Latest / The Learning Corner by Precursor / Episode #12: Peter Walker, Benedikt Langer, Aaron Levie

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Episode #12: Peter Walker, Benedikt Langer, Aaron Levie · The Learning Corner by Precursor

• 0:00
  Maybe it's just the era of venture I was brought up, which is like the entrepreneur is
• 0:03
  the hero.
• 0:04
  You are there to support them.
• 0:05
  The story should never be more about you than it is about them.
• 0:08
  And if you can, like, accept that basic premise, it's actually okay to be in the
• 0:12
  background.
• 0:12
  But you also have to believe the people you're looking for will find you even if you're not as
• 0:17
  loud as other people.
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  It's the week of December 9th.
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  Welcome to The Learning Corner, a Precursor Ventures podcast.
• 0:27
  Welcome to The Learning Corner by Precursor.
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  I'm Mia Farnam, and I'm joined by our GP and managing partner, Charles Hudson, where we'll
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  be talking through the articles and Goodreads that caught our team's attention over the past
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  week.
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  Our first article is a LinkedIn post by Peter Walker around graduation rates from c to series
• 0:47
  a using insights from Carta.
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  In the post, Peter highlights a positive but challenging stat.
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  Approximately 50% of seed funded startups successfully graduate to series a in a 4 year
• 0:58
  journey.
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  This naturally means that half of seed companies do not make it to the subsequent
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  round, underscoring the heightened competition and increased expectations for companies at the
• 1:07
  series a stage.
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  While seed rounds raised between 2019 2020, maybe took shorter periods to graduate.
• 1:15
  Across the board, it does feel like the average cap out is at 50%.
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  And so as a reminder to some of our newer listeners, at precursor, we have over 400
• 1:24
  portfolio companies across 5 funds.
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  So we have a mini data lake essentially of our own that we can compare trends across.
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  And I looked at our own data across all of our funds, and the data does really tie out on our
• 1:36
  end as well.
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  That being said, I have a few companies in my mind that took much longer than 4 years to get
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  to series a, and those companies are actually value drivers for their respective funds that
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  they sit in.
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  So, Charles, what as investors do you think we do with this data in the moment, especially for
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  folks who fit outside of that 4 year time horizon?
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  I read just about everything Peter writes.
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  I think there's 2 dimensions to this article.
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  1 is the graduation rate, which is something I talk to LPs about all the time.
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  They're always curious.
• 2:06
  Hey.
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  What what should we expect?
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  And if I look back across all of our funds, 50% is about the average.
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  But we've had some funds that were right on the nose at 50.
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  We've had some funds that were in the seventies.
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  Like, fund 2 was in the seventies.
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  I think that has as much to do with our skill at picking companies as it did with the market
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  environment at that time.
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  And as I've told a bunch of RLPs, I expect that graduation rates, whether you think of them
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  measured at 4 year or whatever point, they're going to go down because the volume of seed
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  funded companies relative to series a capital is still out of balance.
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  And I think the only way to restore balance is for the number of companies that raise series a
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  to go down as a percentage of the total company's fundraising, which isn't bad.
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  It's not gonna go from 50 to 0, but I wouldn't be surprised if it goes from 50 to somewhere
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  between a quarter 40%.
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  On average, you're less likely.
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  And, again, what this doesn't control for is founder pedigree, the amount raised.
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  But I would say the other piece in this thing is 4 years.
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  When I started the fund a decade ago, my expectation was most companies would go from
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  seed to series a in 2 years.
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  Then it sort of became, well, you get, like, another year of runway if you can't make it.
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  So now we're talking about two and a half years.
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  And now many companies do well with the 1st seed, and they go raise a second seed that's
• 3:22
  about the same size as the original one.
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  And so it's not surprising to me that it takes 3 4 years to get to series a, and then you get
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  this weird feedback loop where every company that a series a investor is meeting has
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  essentially had 2 seed rounds of capital.
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  So the expectations of performance of where those companies will be are higher and sort of
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  the system continues to feed itself.
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  And I think it puts a lot more pressure on seed investors to make decisions about which
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  companies are you gonna continue to back because most companies are not raising c rounds
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  upfront that will carry them for 4 years.
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  And I think, you know, we've had other episodes where we've talked about reserves, but this is
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  something I think about a lot is oftentimes the biggest inputs to that decision are qualitative
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  and, you know, what you've learned about the team and their execution and not quantitative,
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  not, you know, where are they in terms of ARR.
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  So I think it's a really important point.
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  And to your comment, I think it's easy as investors to get impatient and to want every
• 4:09
  company to work immediately right out of the box.
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  I think about some of our top companies in Fund 1.
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  For many of them, it wasn't clear that they were gonna really work in the 1st 4 years.
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  They managed to stay alive.
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  They finished to get some good things done, but it wasn't obvious that they were gonna be
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  successful.
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  And so there's this tension between you wanna tell your investors, these are the companies
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  you should care about.
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  And if you're, like, 4 years in, you know, I'm having this conversation with some of our LPs
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  right now about our most recent fund.
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  4 years in, it's only now beginning to emerge a set of companies that are likely to be the ones
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  that matter.
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  And as you can imagine, they wanna know, and I and I wanna know.
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  Much sooner, sometimes you just have to remind yourself you have to be patient.
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  Were they the companies that you originally thought were gonna be the fund value drivers at
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  the moment, looking back 10 years?
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  Every fund kinda has the same arc, which is you get a couple of companies, at least we do, that
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  get out of the gates hot.
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  Those are usually not in the end the value drivers.
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  And I'd say by year 3, I typically have some sense.
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  These are the 20 companies that are likely to matter the most.
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  And somewhere in that 20 is the top 10 that end up really driving performance.
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  The one I got noticed is even now, Fund 1 is almost 10 years old, and we still have
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  companies that move in and out of their relative importance in that fund.
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  And I thought that was essentially settled.
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  Like, no no one's gonna come in and no one's gonna come out.
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  But, you know, you never know until it's all settled.
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  Peter does mention that just because you don't graduate to series a doesn't mean that you'll
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  shut down per se.
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  There could be a route that you simply no longer need venture money to turn profitable,
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  or you get acquired early on.
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  I do think most founders would love to live in a world where they don't have to go back to the
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  well per se and continue to reach out for venture dollars, but it's so much easier said
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  than done.
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  So my question is what data points do you as a founder need to be able to know that difference
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  of building a company that can grow irrespective of venture dollars, or maybe this
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  is the end of the specific company's journey?
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  Every company we have in our portfolio that got to profitability and continues to grow and is
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  relevant, that decision came from the founder.
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  It did not come from the investors.
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  And in some cases, it was a deeply held philosophical belief from the beginning.
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  I think about, like, Erica at Healthy.
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  Like, that was a company value for her very early.
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  And then I think about other companies in our portfolio where the process of attempting and
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  maybe not having a great experience raising money caused those founders to think about what
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  would it mean to run this business in a way where we never are dependent on VCs ever again?
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  And am I prepared to make those changes, number 1?
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  And number 2, if I make those changes, will the business that comes out the other end still be
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  interesting?
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  And so those are the questions I always ask founders too.
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  It's, like, it's great to get to profitability, but in service of what?
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  If you get to 3 or $4,000,000 in revenue, when you're dropping $1,000,000 to the bottom line,
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  you're not growing.
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  If that's a business you wanna continue to run, by all means do it.
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  But it's also if it's not a business you wanna continue to run, maybe that's the answer, that
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  it wasn't big enough to sort of warrant additional venture dollars.
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  And I find it very interesting that a big chunk of our top performing CPG companies have gone
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  this route.
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  And in many cases, it was in response to a very tepid VC interest in funding their category.
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  And the irony is now, I think VCs would love those companies, and those founders are just
• 7:19
  uninterested.
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  They're like, we figured out how to continue to grow and make it work without your capital.
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  And as always the case, it's always easier to raise money when you don't need it.
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  I'd be surprised if most of those companies raised anything that looks like a venture round
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  The second piece comes from the embracing emergence newsletter titled building
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  reputation, not a brand.
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  There is a lot of really good contrarian content in here, which made it for me such a
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  quick read, but essentially it delved into the hard truths about the importance of building a
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  reputation versus a personal brand as a fund manager.
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  And my favorite quote was, there is nothing intrinsically wrong with building a personal
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  brand, but the way I understand the personal brand is it is nearly disguised as a shortcut
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  to long term success.
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  But things that look like shortcuts are often detours.
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  So the newsletter quite plainly states that personal brand should be the result of a
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  successful fund and not the other way around.
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  And I know that this was written specifically to start conversations about fundraising
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  strategies for emerging fund managers, but the concept of personal brand is so pervasive in
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  every corner of venture and the startup ecosystem.
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  And a friend of mine and I were getting coffee, and we laughed recently of how much peacocking
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  occurs in venture from one investor to another, oftentimes with both of them never having
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  returned a single dollar back to the fund during the lifetime of their jobs.
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  So as wild as that seems, and as much as I absolutely agree with the sentiment that
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  reputation is the stronger long term investment, we as an ecosystem are pelted by
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  personal brands.
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  And so it occurs at the fund manager level, at the investor level, at the founder level as
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  well.
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  Like, how do we, as an ecosystem, recalibrate from that?
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  I think it's really hard because when I got into venture, there was no social media.
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  There were no venture celebrity.
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  Maybe, like, maybe, like, John Doerr.
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  There were a couple of venture celebrities, but not really.
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  Most venture capitalists were, like, pretty anonymous people.
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  Actually, it's funny.
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  I read this this article.
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  I can't remember what it, which was, like, when venture became retail.
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  And a lot of what they point to is actually, like, DFJ as a firm that was, like, much more
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  open to, you know, meeting a bunch of guys in Estonia who built Skype, like, just thinking
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  differently and being out there and being visible.
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  And at the time, like, when I got an adventure, it was much more of a genteel.
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  We don't advertise.
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  We don't do marketing.
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  Like, people find us.
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  It's all our reputation, and that isn't the market we're in anymore.
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  And I remember when Andreessen Horowitz launched, it really did feel like that changed
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  the game about what it meant to be a high profile venture firm.
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  And that's had all of these spillover effects.
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  One is that, like, we have far more mobility in venture capital than we used to.
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  It used to be kind of like law.
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  You go work at one firm, and you either make partner at that firm or, like, you know, quasi
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  radioactive.
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  So there wasn't much movement.
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  So the only thing you could do was work hard, build a good reputation, and, like, rise in
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  your own firm.
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  And now if I think about most people I know who are new in venture, they're gonna probably work
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  at 3 or 4 firms over the course of their lifetime.
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  However, there's these 2 competing pressures.
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  1 is DPI.
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  Like, the winners are taking 10 to 12 years.
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  You know, today, we had the service titan IPO.
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  Congratulations to them, but it's it's been around for a while.
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  So the timetables to get feedback and your decision making in this job can be very long,
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  and the desire to get promoted and move ahead is strong because most people in venture are
• 10:38
  pretty ambitious.
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  And so it creates this weird dynamic where marketing yourself as a winner and an expert
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  before it's true can pay dividends.
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  It can, a, cause people to think you are actually more successful and better at your job
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  than you are.
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  It can cause people to think, oh, I'm interested in subject matter x.
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  This person writes or talks about it.
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  They seem to be an expert, and then maybe I should go to them.
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  So they're there.
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  I don't wanna, like, deny the value of marketing yourself, your interests, and your
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  achievements.
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  That being said, I've seen the dark side of it for a couple of people that I'm close to.
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  Founders in our portfolio who decided to go big on Twitter, and then their companies didn't
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  work out, and people were like, wow, you sure were talking a lot on Twitter for somebody
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  whose company didn't work out?
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  And that's a tough thing to sit with.
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  I've seen fund managers who really built their brands on Twitter privately telling me, like,
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  I'm not sure I'm gonna have another fund, and I'm worried about what people are gonna say
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  about me on the Internet if I can't raise again, given how much of myself I've poured
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  into, like, self promotion.
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  And I think the flip side is, though, there are some people out there who are doing really good
• 11:43
  work who aren't being recognized.
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  And so I've always felt like the reputation thing is what really matters, but it means you
• 11:49
  have to be willing to say, I'm gonna do a bunch of things that might not ever show up on the
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  Internet.
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  They might never show up on TechCrunch.
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  But it's the little things.
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  It's like just trying to get back to everybody every time for a decade is what I've tried to
• 12:01
  do.
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  And there have been years I've done better and years I've done worse.
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  But a lot of people are like, oh, I've heard good things about working with preachers.
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  I'm like, what does that mean?
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  That means some random person who I don't know told this person at some point in time, you
• 12:12
  should go talk to Charles about the thing that you're building.
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  And I think that to me is the difference between reputation and personal brand.
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  Reputation is somebody who knows you or has an experience working with you, telling another
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  person why they should work with you versus, like, I like this person's tweets or blue skies
• 12:29
  or threads.
• 12:30
  And so I think part of the reason, at least when I talk to people, they're unwilling to
• 12:34
  invest in reputation is because it takes a freaking long time to bear fruit.
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  And if you want the like Ozempic answer, personal brand that you can like, you can spit
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  so easy.
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  It feels good.
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  You get almost instant dopamine hits.
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  And a lot of what I've And
• 12:49
  no one can fact check you either.
• 12:51
  Amy, you know, like, 90% of venture m and a exits that happen that get announced on the
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  Internet.
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  I think Hunter had something about it.
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  There's no price.
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  Like, you have no idea if anybody made any money.
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  And if you look at them long enough and you kind of learn how to interpret investors'
• 13:05
  reactions to those, you can kinda get a sense, was this material or not?
• 13:09
  But, like, you're right.
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  There's a lot of people I've seen.
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  I'm like, wow, you are a thought leader who has 0 DPI, like 0.
• 13:16
  It's okay to be humble.
• 13:18
  It's okay to be modest.
• 13:19
  It's okay to to not.
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  But I think our business has gotten so much more competitive that I think, like, personal
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  brand is just synonymous with marketing.
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  And we're in a business now where I think marketing has become a much bigger piece of the
• 13:31
  business.
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  And even firms I would have thought of that were traditionally resistant to marketing
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  engage in what I would consider marketing activities.
• 13:38
  From your standpoint, when you think about precursor, are there any initiatives that you
• 13:42
  feel like we as a fund should be putting out marketing on?
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  I've never had a PR person at precursor, And I've had a bunch of people tell me, like, you
• 13:50
  should get a PR person.
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  And I'm like, to do what?
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  I, like, go on the podcast I wanna be on.
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  I speak on the panels I wanna be on.
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  And I've always felt like I don't wanna do marketing that feels like work.
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  So I don't wanna do something that, like, feels like a chore because then it's it's never
• 14:06
  authentic.
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  So I was like, hey, we should speak or write when we have something to say, and we should
• 14:10
  not speak or write when we don't have anything to say.
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  So I never wanted to be put on, like, a treadmill or a calendar.
• 14:15
  And there are other things that people do that I've always felt like I don't think that's who
• 14:19
  we are as a firm.
• 14:20
  And some of those are big events and conferences and and I'm like, I I respect
• 14:24
  people who do those.
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  I don't think that's our our values.
• 14:27
  And so I've always told people my view is we should be in the background.
• 14:31
  And maybe it's just like the era of venture where I was brought up, which is like the
• 14:34
  entrepreneur is the hero.
• 14:35
  You are there to support them.
• 14:37
  The story should never be more about you than it is about them.
• 14:40
  And if you can, like, accept that basic premise, it's actually okay to be in the
• 14:44
  background.
• 14:44
  But you also have to believe the people you're looking for will find you even if you're not as
• 14:49
  loud as other people.
• 14:50
  And there have been definitely years when, like, maybe we're being too quiet.
• 14:53
  Maybe we're not doing as much as we should to get our name out there, but there's a limit to
• 14:57
  it for me.
• 14:58
  The essay concludes with the statement that emerging managers who build a reputation will
• 15:03
  also win mostly because they are committed to the foundational elements of building a firm
• 15:07
  over a long period of time, which include, 1, doing business the right way, 2, creating
• 15:13
  outlier returns repeatedly, 3, representing their firm first, not their firm representing
• 15:18
  them, and then 4th, paying the bills.
• 15:20
  So 5 funds in, Charles.
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  Anything that you feel should be added to the list?
• 15:26
  I think a lot of this is about figuring out who you are and, like, who you wanna work with.
• 15:32
  And I've had people come to me and say, I'm thinking about starting writing more.
• 15:35
  Right?
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  People tell me writing works.
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  I'm like, do you enjoy writing?
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  They're like, no.
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  I'm like, well, then you're gonna stop writing because it's gonna feel like a chore.
• 15:42
  And running a fund is just like dealing with a constant chore list.
• 15:46
  And you're gonna see write a blog post today, and you're gonna be like, oh.
• 15:49
  The ghostwriter thing, I totally get it, and I respect people who wanna I was like, that just
• 15:52
  isn't me.
• 15:53
  I will write my own words when I have words to say, and I won't write when I don't.
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  But for me, that's just like that's a decision I've made.
• 15:59
  And other people I know have made a decision that, like, volume and consistency is more
• 16:03
  important to them, and they need help or they need a coach.
• 16:06
  I think there's a spectrum between someone who helps you improve your ideas like an editor and
• 16:11
  someone who basically hands you things to publish.
• 16:13
  I I just think if you're gonna do this job for 10 or 20 years, there's a lot of investments
• 16:17
  that make sense to make.
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  And I'd also argue if you're gonna be at a firm for 8 or 10 years, there's a bunch of
• 16:22
  investments you can make that are firm first person second.
• 16:25
  But if you're just like, hey, I don't know how long I'm gonna be here.
• 16:28
  I think in some ways, I don't know what's the chicken or the egg.
• 16:30
  Did, like, firm movement increase the need for personal branding, or did personal branding
• 16:36
  make firm hopping or firm movement easier?
• 16:39
  And to some extent, I'm like, it doesn't matter what the chicken or the egg.
• 16:42
  It's the reality that we're in today.
• 16:43
  And so I think for a lot of people that I talked to gun me for career advice, a lot of
• 16:47
  what I tell them is you gotta decide if you really wanna be at your firm and the difference
• 16:51
  between getting what you want this year and next year in the arc of your career, it just
• 16:55
  doesn't matter.
• 16:56
  It it really doesn't matter.
• 16:57
  And there are long term investments you can make in the people and in being a good teammate
• 17:01
  that maybe don't make sense if you're like, this job is a stepping stone to my next venture
• 17:05
  job.
• 17:05
  I I've actually noticed it is much harder for the founders who put themselves out there and
• 17:09
  live in public and make comments when their companies don't work out.
• 17:12
  The Internet is much harsher to them than it is to VCs.
• 17:15
  Yeah.
• 17:15
  We can always hide behind other people typically.
• 17:18
  Like as investors, the founders.
• 17:20
  You just put yourself out there in the most vulnerable of ways.
• 17:24
  Our final article is a LinkedIn post by Aaron Levie, CEO at Box around the fact that one of
• 17:30
  the most fun questions in AI right now will be how AI agents will be priced over time.
• 17:35
  He laid out 4 approaches with pros and cons to each one.
• 17:39
  The first one is pricing agents like labor, but simply at a discount.
• 17:44
  Over time, the price for these services will probably shift.
• 17:47
  The second approach is pricing agents on a per outcome basis to tie what the customer needs to
• 17:52
  what they are paying for.
• 17:53
  This could be more favorable to service providers as the underlying AI costs drop over
• 17:58
  time and that market grows.
• 18:00
  The third is to price as close to the underlying AI costs as possible, and you become
• 18:05
  the lowest cost for the customer.
• 18:07
  This obviously could encounter some bumps if you're thinking about it from a shareholder
• 18:10
  perspective and maximizing returns.
• 18:12
  And the 4th is simply maintaining a pure SaaS seat subscription model and offering the agents
• 18:18
  that do unlimited work to those users.
• 18:21
  It could work out well for a contract with a bunch of seats, but if there are only a few
• 18:25
  seats, is there a possibility of giving up too much value?
• 18:28
  So we obviously don't know what that outcome is.
• 18:30
  But Yeah.
• 18:31
  Curious, Charles, where do you think beef scenarios will play out over time?
• 18:34
  I don't wanna, like, repeat too much stuff I've said in the past.
• 18:36
  But I think several of those scenarios to me sound very deflationary for pricing.
• 18:41
  So, you know, pricing close to cost, great for your customer, probably not great as a business
• 18:47
  unless you just have massive volume.
• 18:49
  The funny thing is I don't think these things are all independent because it's not like all
• 18:54
  of the vendors in a category are gonna get together and say, let's all agree we're gonna
• 18:57
  charge for output.
• 18:59
  I think what you'll see is very heterogeneous approaches.
• 19:02
  So I think you'll see some people who say, we're gonna charge for the outcome.
• 19:05
  But my question is, like, well, what's an outcome worth?
• 19:07
  If you're an AISDR, is an outcome a disco call?
• 19:11
  Is it a demo?
• 19:12
  And what if my product is a $100,000 and your product is $1,000?
• 19:17
  The value of an outcome is really different to each of us.
• 19:20
  It's funny.
• 19:20
  Everyone's, like, gonna charge for outcomes.
• 19:22
  I'm, like, wait a minute.
• 19:22
  We just, like, went through this period of time where everybody hated usage based pricing for
• 19:26
  SaaS.
• 19:27
  I was like, you've gotta make it SaaS.
• 19:28
  It's gotta be recurring.
• 19:29
  And we have companies in our portfolio that have a mix of usage based and recurring.
• 19:32
  And I'm like, explain to me the difference between usage based pricing and paying for
• 19:36
  outcomes.
• 19:37
  Other than a rebrand, isn't it the same thing?
• 19:39
  You're like paying for outcomes.
• 19:41
  Maybe Maybe it's subtly different, but it's the same.
• 19:43
  And what happens if you've got, like, someone who only gets 2 outcomes a month?
• 19:47
  So I think most of these things don't make sense.
• 19:50
  I wouldn't be surprised if what you end up with is some base fee, which is like a platform fee,
• 19:55
  whether it actually equates to anything.
• 19:57
  I don't know.
• 19:57
  And then I'm sure there's gonna be vendors go, hey, it's, there's a, there's a base fee, plus
• 20:01
  there's a price per outcome.
• 20:03
  And I think the interesting thing to me is gonna be, I fully expect most of the
• 20:07
  competition in AI not to be around the technology, because everyone's kind of using
• 20:11
  the same stuff, but around the business model and pricing and packaging.
• 20:14
  And because everyone's gonna come at it differently, I'll be very curious to see which
• 20:19
  models went out and with which customers.
• 20:21
  Like, for example, there are some enterprise customers who really value predictability and
• 20:25
  spend.
• 20:25
  As much as, like, paying for outcomes is great because you're only paying, they're like, well,
• 20:29
  how do I budget for that?
• 20:30
  I need to know what I'm gonna spend on this for the next 6 months.
• 20:33
  And so I don't think those customers are gonna necessarily be thrilled about paying for
• 20:37
  outcomes, but they might be willing to pay for a platform fee.
• 20:40
  My hunch is the net net is going to be that people are gonna spend less money on if you
• 20:44
  look at the task at hand, people are gonna spend less money on it because that's what
• 20:48
  software is supposed to do.
• 20:49
  It's supposed to make you more efficient.
• 20:51
  The only difference is in this case, I think the customer is gonna capture the majority of
• 20:55
  the surplus.
• 20:56
  That that is just a new thing, I think, unless you've done open source software.
• 21:00
  Most commercial software for the last 20 to 30 years has been major league value capture by
• 21:05
  the provider of software.
• 21:07
  And, you know, some value creation for the customer, but most of the value was captured by
• 21:11
  the person who sold it.
• 21:12
  And I think we're gonna go into a world where that pendulum shifts.
• 21:15
  I think software companies are gonna look very different.
• 21:17
  I also dislike this post because some of the people in the comments had really passionate
• 21:21
  real world examples and experience.
• 21:22
  So I think this is really, for me, the battlefield for b two b SaaS.
• 21:26
  Yeah.
• 21:27
  And this is all irrespective of how good the AI agents actually are.
• 21:30
  I've I've done all across a website that literally ranks and roast AI agents.
• 21:35
  That's all it does.
• 21:36
  And so you go on there and you just rank and roast them all.
• 21:39
  So it's happening now.
• 21:40
  Customers are starting to get smart on what works and what doesn't.
• 21:43
  And so as a result, they're gonna get smarter about how they put their dollars to work.
• 21:47
  Well, we're all out of time for today.
• 21:49
  Thank you, Charles, for taking time to sit with us, and thank you to our listeners for stopping
• 21:54
  by.
• 21:54
  Please like and subscribe, and we will see you all next week.
• 21:57
  Thank you.
• 21:58
  Bye.