Latest / The Learning Corner by Precursor / Episode #37: Bill Gurley's Market Realities, Geo- Arbitrage Investing, The Acquihire Wave

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Episode #37: Bill Gurley's Market Realities, Geo- Arbitrage Investing, The Acquihire Wave · The Learning Corner by Precursor

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  Whatever is in the moment or in vogue at the time that you start the company, if you decide
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  not to do that, I think you have to accept that there's gonna be a whole set of people who
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  don't pay attention to what you're doing.
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  And for a lot of those companies, I tell them there's nothing wrong with your company other
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  than the fact that nobody cares.
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  And I think it takes a certain kind of founder to be able to just live with that.
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  It's the week of June 16.
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  Welcome to the Learning Corner, a Precursor Ventures podcast.
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  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 will
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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 topic is an episode from the podcast Invest Like the Best where Patrick
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  O'Shaughnessy sits down with previous GP of Benchmark, Bill Gurley.
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  In the conversation, he walks through a series of market realities across VC from insights on
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  zombie unicorns and derp era investing to the desire to stay private longer and the
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  misalignment of incentives to market companies appropriately.
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  It was a really thorough conversation around larger discussions that are happening across
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  venture and addressing the so what of it all.
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  I really enjoyed this episode.
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  It was actually one of the first times I've heard someone frame the LP liquidity issue
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  through the lens of arbitrage disappearing once everyone copies the same playbook.
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  Bill asks the question, if everyone pours capital into illiquid vehicles and alternative
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  assets, so a reference to chasing the Yale model, wasn't this eventual squeeze almost
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  inevitable?
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  Basically, what happens to the promise of non consensus returns when the strategy itself
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  becomes consensus.
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  Yeah.
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  Wanted your thoughts.
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  I think I've concluded.
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  I think this is my favorite podcast episode other than The Learning Corner I have listened
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  to all year, mostly because I listened to some really good conversations about the micro.
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  And we've had a lot of conversations about the micro of individual firm decisions and
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  individual investment decisions.
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  I've listened to good conversations about the macro of just what LPs are doing.
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  And it felt to me like this was the first podcast I listened to that really weaved
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  together the macro and the micro in a really nice way.
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  Mia, you've listened to me talk about this a ton internally.
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  I feel like we didn't learn any lessons from the Zurp era SaaS investing, and Bill also
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  seems to feel the same way.
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  And he also articulated something that I've been wrestling with, which is this notion of
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  the game on the field.
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  And I've talked a lot about, well, what do you do with the game on the field as a venture
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  firm?
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  Should you be investing in these companies at a 100 post pre product market fit, prelaunch,
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  when sort of most traditional business judgment would say that's not good?
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  Or is that the game you should be doing it?
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  And he talks a lot about kind of analogies from the Uber or Lyft era, which I thought were
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  interesting.
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  And while there were big winners, there were also massive losses, massive losses during that
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  era of investing.
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  You know, for every ramp in Brex that managed to survive the gladiatorial combat of spend
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  management, there were tons of other companies that raised a lot of money and didn't work.
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  And the thing it made me realize is we talk a lot about the scale of winners in venture and
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  how much bigger I don't think we talk as much about the scale of losses, probably because
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  it's not as much fun.
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  In listening to that post, was like, you know what?
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  There's probably a handful of people who are gonna get directionally right on AI and are
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  gonna be in some of the best companies.
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  They're gonna make a lot of money.
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  There's gonna be a lot of people who are in not in one of the one or two winners in the
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  category.
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  And something he said that really stuck with me, and this is kind of my default assumption,
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  people ask about, well, what about competition?
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  Any good idea is gonna have at a minimum five well funded competitors because each of the
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  very large platform venture funds is probably gonna wanna have an investment in that
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  category.
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  And you should just assume that the best companies have very, very, very deep access to
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  capital until or unless the people who write checks to VC funds decide that the illiquidity
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  premium isn't worth it.
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  And I've always thought that's what would slow the cycle down is it's not so much people
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  making individual decisions of, oh, I like Sequoia more than Andreessen.
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  It would be more someone saying, the fundamental physics of this asset class in
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  terms of when money comes in and when money comes out is just no longer attractive, and I
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  want nothing to do with it at all, not at the firm level, but at the industry level.
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  He talked about it from the founder lens too of playing the game.
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  And I used to think that you could kind of maybe not keep complete blinders on, but stay
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  focused on what you're building even if you have competitors in the market.
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  But he makes a good point that if you see competitors getting funded with a
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  $102,100,000,000 dollar checks, you will eventually get pummeled.
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  So how do you think about this from a founder's perspective too?
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  I think at the tail end of the podcast, they talk about non AI.
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  And I think if you're not in AI land, some of the stuff you'd be like, people are doing this.
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  What are people doing?
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  It it's a different world.
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  And I think the issue is what are people doing with the money?
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  And so I think in Uber, Lyft, and Instacart, and DoorDash, those hundreds of millions of
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  dollars were going into customer acquisition, and we're building user motes and network
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  effects that really enhance the businesses.
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  I continue to wrestle with this paradox, which is that, oh, AI, in theory, makes these
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  companies much cheaper to start.
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  I'm not sure it makes them cheaper to build, but we'll go with the premise.
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  It makes them cheaper to start, and it makes them more efficient.
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  Then I'm like, well, then why are they raising so much money?
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  And what are they gonna do with it?
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  And to me, it's unclear.
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  Yes.
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  You need to fund the purchase of credits or what's called compute.
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  You have to finance that, but some of these companies, it feels like the money they're
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  raising is growing faster than compute costs.
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  So I don't know if the dynamics are the same.
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  If you're a cursor and you're competing with Windsurf, you probably need money to fund
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  compute, but a lot of these companies aren't hiring massive gigantic sales teams.
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  They're hiring salespeople, but not massive sales teams.
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  I I think the analogy for me isn't quite the same because those were network effects driven
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  businesses where you could argue that, like, we wanna have the biggest, strongest network.
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  I don't think some of these other businesses work the same way.
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  But I guess going back, if you're a founder and you're not building an AI, it does probably
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  feel like everyone else's money is going in those directions.
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  So how do you actually now find pockets that resonate with what you're building so that you
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  can continue to build what you're building?
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  We feel it every day.
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  I talk to our portfolio companies that, you know, more than a significant chunk of them are
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  not building businesses that are enabled by AI.
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  And I think the hardest thing is getting people to pay attention and care.
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  I think if you're gonna build something that is whatever is in the moment or in vogue at the
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  time that you start the company.
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  If you decide not to do that, I think you have to accept that there's gonna be a whole set of
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  people who don't pay attention to what you're doing.
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  And for a lot of those companies, I tell them there's nothing wrong with your company other
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  than the fact that nobody cares.
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  And I think it takes a certain kind of founder to be able to just live with that and not have
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  it really, like, make them depressed or cranky or angry.
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  It's hard.
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  It's really hard.
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  Yeah.
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  But I don't know.
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  Every time I listen to invest with the I think in venture, we don't talk enough about the
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  supply and demand element of our business.
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  And I think, you know, every year, it feels like the supply of capital available to invest
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  in private companies goes up.
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  So unsurprisingly, the amount of money invested in private companies goes up, and this money
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  has to find a home.
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  And so I think that's why you see even at the first hint of momentum.
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  Someone the other day reminded me to, like, remember, for a lot of these big firms, a
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  $20,000,000 check is meaningful, but it's less than 1% in some case of the size of the fund.
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  He's like, you should think about it as what percentage of the assets that they have
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  available to invest out of that fund does this check represent.
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  And you look at it that way, like, wow.
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  It's a $5,000,000,000 fund.
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  A $20,000,000 check actually isn't life or death.
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  Meaningful for sure.
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  Right.
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  It's not life or death.
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  Patrick asked Bill, what are some of the things that maybe LPs aren't saying out loud, but
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  they're thinking in their mind that are actually the real reasons why they're getting
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  uncomfortable continuing to put money in specific pockets that the Yale model used to
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  use as a gold standard to get everyone ahead.
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  I actually think a lot of institutions you talked a lot about the macro, about the
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  pressure on research dollars and distributions in Domotech.
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  All those things I think are real.
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  This is my sense, and maybe I'm wrong.
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  In talking to most LPs, as long as the money comes out eventually in the end, there's
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  probably a place for venture in their portfolio.
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  Portfolio.
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  But as Bill mentioned, for a while, venture was just a DPI business.
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  Then we argued that, oh, it's really just now becoming an IRR business.
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  I'm like, we're both.
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  We're gonna get measured on both, like any financial instrument.
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  How much money did you give him back in total, and how long did it take to get it back?
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  I think what's, for me, a plausible version of the future is that venture takes longer and
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  returns the same amount that was good before.
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  You know, three x in ten years and three x in eighteen years are very different products.
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  And it's not just that the IRR is different.
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  The feeling of getting three times your money in eighteen years is very different,
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  particularly if it's back loaded.
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  And I think if we're moving into a world, as Bill mentioned, being public is not really on
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  most people's bingo card.
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  If we're moving to a world where you're gonna get two to three x, but it's gonna take three
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  to five years longer, that's a worse product.
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  And so I think what LPs will do is they'll say, I still want venture.
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  Maybe I don't want as much of it because instead of a a 20% chance of getting all of my
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  money back in the first ten years, it's a 5% chance.
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  And even over a fifteen year horizon, the chance of me getting three x is the same or
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  lower than before.
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  So I'm getting less money, and it's taking longer to get it.
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  That's probably a smaller pool of what LPs wanna commit to.
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  And actually a question for you.
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  I mean, when you were in diligent conversations as a fund manager for Fund One, how often did
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  you get the question on how do you think about returning money back to LPs before the ten year
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  horizon?
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  Never.
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  Never.
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  And now I assume that it must be a question that people are getting asked as how do you
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  think about it from a strategy perspective?
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  I think the irony for venture is when you're a small part of someone's asset allocation, they
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  just don't worry about you in the same way.
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  They're like, okay.
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  I have this tiny pool of money in venture, and it's high alpha dollars, and it's supposed to
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  give me some high alpha return at some point in the future.
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  As you pile more money into the asset class, you start to care a lot more about the
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  performance of those dollars, and this is the extension of the Yale model going all the way.
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  You have people putting more money to work in venture and people caring more about the
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  performance of those dollars and when those dollars will come back and at what multiple.
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  Great podcast, everyone.
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  Definitely take a listen if you have the time.
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  In our next piece, Alex Lazaro reflects on the evolution of the newly public company Chime in
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  his recent post on Substack called 99% Tech.
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  He uses Chime's journey to highlight a broader lesson that sometimes seeing opportunity in
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  innovation takes noticing how other markets, sometimes much more different in size and
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  structure, take hold in their respective spaces.
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  He talks through how there were other global first movers before Chime, such as Brazil's
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  Nubank, Korea's TOS, and Russia's Tinkoff, all platforms which rose to success because they
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  build for their customers who are seeking a modern banking experience to counter for what
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  the more legacy banking rails of their geos just couldn't create.
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  Chime's success was understanding what the current financial landscape of The US was
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  lacking for the average American and understanding the regulatory arbitrage
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  opportunities that existed to build an ecosystem for modern banking.
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  Alex says this is a great reminder on how the best ideas aren't all started Silicon Valley
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  and flow out to every market and geo thereafter.
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  Innovation can flow in every which direction.
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  He talks about the concept of geo arbitrage, so essentially spotting a model that works in one
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  geography and applying it to another.
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  Of course, not every idea travels well.
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  One that came to mind for me would be live commerce right now.
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  It's like a $500,000,000,000 industry in China, but hasn't quite taken off in The US despite a
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  bunch of attempts by major platforms to make it work.
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  What do you think are the key ingredients that make a geo arbitrage play successful, and how
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  can founders or investors better assess whether a model will resonate in a new market or will
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  it fall flat?
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  It's interesting.
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  As you know, fintech is the one category where we will look at things outside of The US.
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  And I've always felt that money has both a global and local component to it in terms of
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  how things work.
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  I look at my friends who are in Revolut and NewBank, and there's so many really interesting
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  companies that have been started.
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  I think a lot of what helped crystallize before I read this article was a conversation I had
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  with the team at Axione, and they showed me this map of where all their portfolio companies
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  were and all the linkages.
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  And I think we talk a lot about, oh, like, things from The US going abroad and things from
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  major markets coming back to The US, things in China.
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  We were still trying to build a super app here in The US and don't seem to have worked out as
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  well.
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  The thing I found fascinating was also just the leaps between countries.
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  So, oh, a technology that worked in India being exported to Brazil without going to The US
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  first.
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  And I think the interesting thing about finance and most regulated industries is in many cases,
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  in finance in particular, the problems are the same.
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  People need access to money.
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  People need access to credit.
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  People wanna find some way to deal with foreign exchange volatility, but the specifics of
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  behavior, technology, and regulation in each country have an impact on, like, what the ideal
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  solution for that customer looks like.
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  And in most cases, if it works in one place, you could take the same concept somewhere else,
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  but you probably have to modify it.
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  I didn't look at Chime when they were getting started.
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  But I wonder how many investors who aren't the Chime target customer just said, I don't have
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  that problem.
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  I can't really relate to this.
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  And so the irony is you don't even have to go abroad.
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  Right.
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  The United States is so large that people in different income strata experience the world
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  differently.
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  And sometimes it's even the ability to put yourselves in the position of somebody in your
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  own country who's having a different experience can be hard.
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  It's actually a good tail into my next question.
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  He said that a large part of Chime's success wasn't because it was a disruptor.
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  It was because it was an ally to the everyday average consumer.
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  So thinking about no overdraft fees and transparent communication, building solutions
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  for the everyday person is something that I find investors all claiming that they do every
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  day now because that would create the largest TAM.
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  But how have you seen this ally innovator approach take form across our own portfolio?
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  Because I know investors say it, and they don't actually mean
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  Yeah.
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  I think the hard thing with those businesses is I think a lot of investors say, oh, we're gonna
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  start with really rich people, and we're gonna provide a product for them because they can
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  afford it, and then eventually we'll go down market.
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  And they never they never do, either because they never quite nail it for rich people, or
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  they get there and get comfortable, or it was never the intention to begin with and it was
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  something you put on the TAM slide in order to make people feel like the idea was bigger.
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  And I think serving everyday people is hard because you have to figure out a way to reach
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  them.
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  And oftentimes, the answer is you have to spend a lot of money on marketing, which means you
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  also to have a model where you feel like, I know my costs well enough, and I know LTV well
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  enough to confidently spend hundreds of millions of dollars on marketing.
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  That's really not easy.
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  It's really not easy.
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  I think about the story of, like, Bobby when you made that investment.
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  That was, like, an average everyday American, but I would think that maybe for most
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  investors, that'd be a tough one to spot just because, one, it'd probably be difficult for
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  them to experience it themselves.
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  And then it'd be difficult for them to imagine, like, people would wanna run out and get
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  formula at mass scale.
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  Like And that company still has, I think, an opportunity to make a product that's even more
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  accessible.
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  I think about pair eyewear, the glasses they make aren't that expensive in the grand scheme
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  of what glasses cost, and their audience and the people who buy them.
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  It's it's a pretty wide swath of America.
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  I think the prize for serving a large pool of people is so it's so great.
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  You gotta give it a shot.
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  Well, our last topic, Tomasz Tongas outlines how the seed boom of 2021 with US software and
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  AIC deals spiking by 49% has created a structural pressure in a startup funnel Yeah.
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  And a forthcoming wave of acqui hires as a result.
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  While c rounds surged to 4,300, the number of series a rounds remained relatively flat,
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  leading to a dramatic 86% drop in the c to series a conversion rate.
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  Some contributing factors include seeds dropping, the impact of AI, and simply a
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  smaller amount of series a slots to advance into.
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  This setup mirrors what we saw in 2015 when a similar surplus of early stage companies led to
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  a rise in acqui hires under $20,000,000.
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  With the growing demand for AI native talent, acqui hires are poised to resurface as a key
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  trend, particularly as large incumbents look to refresh their teams and integrate new
• 15:24
  capabilities quickly.
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  Wanted to ask you first for your reactions to the piece because I know we've talked about it
• 15:30
  a few times on the podcast.
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  One of the things I like about the Theory Ventures post is they're very short.
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  They're very to the point, and they're almost always supportive by data.
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  I've been in a lot of rooms with other seed stage managers who we've had these arguments
• 15:42
  about, well, where where do seed graduation rates ultimately land?
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  We had the salad days of 75 to a 100% graduation.
• 15:50
  Now we're in the trough of, I guess, according to Peter Walker's data, 15%.
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  And I've heard all these elaborate theories.
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  I'm like, guys, it's just supply and demand.
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  There's only so many series a slots.
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  If we create more seed companies than there are series a slots, fewer companies will get
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  chosen, and that's just math.
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  But saying the average and your firm's experience are not the same thing.
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  To me, it seems inevitable that we're gonna go to a world where the average rate of graduation
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  is much lower because there's a lot of seed firms with money, and it's like Wobegon, and
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  everybody thinks they're better, as Hadley Harris from.
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  The only reason to do this is you think you're better than average.
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  And statistically, half of us are wrong.
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  The real question is, like, what's the ceiling on graduation if averages come way down?
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  And I think the ceiling is still a 100%.
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  There will be some people who get every one of their companies through seed.
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  The question is, but what does that mean?
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  Because it's not getting
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  to series a.
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  It's the end of the road.
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  It's not going public.
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  Series a investors don't bat a thousand.
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  So I guess for me, I hope we can deemphasize this seed to series a graduation.
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  That's like saying what percentage of your preschoolers get into sixth grade.
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  A lot should be the answer.
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  Right?
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  Like and so
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  I think, like going to, like, the best schools are getting the top jobs.
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  Like Yeah.
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  Yeah.
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  And so I think how creatively do we have to think about outcomes?
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  And to me, the answer to VCs is if your whole business is predicated on getting companies to
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  series a, you gotta make one or two choices.
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  One is if the averages go down, what can we do to make sure that we're not slightly above
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  average, that we're two to three times better than average, and can you engineer that?
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  Or second, can we come up with a path for the two thirds to three quarters of our portfolio
• 17:24
  companies that are never gonna graduate?
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  They can still be very successful.
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  They can still have great outcomes, but we need to have a plan and a program for what we're
• 17:31
  gonna do for those companies that don't graduate.
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  And I think that's the other opportunity people have to think.
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  I spent all my time thinking about that.
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  Just saying, assume we can't meaningfully improve our graduation above wherever it is.
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  It'll be better than average because we're better than average.
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  The real question is what advice and guidance do we give to the companies that don't or
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  shouldn't raise a series a?
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  Those playbooks haven't been written yet.
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  It goes back to our conversations last week of that's why price always comes up as being so
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  important.
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  Because if this is gonna be a rise, coming in as low as possible or where it feels fair is
• 18:00
  actually very important.
• 18:02
  And what the article describes, I'm already seeing it in our portfolio.
• 18:04
  We have a handful of companies that are being acquired for under $20,000,000 where we should
• 18:09
  get back most, if not all of our money.
• 18:11
  The founders will get some money.
• 18:13
  It's not a huge win.
• 18:14
  But they spent five years of their life on this, and it's it's not going to be OpenAI or
• 18:18
  SpaceX or Anthropic or some huge win.
• 18:21
  Yeah.
• 18:21
  And I think the history of ventures, like, businesses should get sold.
• 18:24
  People should go find a different use for their time and maybe try again later.
• 18:29
  My last question on this one was, Tomasz actually wrote this almost as an extension of
• 18:33
  the post that he wrote in 2015 on acquihire since that was all bubbling up at the same
• 18:37
  time.
• 18:37
  That was the year you created precursor.
• 18:39
  So I was actually asking you, like, what was the impact of the rising acqui hires count back
• 18:44
  then on the overall venture market?
• 18:46
  And did people talk about it in the way that we're talking about it now?
• 18:48
  I think so.
• 18:49
  And I think anytime you get one of these platform shifts, there's always this ability if
• 18:53
  you have some early expertise and it's not working to partner up with somebody more
• 18:58
  successful.
• 18:59
  I think historically, venture capitalists have been bad at two things, predicting when acqui
• 19:04
  hires will pick up and predicting how long that cycle will last.
• 19:07
  Because eventually, two things happen.
• 19:08
  One, back in the day, Yahoo was acquiring everybody.
• 19:11
  And then at some point, Yahoo was like, oh, these people don't stay, or these acqui hires
• 19:15
  aren't doing what we thought they would do for our technology stack.
• 19:18
  We're gonna do fewer of these.
• 19:20
  So there is a half life, and at some point, also, I think a lot about mobile.
• 19:23
  Big tech companies eventually figured out how to build in mobile, and then it wasn't, oh, we
• 19:26
  have to go acquihire people who know Swift.
• 19:28
  We know Swift too.
• 19:29
  So I think these acquihire ways are far more transient than investors would like to think.
• 19:34
  And so if I were a founder who was thinking about selling and maybe thought my company had
• 19:38
  peaked, I would take advantage of this window now because it it never stays open as long as
• 19:42
  you'd like.
• 19:42
  Yep.
• 19:42
  Absolutely.
• 19:43
  Well, we are all out of time today.
• 19:44
  Thank you, Charles, for jumping in.
• 19:46
  Thank you to our listeners for stopping by.
• 19:48
  Please like and subscribe, and we'll talk with you all next week.
• 19:51
  Thank you.
• 19:51
  Bye.
• 19:52
  Bye.