 is going to more than clear that bar based on what I know about the companies that are in that portfolio. Our second fund has just shy of 100 companies. It has greater than zero, but kind of negligible DPI at this point. Still really early. And we have a handful of companies that I'm really excited about in that fund. The most interesting thing, though, I think, David, is, you know, we talk about Power Law, and Venture Precursor is Super Power Law. So in our first fund, we've done a bunch of internal modeling about where we think this fund will land with returns. Even in the median cases, the top 8 or top 10% of the companies end up accounting for 80 or 85% of the returns. So it's not your typical a third, a third, a third, you know, a third really work, a third give you your money back and a third fail. We're more like 40% of them are going to be less than 20 cents of the dollar back. In return, you'll have another chunk of them that give you back somewhere between 50 cents and $2 on the dollar. So your money back plus or minus a little. And A very small sliver of the top 10% of the portfolio that's going to deliver the bulk of the returns.
- [16:03]
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- [16:41]
David
You'Re on the sharpest spear of the power law because you are at the very early stage pre seed how does that inform your investing strategy?
- [16:49]
Charles
I always ask myself, can we get on a pre seed company, can we get a 200x gross cash on cash return from this investment? So if we get in at 5, can we get out at a billion? Is that even conceivable with this idea? And truthfully, 200x gross probably turns out to be 75 to 100x net accounting for future dilution, that's meaningful. That means if we write a 500k check today, at some point in the future we'll get $50 million back. And given that all of our funds are sub $100 million, that's a meaningful amount of capital to get back in the context of what we're trying to do as a fund. So I always ask myself, are we taking enough risk and are we going after ideas that feel like they could be big enough? A number of our what look like they're going to be our big winners would have been controversial investments. If I were in a partnership, they were scary in some way. A lot of things or multiple things had to be simultaneously true for that to be a good idea. And I worry more that we'll do too many middle of the Fairway Safe B2B SaaS, companies that will never become true outliers that'll tank our fund. We really do need those binary big bet winners.
- [17:56]
David
Given that you have a much bigger portfolio than the typical fund, does that change your thinking in terms of every investment having to return the fund?
- [18:04]
Charles
When I look at our first fund companies, the ones that look like they're going to be the real returns drivers, I thought they were all interesting, but they weren't obviously bigger or better ideas than the other companies in the fund. Many of them at the time were going after small emerging niche markets. And so I've continued to see that pattern play out. Also in fund, too many of those companies, the ones that are likely to drive the majority of returns, they didn't feel smaller or bigger at the time of the investment.
- [18:35]
David
So the ones that ended up being the power Lao Outcomes, they didn't seem like bigger markets. What's your takeaway there? How do you process that information?
- [18:43]
Charles
I'll give you one example. We invested in a company called Carrot Fertility, which provides reproductive benefits through the employer channel. We made that investment in our first fund. So in 2016, there wasn't that much of a conversation around employer provided fertility benefits. Egg freezing was not something you talked about on Twitter. It was something you maybe talked about with your friends at a dinner party. The conversation wasn't where it is today, and I didn't know how quickly things would change. It just felt to me that we were on the cusp of an inflection point for that market, and it turned out that the inflection point for that market was much greater than we had anticipated. And that's gone on to be a pretty substantial company. And Tammy and the team there have done a great job growing and scaling it. But I just thought, hey, this is a benefit that only the. The only way you can really scale this benefit is to have the employer in the loop because most people can't afford it on their own and it's highly desirable. And I said, well, this seems like something where the employer should have a role and hopefully more employers will see fit to offer this benefit. But it was really kind of a cultural tailwind that pushed that company. Again, if I go back to Bobby Baby, there was just a ton of demand for a clean formula product manufactured in the United States. And then sometimes bad news for the world ends up being an opportunity for the company. The formula shortage really brought a lot of attention to their category. And so I think almost all of our successful companies have had something that's happened external to them that was a tailwind that was either hard to predict the magnitude of or the existence of it at all. And so I think if you pick really good people working in interesting markets and you're patient and the company stay alive, oftentimes you get these inflection points that can really turbocharge those businesses.
- [20:27]
David
It's interesting. It's almost like if you have enough good shots on goal, something good will happen. Yeah, it's kind of like in soccer. You shoot it and sometimes there'll be a deflection, but if it wasn't on close to a goal, it wouldn't have gone in.
- [20:39]
Charles
Yeah, it reminds me like a lot of times, you know, I'd say probably the meanest thing people say about Precursor is they call it spray and pray. It doesn't feel that way to me. It's not like we're just driving by throwing money out the window to whoever catches it. There is a plan and there is like a. There is a structure to it. And I think when you're a generalist, investing in people, the notion that you could find 40 people a year out of a few thousand who you think are working on really interesting ideas is anything but spray and pray.
- [21:08]
David
You mentioned cultural tailwinds, and again, you're investing at the very, very earliest stage of a company. What does your information die consist of in order to get ahead of some of these tailwinds?
- [21:17]
Charles
While I enjoy reading Technology Press, I think there's diminishing returns to reading things about the industry that you spend all of your time in. And so I try to read a wide variety of things. I also just try to pay attention to what my friends who don't work in technology are thinking and talking about. As much as I love talking about AI and LLMs and all the greatest, like new technological advancements, talking to my friends about cultural trends and the things that they're excited about for me is highly informative. Also, you know, at this point, I'm generally older than a lot of the founders that I end up investing in. And so just talking to them about what are the things that they care about in their lives, what are the things that are meaningful to them, gives me a really good window. The last thing I'll say is I try personally to meet 750 to 1,000 founders a year while running the firm and supporting our portfolio. It's a big commitment. And I think if you can talk to 750 to 1,000 people a year and you're not a specialist, I'm not talking to 750 fintech founders a year. You get a pretty good sense of where people's energy and attention is going.
- [22:25]
David
How do you balance the desire to be non consensus right, as they say in venture capital versus kind of chasing these trends? Tell me about the nuance.
- [22:32]
Charles
The hardest thing about being an investor at Pre Seed is that people should laugh at you on a regular basis for some of the investments you make. They should literally. David Question your judgment.
- [22:41]
David
What are some examples of ones that they laughed at you?
- [22:44]
Charles
I'll give you. So we were one of the first investors in CoStar, which is a social astrology company. And when I made that investment, a lot of my friends were like, are you anti science? And this goes back to your question about sort of cultural milieu. When I started talking to a lot of my younger female friends, they were all very in tune with astrology. Like it was something that they talked about with their friends. It was something they were aware of. And I was like, all judgment aside, like this is something that they care about. There is an audience for this product. We also invested in an electric boat company called Navier.
- [23:17]
David
I love Navier. That's one of the most amazing products.
- [23:20]
Charles
My investors were like, what do you know about electric boats? I said, the irony is we've done an electric vertical takeoff and landing cargo drone company. I've learned a thing or two from those guys about what electric drivetrains can do. And in some ways I think the beauty of precede is the fewer people you have that need to say yes, I think the easier it is to do hard and strange things. And I think we have companies that I've invested in that it would have been hard to get other people as excited about those companies as I was. And look, the flip side is true. There's probably some investments I've made at Precursor where a partner would have said, hey man, I think this is probably one you've just gotten a little too excited about. But again, I think when we're doing our job right, we should be doing things that when I tell people what the company does, we should get a blank look. People should be like, I don't understand why that's a thing. Because we're supposed to be two years ahead of what's obvious and interesting.
- [24:08]
David
What are some trends that you're two years ahead of today?
- [24:11]
Charles
Oh boy. I mean, I think probably the most. There's one. Right. I worry that we've made a pretty big decision as a firm that we're not going to chase buzzy hot AI deals, partially because of price, partially because of some questions I have. That's probably a trend that we're not as in on as as everybody else is.
- [24:27]
David
Let's talk about Screen Door, your GP advisor to one of the most highly sought after lp. Tell me about Screen Door.
- [24:34]
Charles
Screen Door has been an awesome experience. I've had the privilege of being on the investment committee for a couple of years now and there were a handful of US gps. As you know, David, like, once you've been in this business for a little while, you've raised a few funds, people come to you and ask you for advice. And I realized that as much as these people needed advice, what they really needed was money. They really needed money. And they needed money in the context of a first close for a first fund. And I give a lot of credit to the people, to the guys at Homebrew and some of the people who worked on Screen Door in the earliest days. I think there was this light bulb moment where it's like there are some experienced GP advisors who are constantly being hit up for advice from people who want to start funds. And we all try to help as many people as we can. And there were some large allocators who were interested in emerging managers, but just didn't have a vehicle for accessing them. The check sizes they wanted to write were too big for those funds. They really needed people who had been more mature in terms of the fund management side. And so we had this idea, what if we pooled our interests, capital and expertise and built a model where we had some of the world's largest, most highly sought after institutional LPs combined with a set of GP advisors and thankfully now combined with a really experienced professional staff. Jamie and Lisa and Lane have probably as a trio, funded more emerging managers than just about anybody I know on the planet. And I think it's a really unique investment committee because the goal was to try to be a significant, like, think 10% commitment that could come into somebody's fund as early as the first close and hopefully be a signal and give them momentum.
- [26:05]
David
How has being an LP made you a better gp?
- [26:08]
Charles
Oh my God. You think as a gp, I have the most interesting, amazing, unique story and then you hear 50 pitches and you're like, these all sound the same. And I don't. I think I have made significant changes to the way that we talk about and present precursor. Having been a GP advisor at Screen Door and listened to a bunch of pitches where I'm like, okay, 10 minutes in. The essential narrative for this pitch is that you're a smart person with a good network. That's true of like 95% of people who pitches like, what makes you special and unique. And I had no idea, and maybe I was like this in the beginning too, how hard it is to understand what a differentiated pitch sounds like from the to the ears of an LP versus what you think it sounds like in your own head. The story you just told me, if I Took your name out and took the firm's name out. It sounds like 85% of the other pitches I've heard that's not good enough. Like, what is it that really makes you unique?
- [27:00]
David
A good pitch is also a good strategy. So you could actually improve the pitch by improving the strategy, not just, not just put in another layer, not just put lipstick on a pic. For lack of a better analogy, what is a differentiated pitch and what is a differentiated strategy?
- [27:14]
Charles
I always ask them the same question. Given your strategy, why are the very best founders going to choose you? Like, why are they going to choose you? And I'd say half of the GPS I pitch think of venture capital as a stock picking business. Like, if I'm good at identifying companies, I'm like, well, that's only 20% of the battle. 80% of the battle is actually convincing the ones you want to take your money. So if you're good at picking but you're not good at selling and winning, like, what's the, what's the point?
- [27:39]
David
Do you think that's the case for pre seed as well? Or is it more of a picking game for pre.
- [27:43]
Charles
I think in pre seed it is less competitive than seed just because the people almost by. To your point about strategy, the construct of our fund is we're going after people who are generally speaking, less sought after. So I do think like picking and precursors probably more important than it would be if you were at a $200 million seed fund where like winning is maybe more important. But a lot of the, a lot of the fund managers that I meet are building funds in strategies where there are existing competitors. Like, you know, if you're a vertical fund Manager Going after FinTech or AI or B2B SaaS or PropTech, there are other people in your ecosystem who have established brands and also the generalist folks are pretty much all over everything. So I always ask people like, tell me why you win. Like, why are they going to pick you in head to head situations? And I find the best, the best fund managers I meet have a pretty clear sense about when and how they'll win. And the ones who get that, and some of them are just like, hey, you know, we, we deliver on these 10 things before we even invest. And the founders who we've taken money from really go to bat for us. Or there's usually one or two really tangible specific actions or activities that that fund manager is doing that helps them win.
- [28:52]
David
Talk to me about the portfolio strategy for screen door.
- [28:55]
Charles
In most cases, we're going to back people out of the first vehicle. Probably a dozen 15 managers in total with the idea of being a significant LP in almost all cases. There's a couple cases where we invested in funds that had pretty good momentum by the time we'd found them, but the people we really wanted to work with. Now we're entering into the next era of Screen Door, which is we've had a lot of managers that we backed for Fund one and now the question is how do we support those folks in two ways. One way is we want to continue to support the next generation of first time fund managers, but we've also discovered some people that we think are great and we want to be able to participate in their future funds too.
- [29:33]
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- [29:53]
David
Do you think Screen Door is creating TAM expansion? In other words, are you creating managers that otherwise wouldn't have been able to be managers by solving around the anchor check?
- [30:02]
Charles
I think in some ways we're doing what a good pre seed fund does is we're like bringing attention to things that are interesting that people might not get to if they're just sifting through everything that's out there. And hopefully more than TAM expansion, what we're really doing is we're making the Fund one experience more pleasant and less stressful for talented managers who are maybe getting overlooked. I mean, if you spin out of a big established platform, there are a lot of existing large LPs who have practice digesting and meeting with those people. A lot of people I meet from Screen Door, they were an operator and they're starting a fund, or they were an angel investor and they're starting a fund, or they were a junior person at somebody else's venture fund but they weren't senior enough that their departure, you know, caused the managing partner to pick up the phone and call all their biggest LPs and say, you have to support so and so.
- [30:51]
David
Last time we spoke, you said you were shocked that many of the VCs that left top ran firms have almost no connectivity and sometimes zero connectivity with LPs. Tell me about that.
- [31:01]
Charles
I was floored, David. I've talked to a handful of my friends who've left big platforms. I'm like well, you shouldn't have a hard time fundraising. And they've essentially told me like, I'm not really involved in the funds fundraising. I go, what do you mean? They go, well, we have a really professional investor relations team. And between the investor relations team and the senior gps, those are the people who talk to and get to spend time with the LPs both during the fundraising and after. And in some cases the people I talked to were actively discouraged from talking to LPs lest they say something that's off script. I do a bit of everything. A lot of fundraising, a lot of selection, a lot of fund management. The notion that people would be at a fund and not have access to a relationship with LPs wasn't something that had really entered my head. And then when they told me about it, I was like, oh, that's interesting. And a couple of them have come to me and said, well, how do you actually raise a fund? And these are people who are very experienced investors. They'd be amazing board members for any startup company. But the business of building a venture fund is a bit of a black box and a mystery to them.
- [32:02]
David
Clearly they need to listen to the podcast. Yeah, some of those situations, not just going off script in terms of talking to LPs, but the top general partners want to have a succession plan for their junior, junior level people and they don't want them going out and starting a fund. So it's kind of a direct counter incentive for that.
- [32:21]
Charles
I think there's definitely some LP gatekeeping.
- [32:23]
David
When you talk about somebody that leaves a top branded vc, what are the main challenges that keeps them from raising their fund?
- [32:28]
Charles
One, it's kind of like when you leave Google. Sometimes it's hard to know how much of my professional success was me and how much of it was the place where I worked. And I think sometimes LPs make judgments about value of the platform that the person was on versus like them as an individual that are different from that person's own self perception. And I don't know that that means that limited partners are right when they say, well, gee, maybe a lot of this person's success was due to the fact that they were on a platform where they got easy access to great entrepreneurs and that, you know, they're essentially, you know, success was based on the hard work of others who came before them. I don't know if LPs are right or wrong, but I've seen them make that decision before that like this person, without that tailwind of a brand will be less Successful.
- [33:13]
David
How does a GP that's leaving a large platform test the waters?
- [33:16]
Charles
I think it's really dangerous. I think it's like really dangerous unless you're pretty committed to leaving. The best way I've seen it done is the person kind of makes the decision that they want to leave and go start something else. They figure out dependent. In some firms, you could tell the leadership that this is something you want to do and they'd be supportive. In other cases, I think it might be your last day if you were to tell them. It really depends on the culture of the firm. I think the danger is if the firm you're at doesn't really have any clue at all that you're doing this and LPs, you meet with them and they go back and say, hey, I heard so and so from your firm is thinking about leaving to start a new fund. Like, is this something I should be taking a closer look at? And that's news to the management. That's just not good. Like, nobody, nobody wins when that's the case. So I think if you're going to do it, the only people you can really test the waters with are people that you really, really trust to keep it confidential. And oftentimes that's a really small number of LPs, usually people you've gotten to know really well in some context. And this is the irony you mentioned.
- [34:20]
David
One of the biggest risk factors for an LP is whether the GP was just drifting off the brand of the previous platform. How do you suss out yourself as an lp? Whether the GP that's spinning out is actually good, or they were just benefiting from the brand of the previous lp, previous vc?
- [34:36]
Charles
A lot of times I'll just ask people, like, how do you think life is going to be different for you as a GP now that you're not at XYZ platform firm? Like, what do you think is going to be different? And I find the people who are like, nothing's going to be different. I'm great at sourcing, I have a great network, people love me. I'm like, that's kind of naive. It will be different. Like, it will be different. You're going to be starting from scratch with a new brand. And yes, you will have some core relationships that will come with you, but a lot of it is starting over and building from scratch. So the first thing I try to get a sense for is, like, how aware is this person of what's likely to be different on the other side. Starting from scratch, reintroducing Yourself to your network as a new person is a big job. So that's, that's one of the questions I asked them the second. I'll ask them a lot about sourcing.
- [35:23]
David
Do you think that kept you from developing important skills, having that early in your career?
- [35:27]
Charles
That is actually why I left Google a big part of it. I said, I want to get better at business development faster, and I think I need to be in a place where I don't have all of these tailwinds and where more responsibility will be put on my shoulders sooner. And so I went to a. I left Google to go to a startup, and there were two of us on the revenue team when I joined. And my boss was like, well, it's me and you. We're going to have to come up with all the ideas. We're going to have to do all these things. And he. I learned so much. His name was Joe Herkin. I learned so much from Joe because it was just me and him. And he's like, well, this deal came in, we got to figure out how to structure it. What do you think we should do? And I'm looking around, he's like, no, no, I'm talking to you. You and I are going to have a conversation about this. And it was a huge accelerant for my learning to be in a position with less brand power and I'd say kind of more responsibility.
- [36:21]
David
Were you in your mid-20s?
- [36:23]
Charles
I was at that point. Late 20s, yeah, late 20s.
- [36:26]
David
So one of the life hacks for somebody early on in their career is actually just to be a good thought partner, to be a good listener. It's an amazingly rare skill. And you'll have very senior people come to you and we'll just talk to talk at you for 45 minutes. And, you know, you could ask probing questions, but that could be very valuable to a senior partner.
- [36:46]
Charles
It's super useful. And I've had people who've worked in the office with me at times, and I find myself doing that. They're right there and I'm like, hey, I just want to run something by you. I want your input on something. And it's just a natural thing to do when you're around people. And so I'm really grateful for that experience. It was really seminal.
- [37:03]
David
Speaking of a seminal experience, you were chairman of the nvca, which is a trade association for the venture capital industry. Tell me about that.
- [37:13]
Charles
It was an amazing experience being chair for a year. Byron Dieter has taken over for me from Bessemer, and he's doing a great job. It's really fascinating because I run a pretty small venture fund in the grand scheme of things and the NVCA represents everybody, the biggest venture, the biggest multi stage platform funds in our industry, all the way down to small regional venture firms, life sciences, software, hardware. It's this really interesting nexus of all things venture. And I think two of the biggest things I learned is one, the venture capital industry has a huge role in the innovation economy, but is a pretty small trade association compared to most of the other folks that are out trying to influence policy in Washington. And that sort of took me a while to wrap my head around it. And second, there are many laws that are drafted to solve one problem that have meaningful unintended consequences for the venture capital industry. And I found that policymakers were actually quite receptive to hearing about the unintended consequences of some of the things that they proposed and how those things would impact the venture capital industry. And the US Venture capital industry is the envy of the world. Like, we have the best, we have the best thing going. And so, you know, reminding them that we don't want to break that thing was important.
- [38:30]
David
Well, Charles, you did not disappoint with the podcast. I really enjoyed chatting. What would you like our listeners to know about you, about Precursor?
- [38:37]
Charles
I mean, the only thing I'll say is I really love meeting new people and I keep quite a bit of time on my schedule to meet people who are unknown to me but are really committed to building something special. And if you're one of those people, please reach out.
- [38:52]
Sponsor
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