The Past, Present, and Future of Pre-Seed | Charles Hudson, Precursor

Summary

Podcast Summary: The Peel with Turner Novak

Episode: The Past, Present, and Future of Pre-Seed | Charles Hudson, Precursor
Date: June 25, 2026
Guest: Charles Hudson, Managing Partner at Precursor Ventures
Host: Turner Novak

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Episode Overview

This episode explores the evolution, challenges, and current dynamics of “pre-seed” venture capital investing. Turner Novak welcomes Charles Hudson, founder of Precursor Ventures, for a candid, deep-dive discussion on round definitions, industry trends, competition from mega-funds, VC firm building, and the realities for both founders and emerging fund managers. Charles draws on a decade of investing at the earliest stages, offering a blend of practical advice, industry context, and personal playbooks.

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The Definition and Evolution of Pre-Seed

[00:06–07:40]

• Origins and Blurred Lines:
  Charles recalls the early days (2014–15), when "pre-seed" meant rounds under $1M, with very few players (K9, Pivot North). Over time, both round sizes and definitions evolved ("maybe now anything under $1.5M is pre-seed"), resulting in ambiguity and “nomenclature gymnastics.”
  • Quote: “I don’t think anyone’s ever had a consistent definition of what a pre seed round is.” — Charles [00:22]
• Purpose of Pre-Seed:
  The real distinction is the round's purpose: pre-seed is for “hypothesis validation,” not “scaling the management team.” It’s about “proving that people care about the thing you’re building.” [01:55]
  • Turner: “You have a hypothesis ... can we even do this thing?” [01:37]
• Shifting Stigma and Round Sizes:
  There’s a perception that “small” rounds signal low market interest, pressuring founders to raise larger amounts—even calling $9M rounds “pre-seed” (often Series A or an extension). [02:50–04:13]
  • Quote: “I don’t know what round names mean anymore.” — Charles [02:36]
• Industry Trends:
  Venture rounds now range from $250k to $10M with different capital needs (e.g., AI startups require massive upfront investment); defining boundaries is “exhausting” for both GPs and LPs. [04:13–06:35]
• Naming/Labeling:
  Turner suggests calling it “adventure capital” (inspired by the whaling industry)—emphasizing risk and exploration over arbitrary labels. [04:13–05:01]

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Market Forces & The Impact of Mega-Funds

[12:34–16:23]

• Rise of Multistage Funds:
  Charles discusses waves of large VCs playing at seed and the signaling effects. Initially, there was strong concern about follow-on “signaling risk,” but it diminished over time, especially as repeat founders became less sensitive and capital flows concentrated.
• The Need for AUM (Assets Under Management):
  Massive growth at firms like Andreessen illustrates that to scale, funds must “be in every asset class ... from pre-seed to growth.” [14:29]
  • Quote: “If you’re going to grow AUM, the only way you can do it ... is be in every asset class.” — Charles [15:00]
• Competition for Access:
  Repeat founders now expect large checks from branded funds, pushing seed round ownership down for dedicated early-stage funds and increasing round sizes (“20 million post money for companies that they’re paying 50 or 60 post for now”). [16:23–18:04]

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Seed Model: Is it Broken?

[22:23–27:19]

• Classic Seed Model Challenged:
  Traditional seed strategies (“30–40 companies, 2–4M checks… 10–15% ownership, board seat”) are less viable as mega-funds outbid for high-signal founders.
  • Quote: “I’m not sure you can win 10 or 15% of the companies you want to be in as a large seed fund manager if the multi stage funds are cherry picking repeat founders and high signal people.” — Charles [22:50]
• Capital Flooding:
  The “velocity” and magnitude of capital is now more important than precise valuations, especially for multi-stage funds who can maintain access and brand for follow-on investments. [26:28–27:19]
• Two Worlds:
  Sub-$100M funds operate in a different space—targeting companies not yet on mega-funds’ radar, but run risk that none ever “graduate” to the consensus-coveted rounds. [26:02]

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Dynamics of Industry Signaling and LP Behavior

[17:08–20:13]

• LP Decision-making:
  LPs rationally prefer concentrated bets in proven access funds, rather than deploying lots of small checks across emerging managers.
  • Quote: “A lot of people are like, oh, to get to those 10, how many managers do I have to work? ... Or I could give these two people $50 million each. They’re going to cover everything...” — Charles [18:22]
• Performance vs. Perception:
  Being “in hot companies” (Anthropic, OpenAI, Stripe) dominates LP attention, sometimes regardless of underlying strategy or returns. [28:55–29:11]

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The Pull of Consensus Investing and Strategy for Survival

[30:28–36:48]

• Heat in the Market:
  The “game on the field” is chasing hot AI companies. Access to these deals, and the ability to raise again, depends on branding, track record, and perceived proximity to AI winners—risking over-concentration and groupthink.
  • Quote: “If you're in a bunch of the really hot AI companies ... you will have a relatively straightforward time raising capital. If you’re pursuing some other strategy, ... you’ll have a harder time.” — Charles [32:30]
• Bimodal Survival Strategies:
  VC funds either “stick to their knitting” with misunderstood, contrarian bets (hoping for future vindication), or compete fiercely for consensus deals (to ensure fundraising velocity). [31:35–33:16]
• Power Law Gone Haywire:
  The industry’s “one winner returns the fund” lesson has become even more extreme—one mega-winner (e.g. Anthropic) returns the industry.
  • Quote: “They just swallowed the whole bottle of pills ... it’s all that matters is just you get one company that returns the industry.” — Turner [43:36]
• Entry Valuation and Creativity:
  The two most important variables remain entry and exit price—regardless of hype, creativity in portfolio construction is more important than ever for differentiated returns. [48:35–49:18]

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The Founder Experience: Raising as an Outsider

[70:47–76:55]

• “Strangers with Data” Quadrant:
  Precursor specializes in backing unknown founders before proof, operating in a “quadrant” where neither person nor business is well understood by the market (vs. “Mark Zuckerberg starts new social app” quadrant) [68:34–70:07].
  • Quote: “If I do my job properly, I’m going to meet all the people who haven’t quite figured out how to get in front of those [top tier] firms ... But if we’re rerating the stuff that they’ve already passed on, you’re right, I will fail. But if we’re finding stuff that’s been unrated, ... we’ve got a shot.” — Charles [70:11]
• Barriers Faced by Non-consensus Founders:
  • Breaking in is “really hard,” especially as the market migrates back to warm intros and human filters in the AI era. [71:29–71:30]
  • Many founders lack “zero to one” experience or the internalized urgency needed to operate at the earliest stage. [73:09–73:11]
  • The top skill: “untapped management potential”—can they scale from IC to CEO? [73:47]
• The Last $250K Phenomenon:
  Founders often make tough, necessary decisions (“urgent focus”) only when forced by dwindling runway.
  • Quote: “I just wish I could get people to have that experience without literally getting down to their last 250k.” — Charles [97:43]

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Building a Venture Firm: Playbooks, Principal Program, and The Two Deserts

[61:26–65:55, 86:02–96:42]

• Precursor’s Principal Program:
  Every investing team member starts with a discretionary “mini-fund,” allowing them to prove their investing approach independent of Charles—even if it means Charles “wants more or less of this person’s taste” in the overall portfolio.
  • Quote: “I’m more interested in allowing them to express their judgment than I am developing them.” — Charles [61:41]
• Career Pathways in VC:
  Most VC jobs, especially as a fund grows, are “management jobs, not investing jobs"—80% fundraising, fund admin, tax, IR/CRM, 20% investing. [77:26–80:39]
• Emerging Managers: The Two Deserts:
  • First Desert (Funds 1–3): “Everyone wants you to succeed,” LPs have dedicated pools, lots of ‘warm blanket’ support.
  • Second Desert (Funds 4+): Support dries up, “you’re not emerging, but you’re not Sequoia.” New problems around scale, succession, team management, and peer community.
    • Quote: “If you get through fund three and get to fund four, you made it right, it’s over? But all that support goes away.” — Charles [95:01–95:38]

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LP Pitching and Fund Construction Realities

[89:19–94:54]

• SPV/Opportunity Fund Lessons:
  Too much innovation (e.g., follow-on SPVs for LPs) can scare off traditional LPs—“they want vanilla ice cream with sprinkles.” [90:29–91:49]
• Qualifying LPs:
  Time is saved by knowing which LPs can accept your “novelty” (e.g. solo GP, portfolio construction, size constraints). [87:24–89:33]
• Portfolio Construction as Religion:
  Many LPs have strong, fixed frameworks on number of companies, check size, and ownership. Adapting pitch position (novelty at the end, not the beginning) makes a difference. [91:49–92:12]

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Notable Quotes and Moments

| Timestamp | Quote/Discussion | |------------|-------------------------------------------------------------------| | 00:22 | “I don’t think anyone’s ever had a consistent definition of what a pre seed round is.” — Charles | | 15:00 | “If you’re going to grow AUM, the only way you can do it ... is be in every asset class.” — Charles | | 22:50 | “I’m not sure you can win 10 or 15% of the companies you want to be in as a large seed fund manager if the multi stage funds are cherry picking repeat founders and high signal people.” — Charles | | 28:55 | “Some people will just say, is he in Anthropic, Databricks, OpenAI, Stripe, or SpaceX? And if the answer’s no... you’re not in the hot companies.” — Charles | | 31:36 | “Are you any good? ... What are you spending time on if you’re not chasing down this next [AI]?” — Charles | | 32:30 | “If you’re in a bunch of the really hot AI companies... you will have a relatively straightforward time raising capital.” — Charles | | 43:36 | “They just swallowed the whole bottle of pills ... it’s all that matters is just that you get one company that returns the industry.” — Turner | | 49:18 | “Any investment is interesting when you just take that lens of like, what do you pay, what can you get for it in the future?” — Turner | | 61:41 | “I’m more interested in allowing them to express their judgment than I am developing them.” — Charles | | 70:11 | “If I do my job properly, I’m going to meet all the people who haven’t quite figured out how to get in front of those firms.” — Charles | | 73:47 | “Untapped management potential.” — Charles | | 95:01 | “The first desert is like, you’re just trying to stay alive for your first three funds... if you get through fund three and get to fund four, you made it right? ... But all that support goes away.” — Charles | | 97:43 | “I just wish I could get people to have that experience without literally getting down to their last 250k.” — Charles |

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Practical Takeaways & Tactical Advice

• For founders:

  • Don’t obsess over round names—be clear about what your raise is intended for and communicate traction/hypotheses with clarity.
  • Build urgency and focus before cash scarcity forces your hand (“the last 250k effect”).
  • If you’re a non-consensus/out-of-network founder, you’ll need to work harder on storytelling, net-new relationships, and evidence of “zero-to-one” potential.

• For aspiring fund managers:

  • Most of the job is fundraising, compliance, team and org-building—not picking deals.
  • Be upfront with LPs about strategy, portfolio construction, and “reason you win.”
  • Stay aware: after your third fund, the market support structure changes substantially—start planning for the “second desert.”

• For LPs and emerging managers:

  • LPs look for access to hot companies, branding, and evidence of “narrative” success (being early in current megatrends).
  • Many of the industry’s “rules” are downstream of incentives (AUM, management fees, perceived velocity rather than actual returns).

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Timestamps to Key Segments

• [00:06–07:40] Defining and evolving pre-seed
• [12:34–16:23] Rise of multistage/mega funds and AUM logic
• [22:23–27:19] Broken seed model, velocity over valuation
• [30:28–36:48] Consensus investing, how to survive
• [43:36–49:18] Power law, rationale for late-entry investments
• [61:26–65:55] Precursor’s Principal Program, internal training
• [70:47–76:55] The founder experience as an outsider
• [86:02–96:42] Building a firm, the two deserts of venture
• [97:43–101:00] The last $250k effect for founders

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Tone and Style

The discussion is straightforward, candid, and laced with industry war stories, tactical wisdom, and a clear-eyed view of both opportunity and limitation—without sugar-coating. Charles and Turner combine inside-baseball banter with clear advice for founders, fund managers, and those interested in venture’s evolving landscape.

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Conclusion

This episode is a masterclass in early-stage VC realities: from why round names are constantly redefined, to how consensus, power law, and industry structure have reshaped the landscape over the past decade. Charles Hudson unpacks “how the sausage is made” for both founders and aspiring VCs, covering playbooks, pitfalls, and hard-won lessons. If you’re navigating the pre-seed or seed venture universe—as a founder, manager, or LP—this is essential listening (and re-listening).

Transcript

[A]

Charles, welcome to the show.

[B]

Thank you for having me.

[A]

Thanks for being here. I think this will be fun. So you started precursor in 2015 and kind of like helped create this category called pre seed. A lot of people argue that pre seed is now dead. How do you reflect on and think on that?

[B]

I don't think anyone's ever had a consistent definition of what a pre seed round is since I started our fund. So I started working on precursor in 2014 and really got it off the ground in 2015. And back then, the only people I really knew who were talking about pre seed were Manu Kumar at K9 and Tim Connors at Pivot North. And even they were like, oh, these pre seed rounds are small. They're like 500k. And for most of the time that I started the firm from like 2015 to 2017, we had this very strict definition. Pre seed is a million dollars or less. Wow. Anything greater than that is seed. And that kind of worked. There was this sort of like, bifurcation of people who were raising a little bit of money and people who are raising, like, more money. Then we had to kind of update the firmware, so to speak, about three years ago, hey, pre seed rounds are now maybe more like anything under one and a half million dollars is a pre seed and anything above that is a seed. And the reason I've always tried to maintain this distinction, which maybe doesn't matter anymore, is I always felt like pre seed rounds were about product, market fit, funding. They're not about scaling out the management team. They're not about generating a ton of ARR. They're basically figuring out, like, is the thing I'm working on interesting to anybody else?

[A]

Keep going. Yeah, like you have a hypothesis like, this is a problem. We can probably make a product to solve the problem. Some customers might want it.

[B]

That's right.

[A]

There could be a company. But honestly, like, that's like a just whole different equation. It's just like, can we even do this thing in a.

[B]

And if we do it, does anybody even care?

[A]

Yeah, that's fair.

[B]

And so I've always felt like, well, that's what precedes about. It's this hypothesis validation phase. It's about proving that people care about the thing that you're building. And I still don't think for most software companies, you actually need much more than one or two million dollars to execute on that vision. The problem is if you do it too skinny, then you have financing risk. And so I was mentioning to my friend earlier Today, we have two companies that have done $9 million pre seed rounds. And my friend said, I didn't know pre seed rounds could be that big. I said, well, they called it a pre seed round. By my terminology, it would be probably closer to a series A. But they called it a pre seed because they want to maintain the ability to call the next round a seed. And so I don't even know what round names mean anymore. But I will say I think we're in a world where for some companies they think there's like a negative stigma around raising a small round because somehow the perception is, well, if you're only raising a million or a million and a half, it's not your choice, it's all that the market would give you. So your company must be not that interesting if you didn't raise 3 million or 5 million dollars in your precedent. Like some people are just better with small amounts of money.

[A]

Yeah, to that point though too. I mean sometimes for some of these AI companies you could say you need to, there's like some capex sort of related to this and you need $20 million to even get things rolling. That's another argument that can be made.

[B]

You couldn't do like an inference company for like 500k. You wouldn't even be able to do anything. And I do think, I think I told someone the other day, you know, like, First Round Capital is probably in my opinion one of the greatest names of a venture capital firm. Although. Because it leaves very little room.

[A]

Yeah, the first round.

[B]

That's right. Which means no matter what you call it, it's the first round.

[A]

Yeah.

[B]

And I think pre seed, when it started was needed because seed rounds were becoming more of these post product market fit, early expansion rounds. And now I think pre seed is firmly like the thing you do before you're ready to do that. And for some companies you can do that 500k to a million and a half. And for some companies it's five to $10 million to do that exploratory work.

[A]

Yeah. So maybe I've always had this opinion of like we kind of need to figure out this naming thing. And I mean, I don't know if it's ever going to happen, but kind of adjust how we just generally think about this. Like it's, it's almost like one of my favorite ways of thinking about this is adventure capital versus venture capital. My friend Dan Feder at the University of Michigan, he's the best kind of like brought me on this. I'm like, yes, I do like that thinking it's like we're going on an adventure. Like we have this hypothesis, there's a problem, we're going to try to solve it. It's kind of like when you think about the origins of venture capital, sort of going back to like the whaling industry. Yeah, sort of. It's like we're going to the ocean. Like, you know, it's the 1600s of the whales out there. We just don't really know. We're like, we might die in this boat in the middle of the Atlantic Ocean.

[B]

But I think what you highlight though, Turner, is like a real problem that my team and I have been trying to solve, which is we're like, we're a pre seed firm and people will come to me and say, I'm raising 250k for my pre seed. I'm like, well, that's too small.

[A]

Yeah, I've had before like 50k, 50k. And I'm like, you probably, you probably want like 750 grand, like probably 10 times more.

[B]

That's right. And I'm just like, well, I don't want to do 250 where I'm the whole 250 unless I know the person. And we're both like, hey, this is just pure experimentation.

[A]

Yeah, that's fair.

[B]

And we have other people who come and say like, well, I'm raising a $10 million pre seed. And I'm like, like, the last company we did that for is a company that has a significant hardware component in the energy space. And I'm like, well, for you to do what pre seed is supposed to do, which is like hypothesis proving, you probably do need $10 million to get there. So that's like an appro. But how do I communicate to the market? We do pre seed rounds anywhere from 750 to $10 million in size. Because most of the things I get that are seven to $10 million in size are uninteresting to me. Or there are companies that have already raised what I would consider a pre seed round or raised significant capital, and that's really more of a seed. So I find that the messaging for us as a firm has gotten much harder as the definition of what constitutes a pre seed round has expanded.

[A]

What I found myself doing is just saying, I invest in the first or the second round, like a classic preceder seed. Whether you're raising a million bucks or Maybe it's like 4 million in more traditional seed, I don't know. Yeah, it's just first or second round. It's an easy way to it's again, the first round capital. Like raising your first round whatever. Like, I don't care what you want to call it.

[B]

I know. So we've gotten away from nomenclature and we've gotten less strict. We used to be very strict about tracking precede and seed, because I think in the early days, too, a lot of LPs who were like, well, if pre seed's a good thing, your companies will graduate from pre seed to seed. And like, pre seed to seed graduation is like a proof metric that now everyone's like, well, pre seed's a thing. I don't actually care about your precede to seed graduation now. I really care about your cumulative precede and seed graduation Series A. Because series A is, like, now the real thing.

[A]

And then I think that one way I think about Series A is just you have a board member. Like, there's a. It's a real company versus it's kind of. We're hacking this thing together. We're trying to convince people to pay. And it's like, okay, this is a thing. Yeah, still might not work. But there's, you know, we're doing the legal stuff and we're creating the board. And so in my mind, that's kind of when I think of a Series A, even if it's technically a pre seed round or technically it's a Series C, whatever it is. Like, that's kind of when it flips. Like the letter naming is when I would think, okay, the board was created. This is a real company now.

[B]

Well, we have a company that raised a $10 million Series A on a safe, and all of the board stuff got handled in the side letter.

[A]

Oh, interesting. Okay.

[B]

So I was like, oh, even the Series A is not always a price round anymore. That used to be our other thing. Like, oh, the Series A is your first significant price round. And I've had companies that have raised the Series A and wanted to go back and rename that round a seed round so that they can have a big Series A as opposed to a small Series B. And I just find the nomenclature gymnastics to be exhausting.

[A]

Yeah. Cause it's. And it's not always one person's fault. A lot of it is. I have one company in New York where he doesn't really need to raise a Series B like another round, but he's been thinking about it purely from a recruiting perspective of just the external signals, all that that goes in to just make it a little bit easier to hire more people. And so it's kind of interesting with where you maybe the market kind of boxes you into having to do something. Whether you name around, whether you make a certain decision with the company, whether it's fundraising, recruiting, like a product, like the market has so many external factors that influences what you have to do.

[B]

And I'll admit when I see like, wow, $12 million seed round, even though I know in my head, okay, that was probably a $2 million pre seed, $4 million seed and then a $6 million seed extension. And that's how you guys. But I'm still like, that number impacts me even though I know it was probably gamed or structured in a way that if you said that's a $12 million series, a big, pretty good series, A not, not exceptional, but pretty good.

[A]

Yeah. And then there's. There's also this other element of not everyone else sees it and thinks that. They just say, they just think $12 million that you raised and they don't realize that it was like a three month process or, sorry, three year process. And it's an oversubscribed $20 series. And like, oh, wow, like, that's awesome. And I mean, it's not oversubscribed until the end.

[B]

That's right.

[A]

My favorite thing is someone will, for a fund, they'll be like, we raised an oversubscribed $40 million fund. And the reality is that it was a absolute grind for 18 months. And then at the very end, everybody wanted, when it was already raised. And it makes it, it was super hard to put that together. But a lot of people like, oh, congrats, amazing, oversubscribe, whatever. And it just, it's, it means so many different, like, it means a completely different thing to different people.

[B]

Also, I'm like, well, you set the target. If you thought you could raise 50 and the target was 50 and you raised 40, you'd feel like you failed. If you set the target at 30 and you raised 40, you're like, wow, I'm oversubscribed. I'm like, well, in either case, you still have $40 million. It's just how you feel about it depends on.

[A]

It's just like an optic thing. This episode is brought to you by Numeral. Numeral is the fastest, easiest way to stay compliant with US Sales tax and global vat. It's easy to set up and they automatically handle all registrations, ongoing filings, and their API provides sales tax rates wherever you need them with all the integrations you need. Their solution combines AI driven automation with human expertise to manage global sales tax compliance end to end. Numeral supports over 3000 customers including companies like Brax and characteristics AI and they pride themselves on white glove High touch customer service. Plus they guarantee their work and they'll cover the difference if they mess anything up. If you want to get compliant, check out numerl at their new domain numeral.com that's n u m e r a l.com for the end to end platform for sales tax and VAT compliance. This episode is brought to you by Flex. It's the AI native private bank for business owners. I use Flex personally and I love it because they use AI to underwrite the cash flow of your business, giving you a real credit line. The best part is 60 days afloat, double the industry standard. Flex has all the features you'd expect from a modern financial platform like unlimited cards, expense management, bill pay that syncs with your credit line and their new consumer card, Flex Elite. FlexElite is a brand new one ramp like experience for your personal life. A credit card with points, premium perks, concierge services, personal banking, cars and expense management for your family, net worth tracking across public and private assets and a whole lot more fully integrated with your business spend. One card for your businesses, one card for your personal life. One card for everything. To skip the waitlist, head to Flex 1 and use My Code Turner to get an additional 100,000 points when worth $1,000 after spending your first $10,000 with Flex Leap, that's Flex 1 and Code Turner for $1,000 on your first $10,000 of spend. Thank you Flex and now let's jump in. So then what other ways do you feel like? I don't know. First round investing has changed over the past 10 years.

[B]

Oh so it's a good question. So I think when I first started Precursor we were in the founders should be aware of multi stage fund signaling marketing era.

[A]

Because that benefited you, right?

[B]

I think it benefited. I think there were two things. I think most seed funds had enough experience with deals that had been backed by multi stage funds at seed failing to clear the Series A bar. Oftentimes with the firm that had done the seed declining to lead the A. And people are like oh, you're going to get signaling if you take the money. I'm like well it's only a signal if you don't raise money. And you're probably only going to not raise money if you're bad relative to what else is in that company's funnel. So it's not as if taking a seed check from a multi stage fund gives you the fast pass on the next round, it just means they know a little something about you.

[A]

It might declining, it might decide might actually speed you up because then they want in. So it's like it could go either way.

[B]

And this was the argument that I think carried the day from we'll say 2010 through maybe like 2017, 18. Most founders were like, I'm open to the idea that taking a check, a seed round check from these multi stage funds is not great for my business. And then it flipped and then founders were just like, you know what, I think it was really driven by repeat founders who were just like, I know the bar at those funds. If I can't clear it whether I have their money or not, I don't care. Their lack of willingness to fund me is a signal of quality and I can deal with it. And I think it eroded this argument that multi stage funds shouldn't play because we've gone through the cycle where multi stage funds would dabble in seed. They created a lot of ill will from founders who they didn't follow on

[A]

and they kind of pull back and

[B]

they'd pull back and they'd be like, you know, we should just leave this to the seed people. But my whole theory is that in a world where Aum is the name of the game, and I'd like to point out the firm with the most Aum in our industry. How old is Andreessen? 15, 17 years old. A less than 20 year old firm is the largest by reported Aum firm in our industry. So in less than two decades they've gone from non existent to the largest Aum firm. And at some point, if you're going to grow Aum, the only way you can do it, if you believe that each of your individual strategies has a different elasticity, you can put a lot of money in growth. You have to be in every asset class. So at some point I think the multi stage folks said if we're really going to be a tip to tail multi stage VC fund, we actually cannot allow someone else to just do seed for us. We have to have our own product in the market that competes with what they have. There's an Aum opportunity here, but there's also a full life cycle pipeline opportunity here. And their decision to come in in a permanent way, I do think change seed because then I think a lot of repeat founders are like, wow, I can get a large chunk of money on terms that are very friendly to me from a firm that I held in high regard, that I hope does my Next round. And if they don't do it, I'm probably out of business. And I think I'm okay with that. And that to me is the biggest shift because suddenly those repeat founders that I think that was honestly an arbitrage opportunity for seed. There were people who probably could have gotten money from the big funds, but every two years the big funds were out of the seed business. And so if you were a person starting, starting, you're like, well I have to go to these seed specialists. And seed specialists were paying 15 or 20 million dollars post money for companies that they're paying 50 or 60 post money for now if they can even get into those companies.

[A]

When you say if they can even get in is an interesting, interesting line because most seed managers today, the biggest question that you face for your business is can you compete with the these mega funds? And I think one. Well, you tweeted something, it's probably a couple months ago where you're like the biggest. There's like this pretty big difference between how the, the venture managers are saying the kind of the current state of the seed market versus what's the current stage of the seed market from the LPs. Yeah. Actually investing in all these funds. So what are kind of these two things that you're hearing and how are they not or the same? I think different are the same.

[B]

There's a lot of early stage managers who I think as capital has really started to concentrate in this business have felt like I have to defend seed investing. And I'm like, well you should always, maybe not defend it, but you should always understand, am I in a good business? I think a lot of them said, well these mega funds don't make any sense. You can't generate the kind of returns that we can generate. The LPs who are opting for these funds are dumb or they don't get it. At my.

[A]

Yeah, small funds outperform, therefore you should just only invest in smaller funds.

[B]

Yeah. I'm like, well that's a very circular self serving argument. Doesn't mean it's true or untrue. I was like, guys, it isn't. The people who are making these allocation decisions are very sophisticated and smart people. And I'd argue piling a bunch of money into a company that's compounding rapidly, that's working really well can generate dramatically outsized returns.

[A]

Yeah. If you just think about your seed fund, you're investing in all these companies that are probably going to fail versus just put a bunch of money into anthropic the fastest growing company ever.

[B]

That's right.

[A]

What is those two pitches coming to an lp? They look different. That's right. There's different reasons to do both of those.

[B]

Totally different reasons. And if you're an LP who has a cost of capital hurdle that's quite low, even if those firms do underperform relative to small firms, they still might perform well in excess of the cost of capital hurdle that you need to clear for it to be a good investment. And if you told someone you have two choices. You've got $100 million to put to work. You could give $50 million to two firms, or you could give $10 million to 10 people. A lot of people are like, oh, to get to those 10, how many managers do I have to work? I got to meet 200 managers to get to 10 and then I got to make sure I get 10 million into each. Then I have to go to 10 AGMs, then I'm on 10 lpacs and I have 10 re up decisions. Oh, that's a lot of work. Or I could give these two people $50 million each. They're going to cover everything from pre seed, in theory, pre seed to growth. And if they have good brands, they should see and get into all of the stuff that I care about and why shouldn't I do that? And I'm like, for some people, if you're a one, think about this Turner. If you were at a family office and you're like, I'm responsible for all privates, every asset class, private credit venture, all forms of PE and buyout. You don't have time to meet 200 early stage VC managers in addition to the rest of your work. So giving a large chunk of money to one person who can cover the whole swath of venture if they have good access and they run a good firm is actually a completely rational strategy. So I've told people. It's like also, it just sounds lame to be like, well, you shouldn't give those people money because they're bad at their job. I'm like, well, I think the people who are giving them money have a peek into the returns, know what's in the books and they're not throwing their money away. They might be wrong, but they're not throwing their money away. And it's hard to raise money from people by telling them that they're idiots. Yeah,

[A]

it's like, you're dumb but give me money.

[B]

That's right.

[A]

Yeah, it's kind of like the. I feel like you see a lot of Times where founders maybe get frustrated like investors. And that's another thing that can be tricky to navigate too. And it's like, you know, you gotta. There's an investor that's like, you're like grinning while they're telling you that you're gonna fail and your idea is bad or whatever, you know. And that's another. To me, it's a skill that you need as somebody who's starting a company is just like constantly people telling you you're not going to make it, you know. So when you can build anything, Amplitude lets you know how to build the right thing. Use human language to get complex answers about your products. No more manually selecting events or building charts or dashboards, just to ask. Use agents to sense changes in customer behavior, decide what's causing them, and ask you if it's okay to fix it Continuously in the background while you work. Get the answers you need while building directly in the the tools you are already in. Like Claude Cursor, Lovable and more. And for the first time, understand if your agents actually work. Measure quality, debug failures, experiment and measure their ROI with agent analytics, Amplitude with AI analytics. All you have to do is ask. This episode is brought to you by Merge, the connective infrastructure for production AI. The hardest part about building an agent is everything around it. Connecting to the tools your team and customers rely on. Letting agents take action with the right permissions and keeping everything reliable and cost efficient. Once you're in production, Merge handles that all for you. It connects agents to thousands of tools, handles permissions and LLM routing and lets teams move faster without building it all themselves. OpenAI, Dropbox and Ramp all use Merge to move faster and build AI. Right? Visit merge.devo/turner to start building for free. That's merge.devturner to try Merge for free. Do you think that the seed model is broken? Then when you just think of like this, you know, I don't know what the most average seed strategy is, but like 30 to 40 companies, 2 to 4 million checks each, maybe there's some follow on reserves, but you know, you have a 150, 200, $250 million fund. Like does that work anymore?

[B]

I don't know. And I say I don't know because I don't run a firm of that strategy. I have good friends, my old friends at Uncork, they've dramatically increased their fund size. I have other friends who run, we'll say anywhere from 100 to $250 million funds. I think if you think about what the old premise was of those firms, it's like we're going to buy 10 to 15% ownership, we're going to take a board seat and these are going to be billion dollar outcomes. And so the math works that by the time you figure on dilution and everything, a winning company should return the whole fund. I'm not sure you can win 10 or 15% of the companies you want to be in as a large seed fund manager if the multi stage funds are cherry picking repeat founders and high signal people. So I think it's harder to just execute the model of buying that amount of ownership and the cost to buy it is probably double what it was three years ago.

[A]

And is this like a capital supply demand thing? Basically is like the amount of capital like supply is way up or maybe the founders or the supply, the demand is way up. So they just, the pricing is increasing.

[B]

I think what ends up happening is that the people who have access are able to raise amounts of money and on terms that are like hard to pencil. If you're a $100 million seed fund, it's like, how do you, how do you come in at a billion dollar pre seed valuation for a company when you're like, well, even if it's a $10 billion company, my problem isn't capital deployment. My problem is cash on cash returns.

[A]

Because that needs to be a core position for you.

[B]

It needs to be a core position

[A]

for you, but for the very large pool of capital, it's more of an option check for the next couple rounds.

[B]

Yeah. And if you think about it, I think the challenge with seed is someone once told me you should always be nervous if someone else makes your job their hobby. And I think what you have is you have seed funds who are like, hey, I'm running a model here which is ownership, entry price, check size dependent in order to get the returns that I want. And so seed is really important and the physics of these rounds are important in terms of valuation, entry point, et cetera and exit terminal size. If you're a series A, if you're a multi stage fund, you're like, well seed is like a part of my strategy. But seed is a way for me to get access to companies such that I can put large amounts of capital into them in the future and then

[A]

also keep your brand as a VC firm.

[B]

Keep my brand as a VC firm?

[A]

Yeah.

[B]

So I'm actually more interested in the dollar weighted aggregate cash on cash returns I can make from being in this company than I am the return on my Initial seed check investment. Because in the grand scheme of things, it's going to be 1% of what I put into this company if it's successful. And those two strategies push you in really different directions. The latter strategy pushes you to be totally access oriented and relatively price insensitive because for the stuff that works, you're going to put a lot more money in in the future and you have a seat at the table. And when you're running a dedicated strategy, you have to decide, well, how elastic is this thing? Can I do 50, can I do 100 posts? What is the when does the rubber band snap? Which is why I think, like increasingly I think dedicated seed and multistage seed are two different businesses with different dynamics. And I feel it when I talk to my friends at multi stage firms about how they think about seed. And I see how hard some of the best seed managers I know right now are working to get into consensus hot companies. I think if you're sub $100 million, the problem's different, which is like the assets you're buying are different than the assets that the other people are buying.

[A]

You're saying sub $100 million fund, sub million dollar fund.

[B]

The, you're probably like looking at companies that are not on the radar screen of those other firms. And the risk is that like no matter what you do, that basket of companies will never become interesting to the other folks relative to what they're seeing and you end up with a bunch of stranded assets. So I would say this is the hardest period for seed I can remember in my entire investment career. Wow.

[A]

Okay.

[B]

Hardest for sure.

[A]

I want to maybe talk a little bit more about that, but one thing you made me think about is the, the bigger the pool of capital is, the more it's about velocity of movement of money versus what the valuation of anything specifically is because they just see as like if I can put in a very large amount of money and it's worth three times more in a year, that's incredible. You'll just keep doing that all day and that's all you care about. So that's really what you're paying attention to is just like the velocity of how fast you can put money in. And it's just the proximity to liquidity. Basically the closer you get to liquidity, whether that's, I mean, public markets mostly is like an ipo. And how does the public markets value this idea? That's really what you're going for.

[B]

Also, I'd argue we live in a world now of increased secondary. Sophistication elevenlabs. Some of these companies, I, I've called them like the perma privates, like they have almost all the things you'd expect from a public company. Regular liquidity windows price discovery is not that hard for the top 15 companies. You could call any secondary buyer and they could tell you what the going price is. For databricks, it doesn't need to be public. There's a pretty deep and liquid pool of buyers and in some cases buyers and sellers for these names. And I think it changes the game in terms of like if you decide to get out along the way you can. But also I think in a world where liquidity takes a long time to happen, I think more and more of VC fundraising from LPs is based on perception and velocity. So there are a lot of AI application layer companies where I'm not sure that they will survive long term relative to the advancements in foundation models. And I don't want to pick in any specific company so we won't name them. But I think there are companies right now if you said I'm in these five or 10 companies that are valued at tens of billions or multiple hundreds of millions of dollars, LPs are back. I know that name. I've heard of that company. Oh, you're in that company, That's a hot company.

[A]

Therefore you're going to continue to get into more.

[B]

And also when I go to the committee and tell them, hey, Turner's in this hot company, like, well Turner must be a good VC fund. And if you're like Turner's in 10 companies that I've done a bunch of research on that you've never heard of, but I promise you are good.

[A]

That's so hard.

[B]

Some people will just say, is he an anthropic databricks, OpenAI Stripe or SpaceX? And if the answer is no, people would be like, okay, so you're not in the good, you're not in the hot companies, so what are you in then? And so I think it is this weird, it's this weird byproduct of concentration.

[A]

One of my favorite things to say now is I am technically a pre revenue investor in Anthropic because one of my companies that I invested in Pre Revenue was acquired by Anthropic. I got Anthropic. So I can say that with like telling you the truth. I'm a pre revenue investor in the equity of Anthropic. But I don't think that's, it's not quite the same, but it's still. It's. I think it's. But like that's the thing people get most excited about is like, oh, you have anthropic in the fund. And it's because like a lot of my LPs are like, so how much of the fund are we going to get back when this IPOs? And I'm like, I have no idea. I'm just going to give you the shares when it, when it goes public because, like, you're not paying me to make that decision.

[B]

That's right.

[A]

Like, this is a. Jesus, take the wheel.

[B]

That's right.

[A]

Like I did. I didn't know this was going to happen with it. Where it's at today and you're going to make some money from it. But there's like way other companies in the fund I'm actually more excited about. Yeah, that will actually make more money. But it's just, it's so far away. It's just people don't really care that much yet.

[B]

They don't. And I think like the attention span is concentrated in maybe the top five names which feel very. Top five or six names just feel very liquid. Maybe the top 25 companies where there's at least an active market for them and everything else. It's hard.

[A]

Yeah. And so you, so you mentioned. Do you think this is the hardest time to be like an early stage investor? So what's the strategy? How do you survive and what do you do?

[B]

So it's funny, I think there's the intellectually morally superior, like, hey, I'm going to invest in the things I want to invest in and I'm going to stick with it and eventually I'll be proven right. I've been guilty of this at times and I think right now the challenge is LP attention is sorting seed managers. And they're like, these people have access and appear to be in the hot companies. We will continue to fund those managers. I think if you're doing things that are contrarian or not yet understood or whatever term you want to use, I think there's a set of LPs who are like, well, the game on the field right now is enterprise AI. We don't actually know if most of these enterprise AI companies we're funding are going to turn out to be good investments when it's time for liquidity. Right now, that's where the heat, light and energy is. And if you're not in those companies, some people, like, maybe you just don't get it.

[A]

Yeah. Are you any good?

[B]

Are you any good? What are you spending time on if you're not chasing down this next harness or model infrastructure, whatever it might be? If you're not chasing this thing, what are you doing? Because also what I'm hearing from the people who work at the big funds where I've given them all of my money is that's all they care about. So are you telling me that they're wrong? Those big funds that are given and

[A]

you're like, yeah, they have 100 people doing research all day adding all this value. They're talking to founders and all they

[B]

care about is this one very narrow sliver of the market. I'm like, well, you can walk and chew gum at the same time. This can be really interesting and important. And other things can be interesting and important too. So one strategy is you just hope that you have LPs who are supportive of enough or you can finance your organization through this period of having deeply misunderstood companies that feel out of favor. And when the tide comes in, it'll come in in a major way way. The other one is you go, you know what the game on the field is? The game on the field is chasing and getting onto the cap table of hot AI companies. Either because, A, I deeply believe that these companies are the future, or cynically, I believe that being associated with these companies and getting the markups and getting the brand affiliation with the people who will lead them will make the survival of my fund easier. Because without LP capital, most VCs would go out of business. And part of raising LP capital is having a product that LPs want to fund. And right now, I would say if you're in a bunch of the really hot AI companies and the ecosystem thinks that's the person who sees the best hot AI stuff, you will have a relatively straightforward time raising capital. If you're pursuing some other strategy that's not perceived as being as interesting or as popular, you'll have a harder time. That's been my experience.

[A]

Yeah. And I think when you think about the, the piano, like the income statement of a asset management firm, like, like the, you need revenue, right? Like you think like, is this a good business? Is this a bad business? Like, how much revenue does it have? And the revenue comes from taking a clip management fees of the amount of capital that you raise. So really the incentives of if you have an asset management firm increase revenue, it's increased management fees. So it's like the incentives are there. And yeah, again, it's like you. And so if you're taking that strategy of like you talked about earlier, there's like two buckets and can you graduate to the bucket? That's like pretty bold to say I'm going to sit in this bucket where there's not as much revenue for my company and graduate. And then maybe you say you build a reputation over a long time of like, oh, Charles has done this. He has 10 companies over the past 10 years that have become generational businesses that he gave money when there was no consensus around it. We just know he's going to do it again. But that's like someone doesn't meet you for the first time and you've never done that before. Like, oh sure, I'm in super hard.

[B]

And two years ago I was on a panel at an AGM for an LP I love who is sadly not an LP in my fund. And I was on stage with three other seed managers and we were talking about this topic and I started. They ask us like, what's your strategy? I say, you know, we've always been sort of 70% first time founder, 30% repeat founder. That feels like a good equilibrium for us. But you know, a lot of the people that we back, they're just not popular when we fund them. But that's sort of. We don't look for those people on purpose. It's not like, oh, if you're popular, not interested. I'm just like, it's totally fine if the people we meet are a little raw or a little hard to underwrite. I don't mind that I have two years to work with them to help get them better. I don't like this legible term, so I'm not going to use it.

[A]

Illegible to capital.

[B]

Legible to capital.

[A]

I love it and hate it.

[B]

I love it and hate it. I try to avoid using it, but it is the thing. And I'm like, I can help you become easier to understand and tell your story in a way that will get investors excited. And the other people on the panel were like, we're uninterested in your strategy. One of them basically said, if I can't compete for and beat the multi stage funds and the deals I want, I don't want to be in this business. I was like, wow. Because I think they have that part of the market in a bit of a. It's like a vice. I think every year the multi stage funds get better and better at, better at going after the most obviously pedigreed people raising seed rounds and they get 5% better, 10% better every year. And that vice Just gets tighter and tighter and eventually like there's not much left. Now my argument is all of the great companies, in my opinion are not going to come from the pool of repeat or well known founders. If I thought that I'd close up my shop and say, well, the vice is going to get tighter, they're going to take 100% of the opportunity and 100% of the winners are going to come from the pool they dominate. That's what a bunch of LPs I'm like, if you think it's 100%, all the best companies are going to be repeat people who are good friends with VCs who are going to raise big seed rounds. You should just abandon your seed strategy. And if you think it's 0% are going to come from that pool, you should never put nearly as much money into big funds. No one thinks it's zero that I've talked to and only one person I know thinks it's 100. So the only question is, where does that slider rest? Is it 50, 50? Is it 75, 25? I don't know where it rests, but I do know that I continually meet teams where I'm like, these companies are going to matter. And they didn't fit the screen of what those folks were looking for.

[A]

So an interesting data point along that one of the prior guests of the show, I think by the time this comes out it'll have been a couple of weeks ago. His name is Nunu at Chameleon Ventures. So they kind of built this product internally, they kind of call it for hedge funds. They do a lot of factor investing. So they've kind of built this strategy that sort of borrows from hedge funds, like taking a bunch of sentiment and it gives you a bunch of data, you make a decision. One of the data points that they found is I believe it starts with 70%. I think it's 76% of all unicorns, did not have a fund under or, sorry, over 100 million in that first kind of seed round. So basically what it's saying is 76% of unicorns, their seed round was led by a small fund.

[B]

Yeah.

[A]

So this is like historical data over forever. So obviously this is a moving number. But it essentially goes to show that a lot of the biggest companies, the first investors were not a big pool of capital. The caveat is, of course the market is changing. We should look at it in the past year. I mean that's the hard part is like if you look at it in the past year, you don't know which of those companies will go on to become big businesses.

[B]

That's right.

[A]

What the consensus says will tell you that the most highest valued companies are probably the ones that will go on and become. But like that never actually happens. So I don't know. It's interesting that like you said, it's somewhere in the middle, but where in the middle is it?

[B]

It's funny, I had a similar conversation with every fund. We take a little bit of money from a big multi stage fund, usually for relationship and also for me to learn from them. How do they operate, how do they think about the world. And I was hanging out with someone who put money in our last fund and he said, we just did this big analysis and it turns out that we found there was like seed valuations are noisy. If you look at companies that were ultimately successful, the price at seed is very noisy. Some of them are very expensive, some of them are very cheap. Price is a signal more of capital access than of ultimate value. He said, when you look at the Series A's, it's not anything like that at all. The good ones are all expensive. And he's like, there's actually a very strong price quality correlation at Series A historically. And I'm like, that makes sense. By the A, you should know a lot more about the business and the ones that look good should get bid up. It's one of those things I think about a lot, which is as information becomes in theory better understood, pricing should become somewhat more rational.

[A]

And then I think the interesting thing though is, okay, so everything that's going on today, we kind of did this exactly five years ago, like during zirp, right? Have we learned anything? Is this okay? Is this all justified because of AI?

[B]

It's funny, I've gone on this journey

[A]

on this topic because my initial thing was like, we are crazy. ZIRP was insane. We're doing the same thing.

[B]

I have this. Can I do a two minute philosophical?

[A]

Oh, yeah, definitely.

[B]

I think early in my venture career I was like, well, there must be a corrective force for mistakes and bad behavior. I think within firms there are corrective forces. I think partners do get asked to leave and do get fired when performance isn't up to standard. But I think about 2021. I asked an LP who has a lot of exposure. I said, 2021 was crazy, right? He said, yeah. I said, Remember my 2021 AGM? All of you guys were all over us. Those marks aren't real. What's the stuff worth? And then people Wrote blog posts about never again. And we kind of overdid it. And now capital efficiency is back. That lasted for 22 and maybe a chunk of 23 maybe. And I asked this LP, I said, well, who did you fire as a manager based on the performance and decisions they made in 2021. And the person's like, well, none of our core relationships. I was like, okay, so you just ate it. He's like, essentially, yeah, they made a mistake, but it wasn't such a big mistake that we found fired them. I was like, all right. And I was like, well, who did you fire? He's like, oh, we fired some emerging managers because the totality of their track record was 2020 and 2021. I was like, also, that's a low consequence decision. Those people have no power. And I was like, well, what does it mean to invest in a business where the capital providers have limited corrective power? I don't know that anybody's going to. If this AI stuff doesn't end well. I don't know how many firms are going to go out of business because they went YOLO all in on very expensive AI deals that didn't work out if those firms have established brands and strong relationships with LPs. And so I think maybe my lesson from 2021 is it's as dangerous to sit out a bubble as it is to participate in one. And it's actually potentially more dangerous to sit one out because it's not as if the people who were sober and restrained during 2021, in my opinion, have gotten a lot of credit from their LPs for having not participated in the circus. So I'm like, is that really today what modern venture capital is about? It is if there's a speculative frenzy, the rational thing to do if your goal is to remain a venture capitalist, might be to participate in the frenzy, even if you have deep skepticism about the final outcome.

[A]

Because you need to remain relevant.

[B]

You need to remain relevant. You need to remain in business. To your point, you need to remain in business and be able to raise capital. And to do that, your firm has to be relevant and feel like you get it, like you get the message. And that's like a really different. It leads you in a really different set of directions if that's true than it would if you're just like, hey, the people who go crazy and lose a bunch of money on bad things will be punished, and the punishment will be you will not raise another fund. I was like, I don't really think it works that way.

[A]

Yeah. Because tying back to just like how venture works, like you just have to be right once.

[B]

That's right.

[A]

So you go crazy and you were right. And like, yeah, you were really crazy. Like you torched a lot, you lit a lot of things on fire, but you were right in one of them. And like that's the point. Like that's a good. You could argue that was the best strategy.

[B]

I don't know what else is in Menlo's fund, but I know they got a lot of Anthropic and I think it matters whatever else it is. I'm sure they're great companies for the longevity of their firm. I can't believe there's anything else they've invested in the last five years that matters even 10% as much.

[A]

Well, and that's kind of the whole like one of my friends, Pratush at Susa, he has this like this like thing where you know, there's the power law. We all took the power law, but really in a lot of cases a lot of people just swallowed the whole bottle of pills and like it's just like the power law, but like 10 times, 100 times more than like the actual power. Like it's like the ultimate power. Like it's all that matters is just you get one company that returns the industry. Yeah. And if you're in that company, like that's the point.

[B]

That's it.

[A]

So like who cares if you invested in Web three, if you invested in and like you to your point, enterprise AI app that's actually not worth anything. It doesn't matter.

[B]

It doesn't matter. And what you said I think is really true. And I met somebody who invested in Anthropic at a billion in a desire to pick up the logo and that person's up hundreds, they're going to get a greater than seed. And this is the other thing I've tried to explain to my team, not well, is if you think about the goal of a seed manager is to get really high cash on cash returns in the early stage? With the benefit of hindsight, Anthropic at a billion was early in its development, but not early on an absolute price basis. And how do you think about companies where you could still see 2-300x price appreciation at entry prices that look really different than what we've done in the past?

[A]

And on that maybe note of rationalizing something, I've heard the data centers in space where this is like the final frontier of just like computing and like it's, it's early and it's going to like the entire area around the earth like the other 99.999999999% of the mass of the solar system is just data centers. And the upside is a million X from here. I'm exaggerating this quite a bit, but if you believe that then it's still early to invest in that trend or thesis. And so I mean then that's really like it comes back. That's the point of venture capital is like you're investing in something where the upside is unbounded. That's the point of this.

[B]

I think in some ways this goes back to something I hadn't thought about, this connection. You just made me think on this. I think in some ways in the beginning of my venture career, stage names were useful and they served us because everybody kind of had a lane. And it was good to know like, well, this is my lane. My lane is like seed, which is.

[A]

And like my friend that does Series Bs at Kotu, I'll let him know when I have a company raising a Series B.

[B]

And he's not interested in A's and he's not interested in seed. And now I think there's like no lanes anymore. And I think like we've adjusted the fact that like, well, everybody's going to be in everybody's lane. But I think maybe seed managers as a group we've been slower to realize that we can get the kind of cash on cash, multiple returns we want at later points of entry. And that still might be early in the grand scheme. It might not be the first or second round, but it still might be an opportunity to find a crazy. I remember when Keith did stripe at a billion and a lot of people were like, that's nuts. And I'm like, not if it becomes a meaningful part of the Internet's gdp, it's not. No. It's a really good company that's aggressively priced. And now I think a lot of people are like, wow, if I could do $500 billion, I'd be quite happy. And so it's also made me realize that for companies that are really, really working, once they're really working, maybe the optimal thing is to find a way to be a part of those companies, even if it's off model for you. I mean, I wouldn't go buy a bunch of common shares off of some like shady secondary exchange or something, but maybe find a way if you have access to, to get on the cap tables of these companies that matter Because I will say like every time we've done that, I've learned things about the market and the way those companies operate that were not obvious from the outside.

[A]

Interesting, because I think it's like the point of this is just find founders that are building generational businesses and help them out, give them some money and you'll make money doing that. And whether it's Stripe at a billion or a CPG company at 1 million.

[B]

Yeah.

[A]

And like I have a friend who, he's not a CPG investor, but two of his best investments have been angel checks into CPG companies that were raising like 150k to like start a new cereal brand or something. And he made like a hundred X return in a couple of years. And that's, I mean that's like anthropic levels. Like that's incredible.

[B]

We're going to have a couple, we have a couple of. It's funny, like our CPG companies right now are thriving, I think partially because most people are like, there's not a lot of AI threat for those businesses.

[A]

Fair.

[B]

Yeah. And also none of their competitors can raise capital. So that's like one, that's one market where like if you have capital and also most of them have had to live for the last five years, unlimited capital. So the businesses are actually like pretty efficient. So yeah, much to my pleasant surprise, they're some of our top performing companies.

[A]

Yeah. And that's why when I come back to just the entry valuation you come in at is so important. Those are the two levels, the two levers. It's what price do you pay and then what price do you get when you sell. And those two things can make any investment interesting. That's right. And I think you need to buy high quality assets, whether that's like the founder or the business that exists. Make sure it's good and the best you can find, whatever. But you can have a great investment where the valuation is just too high because you paid too high of a price. That's right. And so any investment is interesting when you just take that lens of like, what do you pay, what can you get for it in the future? And I don't know, it's almost like we kind of have lost some creativity in that process over time.

[B]

And that's why I tell our team is like, I'm always just trying to figure out how could this company become valued 200 times more than it is today. Because if that happens, factoring in future dilution will probably make between 75 and

[A]

100x is that your model is like, can we get 100x return on this single check? And this is like in share price.

[B]

That's in share price. And then have dilution, which normally I just like for simple modeling purposes. If you assume you need 200. So I'm like, you can do an investment at 25 post. You just have to believe it's going to probably be a $5 billion company. And I'm like, you know, a $5 billion company with asset price inflation and general inflation in seven to 10 years, that's maybe a $2 billion company today is a $5 billion company in 10 years. But I'm always almost like, you have to believe that it's going to be of that order of magnitude, otherwise you shouldn't do it. That's a 25. You're giving up too much of the upside at 25. And if it's a billion dollar company, you're going to be like, oh, I made like 15, 20 tons of money. Good. But a company of that scale should deliver more for you.

[A]

One thing I feel like maybe we talked a little bit about this, but do you feel like there's an addiction to this, like consensus? Just like investing in consensus?

[B]

Yes, But I think all of the system rewards right now.

[A]

We're feeding the addiction.

[B]

Feeding the addiction because, and I think it's such a big circle. I don't know what's first. It's kind of like, I'll give you one example. Dropping out of college used to be a low status decision. Like high status decision was like, finish college, get a good job. Dropping out was either like you couldn't hack it or you were like crazy enough to think you had an idea that was so good it was better than graduation. I'd argue that dropping out now has become a high status activity for college students at elite universities, partially because 20 VC firms have fellows on campus or scouts who can give you money to start your idea.

[A]

Get a million bucks.

[B]

Get a million bucks. And VCs think, I think, still haven't updated their firmware and dropping out as a signal of seriousness, I'm like, well, if you got into Stanford and you drop out, you still got into Stanford. You're a pretty smart person.

[A]

Yeah, that's the hardest part.

[B]

It's the hardest part.

[A]

Easy to finish.

[B]

Maybe you can't get a job at McKinsey or Goldman Sachs because they would want you to graduate, but it won't stop you from getting a startup job or being in tech. So it's not as risky of a thing anymore as it used to be to drop out of college to do a startup. So there's a lot of energy around. Let's find these 18 to 22 year old cracked AI dropouts. So if you're one of those people, you are going to get found. You're going to get found. There's a lot of belief that people coming out of a small subset of companies have some earned secrets that will make them more successful as founders. There's a lot of people who are just like, I just want repeat founders in an environment like this. So there are whole subsets of founder archetypes that I think are being. They're kind of like overfished tuna. Everyone's like, oh, I want tuna, we can't all eat tuna, we'll run out of tuna. And so there's so much concentration on that population of people. But also if you're like an emerging manager and you're like I want to, I want Sequoia Andreessen, General Kettle, I want those guys to do the follow ons of my portfolio. You're like, well one easy way to do it is find the founder archetypes and profiles that I know that they're looking for and find them a tick before they find them.

[A]

Talking about velocity like, you'll move quick.

[B]

Yeah, you'll move quick and you'll find them. You'll find them two months before they find them.

[A]

Yeah.

[B]

And then your whole deck is like, hey, I found these 10 companies two months before these big multi stage funds and I did them at price X and they did them at price three and my whole portfolio is marked up two and a half X as a result because I found all these great companies before them. And everyone goes, wow, you found companies before these firms that we think have excellent judgment. Everything pushes you in that direction when you don't have those signals and you go try to talk to LPs or other founders who are like, I don't know any of these people, these companies, are they even any good?

[A]

The thing that I think I've noticed this tipping point where so my strategy initially has always kind of been these non consensus but you think they will graduate into. And so I've had some that have been graduating and it gets so much easier when people notice the portfolio companies and it's just night and day between you have some of these consensus and you were actually early in them before they were consensus. I've gone back and forth of like man, I should have just done that from the beginning. Like I should have Just, I should just have raised. Tried to get allocation OpenAI and raised $100 million and like, retired. I could have done that. Why am I messing around with this? Like, trying to give somebody 250k for this, like, crazy idea that no one else thinks is a good idea. But it's fun. It's more fun to do that, in my opinion.

[B]

It is more fun. And I think I'm curious if, like, these companies are going to go public soon and we're going to know a lot more about them as publicly traded companies. And I wonder if these are blips in the sense that these companies just happen to be sitting on the most important technology of this generation in a very strong control position. And we're not going to see other companies like this anytime soon until there's a new technology wave because the thing they're doing is just really special and rare and unique.

[A]

Do you think there was this whole. We needed to put a trillion dollars into the capital markets over the past couple years and once they go public, that drops to 500 billion or 250 billion. Just don't think we'll need that capital anymore.

[B]

We're not going to find companies that can both grow to tens of billions of dollars an ARR, but also consume hundreds of billions of dollars in private capital. I don't know where the next one of those comes from.

[A]

Did you see this? We're recording this. I think it was either yesterday or today. Alphabet announced they were raising a $80 billion private round. Did you see this? No. Yeah. So Google is actually raising 80 billion. I think it's 80 billion to invest in AI.

[B]

And so like data center infrastructure stuff or.

[A]

I haven't read it yet. So this is like the classic prose on the podcast. It could be anything. Yeah, this is a classic. Just like tech pros on podcast. Just like. Did you see.

[B]

Oh, this is the.

[A]

Whatever. But it's kind of interesting because you used to think you had to be a private company to do that. And I think when you think about the incentives for an investment firm, it's all about the management fees. And so if you are investing in traditionally as like a public marketing investor, you used to be able to charge roughly 2 and 22% a year. 20% of the profits you got paid quarterly, which is pretty awesome. The liquidity, it's like mark to market, you get paid. There's been pricing pressure because there's no differentiation.

[B]

That's right.

[A]

So instead of being able to charge 2%, you maybe charge 1% per year. The Carry also comes down to Maybe only get 15 to 10% of the profits per year. And also the companies are. You're at the whim of the market. So if the market pulls back 30% in a year, your revenue drops 30% versus if you're in the private markets, you can charge 2%. Some people charge more than that. And you also can just go out and you have a reason to structure these really big step ups in your management fees. And it also doesn't go down.

[B]

That's right.

[A]

So the market's been the incentives for an investor is to be a late stage private market investor. That's really how you make the most money. But Alphabet's now raising capital in the public markets, I'm assuming. So that $80 billion, who takes the fees on that money, I think is what is pretty important in how the market will continue to change.

[B]

I think going back to something we talked about earlier about this big fund, small fund thing. I think if you think of the largest firms in our industry as scaled asset management firms whose principal business is venture capital, their behavior makes sense. Because my sense is those 10 firms really compete with each other. They don't compete with me. They compete with each other for zero sum access to the very best companies. General Catalyst now has the lending financing product that's non dilutive. One of our companies just took a very large chunk of that. I expect you will see more innovation from those firms for two reasons. One, the only way you can grow your firm is to either grow your core products or launch new products. And I think the answer would be like yeah, we'll do both. And this desire to grow AUM and fund size is a very real pressure. And I think about a firm like Thrive where they have really great access to the most important companies in our industry. And I was like, well the limitation to how much money Thrive could deploy is really how much Money the top 10 companies on the Internet would take from them. It's not how much money they could raise, it's how much they think they could. And again, in a world where you have companies like OpenAI and Anthropic where putting in $10 billion doesn't really mean anything in the scale of what they need to raise for an asset manager, that's like the dream is like a highly valuable company with a voracious appetite for capital that's highly regarded by other people. I don't know that it gets any better than that. If your goal is to grow a.

[A]

And why would you not do that? Of course you would not participate. You would. Yeah. So it's interesting and I think as a participant in the ecosystem, whether you're an investor or founder, like you just need to know that and like there's opportunities to benefit from it, to counter position against it, to make money yourselves. Like I said, to part, like be in it, make it, to become part of that.

[B]

And that's just been my one frustration with some of my seed or emerging manager friends is like there are things that are happening that you don't like they're still going to happen and you can complain about them or you can criticize them or you can mock them. It's probably more useful to figure out what does this mean for me and what am I going to change about my business as a result. And the answer probably shouldn't be it doesn't impact me and I'm changing nothing.

[A]

Yeah. Okay, so it's an interesting question then. So what is the strategy at Precursor today? So you, I think on your website it says you do about 30 to 40 investments per year. So what's like the general strategy? If I'm a founder talking to you or I'm an lp, what do you do? Like what's the current strategy?

[B]

The goal is to get into post idea pre product market fit companies. The majority of those will be companies that are raising at sub $10 million valuations with a lot of first time founders and the sort of, if that's our major, our minor is there's a lot of repeat people I've met in the last 30 years in the Valley. They come to me but they don't raise on terms that work at the sub $10 million valuation. But I'm like these are good founders and I think on a risk adjusted basis they're likely to be successful and the prices at which they're raising are prices where I still see how we make money on those companies and we do those too. And those companies. First of all, those founders don't really ask me for much help. They don't need it. But I'm also just like part of what I'm betting on is that you will have access to capital and you have management experience that makes you on a risk adjusted basis more likely to succeed than the first time founder. So it's just like weird barbell. It's like we're paying for experience and access. Over here we're paying a premium and over here we're paying a steep discount for the unknown for founders where no one knows that they're going to be any Good for markets that are maybe not interested. And as long as some of these work and some of these work, you end up with a really great fund.

[A]

One thing that I saw is literally Claude told me this, so I don't know if it's true. It might have been hallucinating. The way you do the principal role at Precursor, you actually give them money that they can make decisions with. And it's. So how does that work? How's that a little bit different?

[B]

I started talking to a bunch of my LPs, like, well, how are you going to develop your team? I was like, well, I'm more interested in allowing them to express their judgment than I am developing them. This whole can you teach people? I'm not sure if you can teach people a venture. I think what you can do is you can give them money and figure out what they think good looks like. And then I, as the person who runs the firm can decide, do I want more of this person's judgment and taste in our firm or less? The answer is never. I want the amount that I. It's either you want more, it's. A friend of mine said, there's only two kinds of companies in your portfolio, companies you wish you owned all of and companies you wish you owned none of. And I'm like, well, that's a little harsh, but I understand the sentiment. So I start everybody in our team with a budget. Think of it like a mini fund. It's fully discretionary to them, subject to a couple of constraints. Like I give them a check size constraint, so they start off with 25 to 50k checks. So like a big angel, they have to conform to our lpa so you can't invest in prohibited sectors. And they have to generally be credibly pre seed companies. So you can't go put 50k into a triple layered SPV and anthropic. You can't do that.

[A]

As fun as that would be.

[B]

As fun as that would be. And so I tell them, I was like, I'm judging you in the beginning, more on underwriting and less on performance because I want to know that you can identify great founders, work with them and get on the cap table. I don't want you chasing just hot markups so that you can say, oh well, my portfolio is up like 3x, so you have to make me a partner. And then with each successive fund that they're with us, I increase the check size to figure out can this person win access onto cap tables of the same quality with a larger check. Because you're going to displace better people and it's harder to do that. And it keeps going until you write the same size check as I do. And if at any point in time I think your performance isn't good enough to continue, I tell the person, like, thanks for playing. It's not going to happen for you here. The only terminal state in this program is you make partner. And if at any point in time you either decide you don't want to do that or I decide you're not going to do that, the experiment is over. And my LPs at first were like, well, why don't you put your thumb on the scale? Why don't you make them get your approval? I'm like, well, because that will then become part of their algorithm and they will just say, well, I only have to sell him on this deal and he hates XYZ category. Or I don't think he's going to like this and they'll talk themselves out of. I'm like, I'm trying to figure out what they like, not what they like that they can sell to me, but like, what do they like? And it's actually not a very expensive program to run like the V1 for a person's like between 250 and 500k. And I get 10 yes. Decisions from them about companies that they picked and I can decide like, do I like this? And now my LPs went from being like, this is very irresponsible to like, oh, this is actually a very good way for you to get a sense for their judgment. Rather than giving them $5 million after they've been at the firm for five or six years and just say, go crazy with this.

[A]

So you go from 0 to 5 million.

[B]

So you go from 0 to 500k.

[A]

I'm saying other firms, yeah, other firms

[B]

are just like, hey, you've been here for a while. Like you're a partner.

[A]

Like, here you just, now you can start.

[B]

Now you can start.

[A]

So other firms, you maybe don't even get to do that. How does it work? Maybe in a traditional venture, the way

[B]

to think about it is most people, if you come in as an associate, it's probably going to take you two to two and a half years to get check writing privileges. If you come in as a principal, maybe it's a year. The one gate is to get into the program, you have to source something that we work on together and that we close so that I get to see how you work. And then after that I'm like, this is your audition, this is your ticket to show what you can do. And in this environment, I told our team the bar for what a winning company looks like has gone up in my mind because LPs are holding me to a higher standard. I was like, guys, 3x in 15 years is not very good. It's really not that great. From an IRR standpoint, 5x in 15 years is the equivalent of 3x and 10. So I'm like, the bar for what a great company looks like in the context of our fund has to go up because I don't think the hold period's going to come down.

[A]

It's probably going to keep extending, probably

[B]

going to keep extending. So I'm like, maybe 7x is really the new 5x.

[A]

But the other side though is that for a high quality asset, there's a lot of liquidity. So again, do you want to sell those high quality assets or keep holding them? But it could be a 7x fund return in 3 years maybe.

[B]

And we now take a little bit off in the B if we can.

[A]

Oh, I think I actually saw that.

[B]

Yeah, we take a little bit off mostly because now our bees are five to seven years old by the time they get to the B. So I'm like, you know, taking a little bit off and returning it to LPs is probably not the worst decision in the world if they've gotten to be. It's a DE risk asset, but not a riskless asset. And like clawing back some amount of capital I think makes sense. So we do that too. Do you.

[A]

How do you size up and decide how much to sell? Is it the same every time or is it like contextual?

[B]

I talked to a lot of people and they're like, you should just pick a formula that works. Some people are like, anything above X valuation, we sell Y percent. I just said like we should try to sell 20% if we can in the B, provided that it's not hostile to the company and that they're supportive and that the pricing isn't crazy. And ideally we're selling it to the new round lead, which is what we've done the last two times we did it.

[A]

Yeah, and it's interesting, I actually A16Z put out some data on the amount of capital deployed by stage, like secondary crypto, et cetera over the years. And I think I may be remembering this wrong, but I think they bought something like a billion dollars in secondaries in 24:25. So it's like a pretty big chunk of their Strategy is buying secondaries in a lot of it's in those cases and actually the number may have been like 500 million but it's still like an astronomical amount of money compared to a precursor selling 20% in a series.

[B]

And look, there's only a hundred points of equity in a company to go around. So at some point I'm like look, the private equity guys figured this out. There's this like handoff, like the middle market guys like sell like there's like a mechanism and I think venture is figuring out. I tell him, I was like we're like a part of finance but also apart from finance. And I think we're discovering everything that everyone else has discovered before continuation vehicles and like second like we're discovering all of the like financial engineering because the sums of money in these asset management firms are getting such to the point that figuring out how to get out on a regular basis is more important than it needs to be.

[A]

One way that I've heard you kind of describe what you do, I think there's a post that someone made where it was a sample of your deck or something and there's this kind of, there's this axis and there's a quadrant. It might be helpful for people to understand and you've basically said this already but it might be helpful to restate where do you operate in that quadrant.

[B]

I think like there are people. So we. The quadrant has like two different dimensions. One is like what do you know about the business and what do you know about the founder? So you know like there are some things like if you know a lot about the business, you know a lot about the. So if, I don't know if we'll make this up. If Mark Zuckerberg started another social network tomorrow, he would raise that. Like if he even took outside capital it'd be at like infinity dollars, right?

[A]

Yeah, you could probably get a billion dollars from someone pretty quick.

[B]

That's right. And you'd be like oh the guy knows what he's doing like. Or Yann Lecun.

[A]

Oh yeah, that happened.

[B]

That happened. Right. Like somebody who's people are like this person knows a lot about LLMs and he's a high profile founder. So that upper right hand quadrant, those are expensive deals where people feel good about paying them because they're high consensus. There's another quadrant which is like you know a lot about the founder but you don't know a lot about the business. I call that like that's like your business school roommate or your former coworker who you think is a smart person, but you're like, I don't really know what they're building.

[A]

Yeah. Second time founder. Second time founder. Taking on like maybe a slightly weird idea, but we'll figure it out.

[B]

Like there's a lot of market.

[A]

She's really good.

[B]

That's right.

[A]

Yeah.

[B]

There's market for that person too. Then there's what I call strangers with data, which is person who moves to San Francisco from. I'll make this a button from Louisiana. Starts. The company gets to 50k in MRR and people are like, I don't know this person. They didn't go to college, they're not my friend. But the attraction's interesting enough that I'll at least investigate the business and maybe get to know the person. Then there's people where you know very little about the person and very little about the business and almost nobody wants to fund those companies. And we spend a lot of time in that bucket really. And it's not efficient. You meet a lot of people and

[A]

you're like, you might do a hundred meetings and find no founders that you get excited about.

[B]

That happens sometimes. But I'm like the asymmetric upside from finding these people because most people never meet with them. It's funny, when I started the fun, everyone's like, oh, you're going to end up with all the rejects of the seed funds. I'm like, not if I do my job properly. If I do my job properly, I'm going to meet all the people who haven't quite figured out how to get in front of those firms either because they're not far enough along with the business, or their network isn't developed enough to get the warm intro to get in front of them. But if I'm rerating the stuff that they've already passed on, you're right, I will fail. But if we're finding stuff that's been unrated, that has never been underwritten, then I think we've got a shot.

[A]

And so one thing I think would be interesting to talk to you about because you've probably seen this really more than you're probably in the top 0.001% of the world of people who've seen those kind of founders. What is it typically like to raise money when you're a founder? In that case, what are you usually going through when you are extremely non well known and your idea you don't have a lot of data?

[B]

It's really hard. Raising money for a private venture backed company is really different than anything else because usually it's not like going to the bank and you're like, here's my five year financials and I'm raising money for an ice cream shop. And the bank's like, I know how ice cream shops work. Here's somebody you're going to find. First of all, you got to find a way to get in front of these people.

[A]

Is that hard?

[B]

Typically, I think in 2019 through 2021, we went through an era where people were like, maybe ventures should become more open, maybe we should be more welcoming outsiders. Maybe this warm intro thing is a little too much. And then I think AI, everyone's like, there's so much slop and there's so much scaled outreach. I now I'm going to go back to human filters and put more weight on those because it's too much to process without that. And if you're new, you maybe don't have the relationships. You also probably don't even know how to tell your story in a way that it works for VCs, which is different than the way it would work for a banker or even for an angel. And third, there's a set of process and style steps around how you run a fundraise that you might not know. And so I think we can help people with that in the beginning. And many of the people I invest in, they don't know what they're doing when they go out to raise their first company. Also, recruiting and hiring is hard when you're doing it for the first time. If you're not embedded here in the network. You didn't work at Google, you didn't work at Facebook, you didn't go to Stanford or Berkeley.

[A]

And that's one of the risks where VCs by wake up, can you hire good people around you like, well, Yann Lecun probably will be able to hire great people.

[B]

Shouldn't have a problem.

[A]

Yeah. So then what are you looking for then? When you're meeting these people and you're like, you know, you're unrated, how do you start to rate them?

[B]

I think the biggest thing I've learned is one, it really does help if you've been in some kind of zero to one experience. It doesn't have to just be a startup. It could be you started a nonprofit. You started, you're a college kid who started a club at school, you worked at a startup, not as a founder, but you were one of the first 15 or 20 people. I need to know that the chaos of 0 to 1 won't phase you.

[A]

Does it faze a lot of people?

[B]

Oh, man, does it ever? Especially, I find people who come from highly structured corporate backgrounds. The lack of structure, it tends to paralyze, overwhelm them. In many cases, not in every case, but in many cases, they're like, wow, this is hard. They're either too slow or too tentative or unwilling to. Or they want to recreate everything they had at their old shop. Can't make decisions. There's a lot of failure modes there. The other thing I'm looking for, and this is very squishy in some ways, but I don't want to see it. People who have untapped management potential.

[A]

Management potential.

[B]

I mean, a lot of people where they were an individual contributor and they worked at a company where their job was small by design because the company's like, look, if you leave, we can't be dependent on you. You're an individual contributor, so we're gonna keep you in this box. So their hiring strategy, fundraising, budgeting, charisma, all of these things have been, like, suppressed because they've never been able to use them in that environment. And if you put them in the environment of being CEO, like I tell our team all the time, we're mostly hiring CEOs who've never done this for. So our job is to try to project. For whom will the added responsibility be something that causes them to flourish as opposed to shrink?

[A]

Interesting. I kind of think about it as, like, would this person be a good public company CEO? It's like, part of the. It's not everything, but, like, that's what you hope, right? You hope in 15 years they will be leading the earnings call, like, after they rang the bell a couple weeks ago. And, like, that's really, I think everyone's goal, really, at the end of the day, I agree.

[B]

And I think what helps give me confidence is we've seen a lot of people in the last 12 years go from rough around the edges or inexperienced to quite polished and successful and effective in three years. So I know for the right people, for the right people, the development can be very rapid.

[A]

What have you found to be the traits of the people who can get to that? When you're sussing out, do I think you'll be that person? Are there other things you're kind of looking at?

[B]

A lot of times I'm trying to figure out, what does this person know about this problem they're trying to solve and how do they acquire that information, and what can I glean about the way that they go about problem solving for how they gleaned information. And there's something about me, they're just like, oh, I've read a lot of stuff online. I'm like, well, you guys go talk to people or go like, get closer. Get closer to the actual work.

[A]

So that's a good indicator. People who are like, getting closer to the problem, essentially.

[B]

I think part of the problem is, I think founders now know that, like, urgency is something that VCs are looking for. And people will sometimes fake a level of urgency during a fundraising. It's performative. Then you start working with them. You're like, oh, the you that was fundraising was a lot more urgent and driven than the youth that's running the company now.

[A]

Interesting.

[B]

I've seen this happen in a few cases where people have adopted a personality that doesn't survive.

[A]

I've definitely seen our calls on Thursday and we're closing around in 24 hours and you need to make a decision. Kind of a urgency that was not real.

[B]

It was not real. Or I see people who are lightning fast on every reply during a fundraising process and you're like, well, that's not really what the email experience of dealing with you is like on a regular basis or the follow up. But part of this is we're trying to make speculative bets on unproven people. And I'm like, If we're right 10 or 15% of the time, we're going to do really, really, really well with this pool of people because the pricing dynamics make it such

[A]

one thing. Maybe slightly different topic that I think you maybe have an interesting opinion and perspective on. You actually made some videos. Oh, a lot of videos. So if I'm somebody who thinks I really like investing, made some good angel investments, or I'm working another fund, I want to start my own fund. I want to start turning Novak Capital, which, I mean, Banana Capital. I've done it. So what do you usually go through with people when they say, hey, I want to start my own venture fund?

[B]

During the pandemic, I had so many people who were reaching out and every call I had was the same.

[A]

I was literally one of those people. I'm pretty sure you're fine, but I mean, I mean, like, I was like, I'm starting my own fun. Yeah.

[B]

But, like, I had people who everyone asked me the same questions and I'm like, I have an hour for you. Because the pandemic, I have a bit more time. 48 to 50 minutes would be fund admin. And like, how do I get started and what do I need to know about LPs? And the last 10 minutes would be the stuff that was actually unique about them. So we'd finish this hour and people would be like, this is great. When can we talk again? I'm like, well, not anytime soon. We just spent an hour together. And I realized that I wasn't getting what I wanted out of that hour. So I made a video series which is like, this is everything you need to know. And I tell people, I'm going to give you an hour. I probably won't be able to give you another hour anytime soon. You have two choices. You can like, there's an audio version, there's a video version, there's a text version. You can consume this thing that I built. And we will spend the majority of the time talking about the things that are uniquely relevant to your fund. It will be far more fun for you. You'll get way more out of it. You don't have to do that. You can also just not read it. And we can spend the hour and we'll probably spend a bunch of time on stuff that you could have read. And I am happy to spend that. I've agreed to spend the hour with you in either case. And I've had three people who now three before I talked to you last time I was two. Now three people who've watched the videos. I'm like, I don't want to be a fund manager. And I'm like, why? They're like, well, basically what you've told me is the investing part is only one third of the job. I'm like, yeah, you have a management company to run, which is like running a law firm or an accounting firm. You have to go fundraise for your fund. Yeah. And then you get to invest too. So if you really like investing, being a fund manager is more of a management job than an investing job for a lot of you, especially if your firm grows in size. We have 14 people. I spend a non trivial amount of time on non investing things in addition to investing. And so I was like, if you really want to be an investor, like, find a structure that allows you to invest without all the overhead of. So we had our first emerging manager in residence with us for a year.

[A]

Oh, interesting.

[B]

We never really talked about it. He's a good friend. He's closing his first fund, I think next week. And I was just like, hey, if you want to raise a fund, you can hang out with me for a year and I'll help you figure Out. How do you sides a capital call? Why do LPs get irritated when your K1s are late? How do you pass tax and audit? How do you choose the tax modifier? I'm like, I'm going to help you see all of the things so you at least know what you're signing up for. Because I think most people are like, I want to start a venture fund so I can raise enough money to invest. And I'm like, well that's not great. You might be happier doing one off SPVs. You might be happier with a smaller operator fund that you run on the side. But running an institutional venture capital firm is really three jobs. And I feel like when I explain to people they're like, oh, I thought it was just like an investing job. I'm like, no, not as the founder.

[A]

Are these videos public anywhere?

[B]

Yeah, they are. It's like a public secret. It's like a notion page I have that I freely give out to people.

[A]

Can I throw it in the description and people can watch it if they want. Totally. So then they can watch all those. They'll pause, they'll come back after 50 minutes or whatever. So then what's the last 10 minutes of the conversation? Like, how do you usually go through like what?

[B]

Honestly, like the main thing. And maybe you've experienced this because I know people come to you for advice too. Now people are just like, this is my strategy. I'm like, it's not unique. What do you mean?

[A]

What's usually not unique about what?

[B]

Usually it boils down to I'm a smart person with a good network. I'm like, so is every other person you're competing with for capital. They believe that to be true. Also I'm also in the investment committee for Screen Door, which is a fund of funds for emerging managers. Through that I've seen, I was like, wow, some of these decks are really bad and they're not bad design, they're not bad content. They fail at the core question, which is this is the most important question I ask myself every day. Why do the founders that are in our strategy, why are they going to pick us if it's a right to win? I'm like, I don't know, I don't know about all that stuff. All I know is that like we have to have a really clear reason why. And I'm like, I think for these first time founders that are post idea pre product market fit, we are one of the best landing places for those people in terms of the amount of support you're going to get the founder community. We can plug you into, the amount of you're around we can speak for and the help we can give you in your first two years. I think we're very good at that work. Are other people good at it too? Absolutely, as long as that's true. I think we should, and we do our work in maintaining good relationships with our network, we should attract the kind of founders that fit our strategy. Ask the people I meet. I'm just like, you want to co lead seed rounds? I'm like, great, here's the top 10 seed firms. Who are you going to beat? Who are you going to bump down the stack so that you can be in the top 10 or what are you doing that's interesting. And sometimes I meet people and I'm like, it's you, it's a cult of personality. Like it's really you. Like you are the main attraction and like you should just lean into that like, well, our strategy. I'm like, your strategy is like not interesting. You're more interesting than like the state of strategy. And in some cases people tell me strategies. I'm just like, I just don't think that will work. I don't think that's available to you. I met someone like, well, we want to like lead top tier series A firms. Well, how are you going to beat Sequoia, Andreessen, Lightspeed Index, gc? And their answer I found like to be utterly uncompelling.

[A]

What does the average bad answer look like when it's like, I'm going to get the hottest companies and I'm going to beat all the best firms?

[B]

I think most people I meet think of venture capital like stock picking which is, oh, if I identify the asset I can just go buy it. I'm like, no, no, no, no. If you identify the asset, you have to convince them to sell you equity.

[A]

Yeah. You have to convince the asset to pick you.

[B]

That's right. And like the stock picks you. It's not you pick the stock. And I think this is a fundamental misconception I find in a lot of first time fund managers. The other one I find is I meet a lot of people who are spinning out of established platforms and I talk to them. I was like, well, how much of your success do you feel like came from the domain behind your email address? People who are just like, none. I'm like, none. You don't think it helped you at all to have the amousvc firm.com who does none. I'm not asking you to say all of it, that would be disingenuous, too. But I find those people have a different problem, which is, for them, the whole business of running a fund is usually an abstraction because they have an IR team that raises the money and a finance team that does the wires and a tax. Like, there are all these functions that are abstractions to them.

[A]

Yeah, that's how I describe it to a lot of friends who have been from that. It's like all the teams that you have, like, the departments, like, there's like, 10 different teams that do these things.

[B]

I just do all that stuff myself.

[A]

And, like, I mean, it's just. Everything is different. Like, my. I mean, my marketing is like, I make memes and I have a podcast that people listen to and like that. Like, it's totally different than what your firm does for marketing.

[B]

Yeah.

[A]

My Capital call strategy is I just call 25% and I tell my LPs a quarter or two ahead of time when the capital call's probably going to happen based on. But there's teams that have that strategy. You have a line of credit to bridge.

[B]

Yeah.

[A]

And it's totally different. And the fundraising, it's the IR people that sometimes you join the calls. I have to do all that myself. It's pretty hard.

[B]

It's pretty hard.

[A]

There's a lot of stuff that goes

[B]

into it, and you have to do all of these things. So I tell him. I was like, oh, in the first fund, it's kind of not as bad because you don't have an existing portfolio to service, and you can just decide to not meet companies while you're fundraising. You have to fund 2, 3, and 4. You're like, I have, like, a whole business over here called my existing portfolio that I have to continue to run while fundraising. It's hard.

[A]

My issue is I keep meeting companies while I'm fundraising. Me, too. It's always been. It's like, man, I just really need to spend more time in this. But there's just so many cool people you want to meet still, so you don't. And it goes from like, there are five people doing it full time, 500% of the time, whatever, to me doing it, like, 20% of the time when I should be doing it 500% of the time.

[B]

It's hard.

[A]

So one thing you've talked about, you've written about this, you talked about there's two kind of deserts in venture capital. There's the first desert and the second desert. The first desert's out there. Maybe we can Talk about what it is, and you can talk about your experience going through these deserts. I don't actually know what the second desert is. Like. You kind of talked about it. So when you started Precursor First Fund, you went through this process we just talked about. So what was that like?

[B]

I think I talked to like, 300 LPs. I would have talked to more. I couldn't get more people to talk to me. A lot of people were just like, I don't like your portfolio construction. It's too many companies, not enough ownership. And I respect that. I think for a lot of LPs, portfolio construction is close to religion. And so I just accepted that. And it was hard because I didn't really know what I was doing. Fundraising, I was learning by doing. I'd been at Uncork, but Jeff did all the fundraising, so I'd observe.

[A]

You just talked about.

[B]

Yeah, it turns out observing and doing are quite different when it comes to fundraising. And also, I didn't in the beginning understand what was my LP Fund manager fit. I didn't know who liked us. And it took me a long time to figure out, like, oh, we're not really that popular with funded funds and big endowments because our fund is small in our portfolio instruction. But family offices and smaller institutions, they seem to like what we do, so let's spend more of our energy there.

[A]

So how do you qualify LPs, then? When you're doing your very first fund, how should I think about who I should talk to?

[B]

I think it's really important to understand what are the things about your fund that are potentially problematic? So I'm a single gp, and when I started Precursor, I thought, oh, the single GP things going to be the real sticking point. So I'm going to qualify everybody. And a lot of people are like, ah, you know, I did Steve Anderson's fund a long time ago. I did Sockless Families. Like, I've done solo gp. That's. That wasn't as much of a disqualifier as I thought. The real disqualifier was portfolio construction. And I didn't know that when I started. So then I was like, oh, well, I have to, like, make sure people are at least open to my portfolio construction, otherwise I'm going to waste their time and my time and I'd rather not do that. And then I started saying, like, okay, well, how big is our fund? How much of our fund do I think an LP would like to be? A lot of LPs I met were like, well, we don't Want to be more like, procedurally, we can't be more than 10% of your fund. For some people in practice, 20% is about the max. So I'm like, well, I'm raising a $15 million fund. I need to find people who can write one to $3 million checks if I want to get this done. Because people who want to write a $5 million check, they're probably going to say, I don't want to be a third of the fund. It's too much exposure. And then I was like, well, who writes those funds? And ironically, most of the advice I tell people is go find a fund manager who's one to two funds ahead of you who closed recently. Those people generally have the best intel about who's actually deploying and the kinds of LPs that fit your filter. But the hardest part is, I think, figuring out, because I don't know if you had this experience. I've gone and talked to people and they're like, I just had this meeting with this lp. They suck. They're the worst. I'm like, that's my largest lp. Yeah. Or they'll be like this. I'm like, ah, this person's so difficult. They'll be like, oh my God, that person loves my fun. They've been super supportive.

[A]

And I'm just like, yeah, it's like your mileage may vary. Depends. Yeah. So did the pitch, like, evolve at all over time? Like, did you change anything with your pitch or was it more so like dialing in on specifically the changed One big thing.

[B]

And I see this less today, but I still do see it sometime. When I started my fund, it was right when Angellist had started doing SPVs. And I was friends with the Angelus guys. So I went to their office. They're like, you know what would be kind of novel? What if you had this small fund and you just ran SPVs. This is in 2014. What if you ran all of your follow ons on our platform as SPVs, you could invite your existing LPs and we have this vision of eventually bringing outside capital of the platform. It would allow you to keep your fund level reserves low, continue to participate in the follow ons of your best companies, and then you have economics on this stuff outside of the fund. So you get basically single company, you get an American style waterfall. You get this better deal over here.

[A]

Imagine doing an anthropic SPV with that and you get paid to carry around. Yeah. It doesn't matter how the rest of the fund does.

[B]

Doesn't matter.

[A]

And LPs also are excited about that. Like, give us some anthropom.

[B]

That's right. And I did all that, and it was in the deck. And I went and showed somebody who's been doing seed investing longer than I am and all of the novelty in the fund, this SPV thing, it was all on the front of the deck. It was like the lead was, we're innovating on the seed model. This person was like, you don't understand LPs. This is going to scare the bejesus out of them. This is too much innovation, too much novelty. I was like, well, what should I do? He goes, put this in the end in the appendix. He's like, you want vanilla ice cream with sprinkles? And I was like, oh. And I didn't really appreciate what he meant. And I took that first version of the deck to people, and they were just like, I don't even know how to explain this to my committee. This is so many moving parts. I'm like, not really. It's one moving part. It's really this. But I was like, oh, wow. To you, this feels novel. And I think novel is good. And for you, novel is scary. And it was a good reminder to me that different people have different preferences. And that leading with the novelty was fun for me, but not fun for the audience I was trying to convince to come invest in our fund.

[A]

Interesting.

[B]

Okay.

[A]

And then, so the first fund was 15 million. What was the kind of like the evolution of the fund strategy that went

[B]

to 31, 49, 85, and 66.

[A]

Okay. And over those different periods, did you have any changes to the strategy? Any changes to the LP base? How did you.

[B]

We had a lot of changes to the LP base. We added a lot of foundations and funds. Two, three, four, and in five, it's interesting, in fund one, we had a lot of family offices and individual GPs who could underwrite direct deals. So I'd bring them SPVs, and they'd be like, that company's interesting. I'll put a little bit of money in there. Oh, that's kind of cool. And then we had all the foundations. They were like, hey, no fair. We don't have a direct team, so you should do an opportunity fund. I'm like, would you fund it? They're like, absolutely. So we did an opportunity fund. It was really small because a bunch of my other LPs were like, well, I already have exposure to Series A and B companies through other vehicles. I'm with you. To get the early stuff. If you need me to do the op fund, I'll do it. It's really not my preference. And I was like, oh, I just spent a bunch of time raising this off cycle op fund that people aren't as enthusiastic about as I am.

[A]

Interesting, huh?

[B]

And then for a while it was only me writing checks. And then the check writing team expanded. Those are probably the only meaningful changes. We're still sub $100 million, still doing predominantly pre seed with some seed still trying to get in early. I can't think of too much else that's changed. Another lesson I Learned for our fourth fund, which ended up being 85 million. My original goal was I want a $20 million breakout op fund. And I was like, the main fund should be like $65 million. And I went to my LPs and they're like, please don't make us take too small funds to committee. It's so much work to get ready for committee and to do it for two small funds. I'm like, well, they're not stapled. They're like, thank you for not stapling them also, but please don't make us take these two things to committee. And I was like, okay, I hear what you guys were saying. I said, what if I mashed them together and had some liberal but defined and bounded crossover provisions such that the 85 functioned more like two different funds? Two funds, they're much better. So that's what we did. And then the fifth fund, I was like, we need to be somewhere between 60 and 75. I don't need the appendage of a growth vehicle for this one based on what I know about the world. And we also raised that fund. We started pre marketing before SVB crashed. And everyone's like, we love you. We have all the money in the world for venture. Then SEB crashed and they're like, we don't know if we have any money at all. And so I went and tinkered with the sizing of our last fund. I was like, hey, this is a weird time to raise. A lot of people have existential questions about venture and the US banking system. This is probably not the time to force the issue.

[A]

Yeah, that's fair. And then, so is this this. Are you in this like second desert phase? Like, what is this? Yeah, what is the first desert and what is the second desert?

[B]

The first desert is like, you're just trying to stay alive for your first three funds. And there's all these programs, there's raise and there's emerging Manager circle. There's all these like programs that want to help you be successful. There are LPs who have dedicated pools of capital to keep you in business. It's like being in a warm blanket. People are trying to make you successful, they're trying to support you. There's a lot of peers going through the same thing. That's the first desert. If you get through fund three and get to fund four, you made it right, it's over.

[A]

You've navigated it all and you're good,

[B]

but all that stuff goes away. A lot of your LPs who helped you with the first three funds are like, well, that's the business we're in. We're in the one through three business. Then I was like, well, who does four and beyond? They're like, for you to figure out, sir. And you're no longer emerging, but you're not Sequoia. You're not so established that you're a no brainer for people. And also I find when I got to fund 4 and 5, I'd go talk to my emerging manager friends and their problems were problems of survival and mine were problems more of scale and growth. And I'm like, oh, I remember being really wound up about the thing you're talking about. It just isn't my problem anymore. I have different. It's not like no shade. It's just like I have different problems now. I have problems of figuring out which people on my team I'm going to promote and figuring out what I want to do with my LPAC and figuring out what is the longevity of our firm. I was like I said taxes. I have different problems now.

[A]

But also we got distribution, distributions. When do we sell? We're going to make a bunch of money for everyone. But man, this is a hard decision.

[B]

It's a hard decision. And then it's also just. I was like, I have fewer peers. And the people who had advised me when I was fund one through three, most of them had retired or were far less active in venture. So I'd go to them and they're like, I'm kind of out of the game. And so you find yourself having to recreate from scratch kind of a community and support system when there are just far fewer people that you know who are still around.

[A]

So really like the challenges never go away. It's just like on the company side, people are like scaling from zero to a million, scaling from one million to ten or a hundred to a billion. Like the challenges are always there. Like there's something they're just different. Yeah. One last thing I wanted to ask you about. You wrote a post about the last 250k effect. So what is this concept of the last 250 grand?

[B]

I started noticing this very strange phenomenon, right? I have these companies and I'm just like, guys, you gotta cut burn. No, we can't cut burn. Everybody here is great. I'm like, okay, fine, we gotta cut one of these. Burn. No, we gotta work on everything we're doing is needed and essential and we gotta do it all. Okay, fine. Then the company gets down to, I just picked the last 250k because that seems to be about where it happens. And they're just like, oh, wow, we have like four months of cash left. Okay. We're getting rid of our office. We're like selling all of this stuff. We're canceling this middling project and we're firing this person on our team who's not operating. And we're going to laser focus and put all of our energy behind this one product we have that's working. And I'm like, it could have. And they're like, oh my God. I was so afraid to make all these changes. And because I was forced to, I realized that like our company was bloated. We had to make all these. And this is so much better. I'm like, it could have always been this way. Could have always been this way. But you needed to experience this like weird near death moment to get the level of focus to do the things that are necessary for the business. And I'm like, I just wish I could get people to have that experience without literally getting down to their last 250k. Yeah, I've had a lot of founders who, when I posted that, they're like, yeah, you're right. You know, like, I thought I needed it. I was dealing with a founder who has like a medium sized team. And I was like, you should be able to make it work with a team of this size or smaller. He's like, I can't imagine these things. These things. I was like, if you had to do it, you'd find a way. And the only reason why it was conversation is because, like, you don't believe you have to do it. And he finally did it. And he's like, oh, wow. I'm like, yeah, those people weren't bad. You just didn't need them. And you were conflating like, if they're good, I need them. I was like, no, sometimes there are good people that you'd Love to keep in the org, but you can't afford them or they don't fit into the plan.

[A]

Yeah, it's almost a sense of urgency. Just around once you get down to the wire, you figure it out. But you weren't close enough to the wire to have to figure out yet. So can you get there sooner? Let's say you have 5 million in the back. You have 40 months of Runway. Like, can you get there faster?

[B]

I have a company that raised $8 million and they said, well, here's what we're going to do. We're going to put $5 million in this other account over here that it's our money.

[A]

Oh, interesting.

[B]

But we're just going to run the business on this three, and we're going to run it on three until we find product, market fit and something that's really growing and working. And only then will we tap the 5. If we cannot find it on the 3, we'll figure out if we just return the 5 or what we do with it. But we're not going to behave as if we have eight. Eight, we have as if we have three. And it was a little artificial, but it worked for them.

[A]

Interesting.

[B]

And they have product market fit now and it's working.

[A]

That's good. Yeah. I feel like I've seen it quite a few times with teams. It's like as they get down to the 250k, it's not always that number, but just all of a sudden it seems like things start to work because of this weird urgency thing and you trimmed maybe the worst engineer or you didn't need an HR person or the ops person and you can automate some of it with AI and you're like, ah, maybe we didn't quite need it now. And like, it just magically starts to work.

[B]

Shocking.

[A]

Yeah. This has been an awesome conversation. Thanks for coming on the show.

[B]

I am like, my brain is very full after this.

[A]

Yeah, this is a lot of fun.

[B]

Awesome, man.

[A]

Thanks and thank you for listening. Thanks again to this episode's sponsors, Flex, numeral, amplitude and Merge. If you enjoyed this episode, please, like, comment, subscribe and share it in the group chat where everyone's raising a pre seed. Make sure to check out the back catalog of over 100 episodes with the founders of companies like Robinhood, Sweetgreen and Mercury and investors like Gary Tan, Elad Gill and Chathan and Erica Benchmark. Tune in over the next few weeks for conversations with folks like Hans Swilldens, whose secondaries firm, Industry Ventures, was just acquired by Goldman Sachs with Peter Rahal, who started at RXBar, and David Protein Michael Tanenbaum, the CEO of Figure and my friend Sheni Ding, co founder and CEO of Merge. If you don't want to miss any of these, subscribe to my newsletter, the Split linked in the description to get each episode plus a transcript emailed directly to your inbox every week. Thanks again for listening. See you next time.