Latest / The Learning Corner by Precursor / Episode #3: Nnamdi Iregbulem, Jordan Nel, The New York Times

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Episode #3: Nnamdi Iregbulem, Jordan Nel, The New York Times · The Learning Corner by Precursor

0:00
If you're at a fun that puts a heavy weight on making sure that the whole team is on board,
0:04
maybe unintentionally, you are training yourself to look for consensus deals.
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Again, fun like hours where there isn't that intense emphasis, it has become very
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empowering.
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It's the week of October 7th.
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Welcome to the learning corner, the Precursor Ventures podcast.
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Welcome to the learning corner by Cursor where we talk about the articles and Goodreads that
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caught our team's attention over the past week.
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I'm Mia and I'm joined by Charles and also another member of our investment team, Marina.
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Marina, welcome to the Learning Corner.
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Thanks for having me.
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Do you mind sharing just a little more about yourself and what you're excited about lately?
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Yeah.
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I have been on pre commercial investment team for the last 3 years.
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Before that, I spent time on the stock market space about 5 years covering semiconductor
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stocks.
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So a big pivot from stocks to precede.
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Things I'm excited about now, it's honestly just founders, people that I would love to work
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for.
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It's across cybersecurity and retail tech, insurance tech.
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I'm trying to put more emphasis on who the founder is and why they're so excited about
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this space and less so about what the space is specifically.
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Love it.
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Without further ado, let's get it started and we can get into the topics for this week that
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caught our team's attention.
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So kicking it off with topic number 1, seed valuations aren't valuation.
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This was a piece by Namdi Eregulam Substack from Lightspeed.
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He did a really impressive analysis on seed valuations over the years, conducting all sorts
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of comparisons between trends in later stage valuations, public tech valuations, and the
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effects of shifting interest rates.
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And what he concluded was that seed valuations are really unlike any other type of valuation
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in the market, in that they are completely unaffected at really any of the affirmation
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comps.
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And the closest thing he was actually able to find similar trends with was actually following
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tech worker wages over time regarding seed valuations.
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Nnamdi said, rather than venture capital, they seem to be a proxy for the human capital of the
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founders and early team.
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So, Marina, question for you.
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Your entire venture career has been within these pre seed stages.
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So I'm curious to know what you thought about the article and what insights stood out the
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most to you.
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The first thing I thought was I am so glad someone finally said it.
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A lot of what I had to do since my previous career in the stock market to now is retrain my
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brain on how to look at companies and these prices so differently.
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In stocks, every price has a reason behind it, and you can see the math and the model that led
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to that conclusion and that number and having to shift so differently to pre seed where
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that's just not the case.
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So when I started seed investing, it was honestly a very large learning curve to go from
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that to understanding that truly everything is subjective.
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And these valuations we put on precede or c companies, there's no model or math that we can
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show that led to that valuation.
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It's different factors.
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And if you're a founder, you can, of course, ask your investors how they got that valuation
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for you.
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But you might get different valuations from different investors depending on what sort of
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factors they value more of.
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Those factors can be anything from the current general market, their company progress, or the
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founder's background.
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It's more of an art than a science.
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And maybe if you talk to a bunch of different investors and you get so many different
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thoughts on valuation, you'll end up in a similar range.
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I imagine that the number itself will be very different.
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And I just really appreciate Nnamdi saying that very bluntly.
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The fact that there's even data to support it was really great to see.
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It's great to hear the comparison between your previous work and then now and how much that
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affects and and changes the way you think about valuations.
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If I'm to think from the shoes of a founder after reading this article, the thing that I
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might hear is that most seed investors are quasi arbitrarily pricing my head as opposed to
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the company itself.
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So anything specific that you've found in founders that warrant higher valuations?
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Like I said, it's multiple different things, but Charles and I actually, a few years ago,
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took the time to create this sort of pre seed valuation decision trade, if that's what you
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wanna call it, just to make sense of it all.
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And we had these 3 main buckets, which included first, how competitive is the round?
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And then from there, how experienced is the founder?
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And then from that, how large is the round size?
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And those 3 main buckets, depending on you how you answer each one of those three factors, it
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put you in a different range of valuations.
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And it can be anything from looking at a sub $8,000,000 valuation to over 20 +1000000
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valuation.
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It's not an exact science.
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It it was an art.
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And it's something that was did just to ground our thinking.
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I think at the end of the day, the things I find that matter are the founder's background.
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And the founder's background is oftentimes a proxy for access.
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So I think in general, the more access you have to venture capitalists, repeat founder, you
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went to Y Combinator, you're leaving a highly regarded company, the greater the probability
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that you're gonna have leverage to push prices up.
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And at the end of the day, I think most of these seed rounds are really about supply and
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demand.
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And if you are a founder with a highly sought after background and resume building in a
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category where people think you have an advantage, you as the seller of equity, as the
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founder, have most of the leverage over the buyers of the equity.
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Also, I think it matters who's bidding.
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There are some firms where seed is not the main event at that firm.
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They care less about the price they pay at seed because their strategy is to make sure that
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they're in great companies at seed and that they can lead the series a around.
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There's a bunch of new branches that I would probably add to that decision tree.
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But in the end, I think most seed prices are about the relative power dynamic between the
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founders and the buyers.
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And anyone who's been to YC Demo Day has seen that dynamic play out in real time where
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founders who have limited equity, they're willing to sell, and a ton of potential buyers
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in the room are oftentimes able to get better valuations and prices than they'd get in a
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world where they didn't have that dynamic.
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So I I always ask myself what Rita said, which is like, how competitive is this round?
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Because that gives me some lens on the room we have to move on valuation and whether we're
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likely to land closer to something I like or something that the founder likes.
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Shifting it from a different perspective, Charles, curious actually how LPs should absorb
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and digest this information.
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But the seed evaluations are an enigma, and there really isn't any specific math or it's
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more of an art.
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How do you think that they should react?
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Boy, I I think it's interesting.
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Sometimes when I talk to limited partners about what we do, they go, wow, the valuations you
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get are very good for pre seed.
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Those are low valuations.
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And I say, they are, but they're not the lowest because some things are cheap for a reason.
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Sometimes I meet companies where the valuation is so low.
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My conclusion is either there's something wrong with this company that I haven't found yet, or
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these founders have been pitching people who've taken advantage of them.
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And there's sometimes we've paid high valuations that are outside of the model
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because I believe relative to the future potential of that company, it's fair.
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A precursor we have what we call the celebrity seed deals, which are seed deals started by
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repeat founders or people who have a lot of access to capital.
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Those can be 5 to 10 times as expensive as our average pre seed deal.
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And in many cases, I'm like, it's worth it.
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This person's access to capital, their expertise makes the probability that company
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will become valuable in the future feel much higher.
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So whenever I talk to LPs, I'm like, there's a range of valuations on average that work for
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our fund.
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Sometimes we will go above those valuations for special opportunities.
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And in many cases, going below them is maybe more risk than makes sense to take, or maybe
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you're dealing with companies that have like more fundamental issues.
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Love the insights from both of you guys.
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Moving on to the next topic too, big funds, small funds, and the changing tide.
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This is an essay by Jordan from Hummingbird and Nomad found on their substack called Jordan's
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Writings.
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It really summarizes the trend of LP slowing funding for emerging managers amidst this
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venture slowdown and opting for allocations in bigger funds.
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He challenges this shift, arguing that it's actually the time to invest in smaller funds
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who are less susceptible to consensus and investment narratives.
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When elaborating on who has the opportunity to actually generate real returns in a market like
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today's, Jordan said, quote, with the big funds now facing deployment pressure, doing more
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expensive deals, and having trained a generation of investors to source and sell
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rather than pick, the feel is more open than most think.
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Another memorable quote from this piece is regarding that 2 decade long trend of consensus
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driven deals being susceptible to the steep bid ups from C to Series A.
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And Jordan says, quote, this dynamic has created a generation of investors who are
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excellent networkers and salespeople, but fairly limited pickers.
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Charles, I'm curious to know what your thoughts are here.
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I enjoyed reading this article.
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I felt like it spoke to a lot of the things I've observed.
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One thing I will say is I am sympathetic to the plight of LPs.
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If you're investing in a multistage fund, there's a good chance that some of the
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companies in that portfolio that are series b or c are names that you've heard of before.
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A Stripe or a Databricks.
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When you're investing in a pre seed or seed stage fund, there's a high probability you've
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heard of none of the companies that managers invested in.
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And that's the way it's supposed to be because those folks are supposed to be finding
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companies that other people haven't discovered yet.
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So then you're left with the question where, if I don't understand the assets that are in the
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box, how do I get some sense for whether or not this person's any good at picking?
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And one one thing that became, I think, very fashionable in the LP community was, I know one
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way to do this.
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Let's look at graduation rates from seed to series a for these early stage funds.
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And let's not just look at graduation rates.
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Let's look at who's doing the As.
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Are there As getting done by the tier 1 VC firms, or are they getting done by other folks?
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Because if you're good at picking companies that the tier 1 VCs like, you're part of this
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sort of a link in the chain of, like, pre seed to IPO.
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And I think for a lot of LPs, somebody who's good at finding companies that Sequoia also
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thinks are interesting at the a, that's a signal of quality by proxy.
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And so taken to the extreme, one could imagine attempting to construct a venture fund where
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your sole goal was to try to pick the kind of companies that you think would appeal to a tier
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1 VC fund 12 to 18 months later when it's time to get those companies financed.
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And if you had insight into what those firms want, you could build a very interesting
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portfolio of companies that those folks would be interested in, and you would essentially
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look for the thing they're looking for but sooner.
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And I think there's a set of LPs who said, I want that.
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I want the people who are the sources and fodder for a 16 z, Sequoia, Index, Sanderson.
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I think the challenge is that just because those firms do the a doesn't mean the company's
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gonna be successful.
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And just because those firms don't do the a doesn't mean the company's gonna be a failure.
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And 2, I think it's really hard as a seed stage investor to know what the people who are next
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in the line from you are going to want 12 to 24 months from now because the world is very
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dynamic.
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The thing that I think is true though, having talked to some of my friends who were younger
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partners or principals at other firms, getting a deal done by one of those big firms as a
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follow on helped you internally in your path to promotion or your basic relative ranking in the
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firm.
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So it did, I think, to his point, create this incentive for people who were trying to
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progress in their careers to find companies that they thought had a high probability of
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getting a follow on round done by a tier one firm, which you can do by a couple of ways.
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One is spending time with those people, getting to know them, greasing the skids so that when
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you send them a referral, it's warm.
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But also trying to figure out what they wanna see and going and looking for that thing, which
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is really different from doing your own independent work.
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I'm not saying one is better than the other.
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I'm just saying they're different.
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I also just think there's a in my mind, in talking to LPs, there's a fundamental split in
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a lot of the people I talk to.
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Some of them have essentially told me, we think all of the alpha and venture is going to come
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from these repeat founders, and that the multistage funds are gonna bid these deals up,
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and that most of the future success is gonna be very high priced seeds started by repeat
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people, and that's the game.
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And that's where the money is gonna be made.
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And the high prices on entry will be offset by the high prices on exit.
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And there's another camp of LPs I've met, and it was like, that's absolutely not gonna work.
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The high prices on entry are gonna eat away the profits, and the opportunity is really in
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smaller funds who are doing things differently, and that the big funds are gonna have a
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challenge generating meaningful returns because the power law of scale outcomes that they're
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gonna achieve will not be big enough to move the needle given the size of their funds.
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And so, obviously, depending which camp you sit in, you have an incentive to believe 1 or 2 of
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those versions of the world is true.
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I tend to believe that both are true.
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There will be companies like OpenAI that will never do a $1,000,000 pre seed round because
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the context of what they wanna do and their ambition means that you just need more money
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out of the gate.
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And there'll be other companies that start and follow a really different path and are very
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successful.
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And I don't think these two things are in conflict.
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But I do think we're coming off of a world where a lot of the analysis or a lot of the
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questions we got from LPs from 2018 to 2021 was what's your graduation rate and who's doing the
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As?
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And if the answer was tier 1 venture firms, you got a gold star.
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And if it wasn't, you had some explaining to do.
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It's so interesting.
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I feel like everything in ventures, they're all like little microcosm ecosystems of itself.
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I have friends who work at multi stage firms and they lament on how the job is not actually
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finding the best deal.
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It's finding the deal that your partner will do.
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And so similar, when do you stop trying to cater to the next fund and trying to feed them
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that?
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So then LPs will provide you more capital.
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One of the takeaways from this piece was that it is a great time to invest in non consensus
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alpha type funds in hopes that they invest in companies earlier than the big funds through
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their punchier bets and insights.
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So Marina, someone down on the ground would actually love to get your perspective on
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consensus versus nonconsensus deal sourcing and diligence.
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It's so easy to get carried away in thinking about what other investors are looking at.
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At at precursor, we operate with somewhat different and unique model than others.
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And we now go through a typical IC process where everyone say yes or majority say yes.
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Voting just doesn't make sense at this really early stage because, again, everything is sort
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of subjective.
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And, Mia, to your point, if I'm only thinking about what will the entire team like, I'm not
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thinking about what do I love.
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I think if you are part of that generation of investors and you're at a fund that puts a
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heavy weight on making sure that the whole team is on board.
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You end up looking for companies to bring at the table that everyone's gonna like.
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And maybe unintentionally, you are training yourself to look for consensus deals.
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Again, fun like ours where there isn't that intense emphasis.
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It has become very empowering.
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I've learned to really trust that that instinct in me telling me that this founder I'm talking
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to is really something special.
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And over time, that has really influenced where I look for founders.
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And today, I've spent a lot of time building my own outbound channels so that I don't have any
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sort of external signals from other investors on who they're looking at and rep their team
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roped or didn't like.
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And I think that's helped me see a lot of companies that others haven't seen yet and form
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opinions on things before anyone can tell me something different.
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In terms of diligence, it's a delicate balance.
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I often ask the opinions of experts in the space just to make sure I'm asking the right
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questions.
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But I've always been proud of my ability to still trust myself.
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Again, it's it's just a delicate balance between listening to valuable input from
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others, but also having the confidence to trust my own judgment and being very okay with
15:51
disagreeing with others when it's appropriate.
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I think if you're at Edmarifan, it does put that intense emphasis on making sure the whole
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team was on board and signaling for the future.
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It's a different sort of mindset, and it can be harder to become comfortable with that unknown
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and bearing opinions.
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Like, I've made a bunch of investments that people have made fun of us about at the time.
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It just doesn't bother me.
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I think it's, like, for me, like, a necessary attribute if you're gonna be successful at
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PreCede.
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You have to be comfortable doing things that other people will look at, and they will say, I
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really don't understand why anybody would invest in that company.
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I'm like, that's great.
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Then either I'm really wrong or I'm doing my job.
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One of those two things, and maybe both of them are true.
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But I do think this sort of precede being comfortable saying, we're gonna invest in this
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company that no one else understands because we think it will eventually be well understood and
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appreciated.
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And the path to getting there requires sitting out on your own for a while, and that's not for
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everybody.
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Yes, definitely not for everyone.
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I'm glad we were able to talk through the realities of consensus driven investments.
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Got to kick it off to the last topic.
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Topic number 3, a venture capital firm does something rare, give money back.
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It's our final topic, and it's an article from the New York Times, and it's about CRV planning
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to return $275,000,000 from its $500,000,000 later stage focused select fund to investors.
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4 of the firm's partners said the move was due to changing market conditions, particularly for
17:17
mature startups, where valuations have become too high relative to potential returns.
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The firm argued they are seeing fewer opportunities for high growth, late stage
17:28
companies and is focusing instead on younger, earlier stage ventures.
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So while the select fund was focused at more mature startups, this decision, I'm sure
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affects every type of fund.
17:40
Charles, what did you think when you came across the article?
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And how does it affect the way that we think about the pre seed fund land, if at all?
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I think when I read this, I was like, this makes sense to me.
17:51
If you dial back to 2016, 2018, that's really when a lot of people started looking at
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opportunity funds or select fund, growth fund, whatever you wanna call it.
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Some dedicated vehicle that allows you to either stay in your best companies longer with
18:07
a dedicated pool or buy access into growth companies that maybe you missed earlier.
18:12
And I think that strategy felt great because everybody was getting these markups, and they
18:17
were significant.
18:18
And the pro rata price to pay to stay in these companies was high.
18:22
And in many cases, people said, wow, you do the math.
18:25
You're like, boy, we didn't do our pro rata in the series B and C of a bunch of our best
18:29
companies.
18:30
And if you do the look back and how do we have the capital to do the B and C round, now that
18:35
the company's going public in a SPAC, boy, we would have made a lot of money.
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And I think what ended up happening was a lot of people did that math and said, the answer
18:42
here is we need a dedicated pool of capital to invest in either follow ons for ourselves
18:48
because we're leaving all this money on the table and we have access to these great
18:51
companies.
18:52
And then I think the entire valuation environment changed.
18:56
I think that made sense in a world where people were getting 20 x multiples and companies were
19:01
highly valued.
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Then the world changed.
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And I think as the folks from CRV mentioned, the opportunity set looks really different
19:08
today.
19:09
I think most people don't feel the need to concentrate and put more money into their
19:13
series B and C companies.
19:15
There's not so much activity in that market either that you need piles of cash to do it.
19:20
And I think it's an intellectually honest admission that, like, the world today is
19:24
different.
19:24
And I think it's very hard to give money back in venture.
19:27
They could've just held on to it and said, we're just gonna look harder, or we're just
19:31
gonna wait longer, or we're gonna find things.
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I think at some point, you look at the world and just say the amount of capital we have is
19:37
too much for the opportunity set in front of us, and we're going to give some back.
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But it's really hard to give capital back even if it's a select pool, which maybe has a
19:45
different fee structure than your core fund.
19:47
There were some interesting commentary on x around this article.
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Some people saying maybe you just can't find or access the companies that are big enough.
19:55
And I think we're in this interesting bifurcated world where you have a handful of
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highly valued private companies that are worth north of $10,000,000,000 growing or some cases
20:03
north of a $100,000,000,000 now in the case of SpaceX and, OpenAI.
20:08
And then you have a bunch of companies that are simply valuable, that are, like, worth 1 or
20:12
2,000,000,000.
20:13
And there's this huge gulf in between.
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And I just don't think people feel like they need as much money for the companies that are
20:19
in between.
20:19
The ones that are expensive, but not crazy, you can probably do your pro rata for those out of
20:24
your main fund.
20:25
And the ones that really do take off, if you're systematically in those companies, like a
20:29
founders fund, you already have a big enough vehicle to do what you need to do.
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So I think the era it felt to make the era of the opportunity fund ended 3 or 4 years ago.
20:38
A lot of LPs were like, look, we don't wanna do these anymore.
20:40
We'd rather fund managers to do whatever their core strategy is.
20:44
And unless you're going to force us to do this opportunity fund, we'd prefer you to just focus
20:49
on the main thing you do.
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And I think this is the beginning of the unwinding of the end of the opportunity fund
20:54
era.
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There'll be some people who have portfolios where this makes sense, but I think a lot of
20:58
other people will conclude we don't need that multi $100,000,000 vehicle we raised because
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the opportunity set just doesn't support it anymore.
21:05
Well, Son, We are actually all out of time for today, but Marina and Charles, thank you so
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much for making the time today.
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Thank you to our listeners for popping by.
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Please like, subscribe, and share with a friend, and we hope to see you next week.
21:22
Bye.
21:22
Bye everybody.
21:23
Bye.