Latest / The Learning Corner by Precursor / Episode #36: Founder Optimism, Seed Math Is Broken, Aumni Venture Beacon Report

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Episode #36: Founder Optimism, Seed Math Is Broken, Aumni Venture Beacon Report · The Learning Corner by Precursor

• 0:00
  There was a good ninety percent of startups fail.
• 0:01
  Well, these are all things that if you internalize them, you would never get out of
• 0:05
  bed as a foundry.
• 0:06
  But, oh, statistically, I'm going to fail.
• 0:08
  Statistically, these things are gonna go wrong.
• 0:09
  The question's, well, what if everything goes right?
• 0:12
  It's the week of June 9.
• 0:14
  Welcome to the Learning Corner, a precursor ventures podcast.
• 0:22
  Welcome to the Learning Corner by precursor.
• 0:24
  I'm Mia Farnam, and I'm joined by our GP and managing partner, Charles Hudson, where we will
• 0:29
  be talking through the articles and Goodreads that caught our team's attention over the past
• 0:34
  week.
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  Our piece is a thoughtful essay from Colin and Joshua Wallace that explores the trap focusing
• 0:40
  too much on downside scenarios.
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  This is often common among type a personalities, founders, and investors trained
• 0:47
  to spot risk.
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  They reflect on a personal turning point when they challenge their worst case planning with a
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  simple question.
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  What if everything works out beautifully?
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  It's a call for balanced thinking, not to abandon risk management, but to make space for
• 1:00
  positive visualization and conviction.
• 1:02
  For founders, that can mean reconnecting with their original vision.
• 1:05
  For investors, it could be modeling best case outcomes with as much rigor as the worst.
• 1:11
  In work and life, the essay reminds us the future holds uncertainty in both directions,
• 1:15
  but why don't we plan with optimism too?
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  So in diligence, we're wired as investors to stress test basically everything that could go
• 1:22
  wrong.
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  So like, what if TAM isn't big enough?
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  What if the go to market fails?
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  What if tariffs disrupt the supply chain?
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  How do you make space in your process to also model what radical success could look like
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  almost to meet in the middle with where founders' minds need to lie, which is typically
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  that their vision is always going to succeed.
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  Oh, boy.
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  It's funny.
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  My venture job, my person I worked for was always like, well, just start with what if
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  they're right?
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  What if everything goes right?
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  And I think it's really easy to go to the negative.
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  This is gonna go wrong.
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  And I don't know, I always feel like when I'm doing due diligence or trying to get to know a
• 1:54
  company, I'm like, okay, what do they believe the world's gonna look like in the future?
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  If they're right, is this a big company?
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  And most of the investments I end up making, it's because I have a shared optimism with them
• 2:06
  about what the future looks like.
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  And look, as we say all the time, for pre seed companies, they all look pretty terrible.
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  There's like usually no product.
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  There's a bunch of unproven assumptions.
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  The answer is what could go wrong at everything.
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  And so if you were so focused on the things that could go wrong, you'd almost never make a
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  preceded investment is my guess.
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  So don't know.
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  I I think it's a good reminder to people that the business yes.
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  It was like 90% of startups fail.
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  Like, well, these are all things that if you internalize them, you would never get out of
• 2:32
  bed as a founder.
• 2:33
  But, oh, statistically, I'm going to fail.
• 2:35
  Statistically, these things are gonna go wrong.
• 2:37
  The question's like, well, what if everything goes right?
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  And the funny thing is, we have a handful of companies where things have gone right for
• 2:43
  them, and the unlock was not anything that was known at the time that we made the investments.
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  Like, the world generally confirmed the direction.
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  I was talking to some founders this morning.
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  They're like, what's one of the more surprising investments you've made?
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  I was like, well, we were small investors in this company, Caper, that was building this
• 2:58
  computer vision powered shopping cart.
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  And I remember when I made the investment, one of our LPs was like, who's gonna acquire that
• 3:04
  company?
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  I'm like, I have no idea.
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  He said, do think it'd be a grocery store?
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  I'm like, I I guess that I have no idea.
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  And they end up getting acquired by Instacart, which it might have been in the founder's mind.
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  It was not in my mind at the time we made the investment.
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  That Instacart would grow and scale the way that it did, and that the shopper experience
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  would be so important that they would decide to buy the cart.
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  And so a lot of the investments I make, I go in thinking two things.
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  This is a positive, optimistic person, and good things will happen to this founder and this
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  team in the future.
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  And that if we're directionally correct about where the world's heading, there will be other
• 3:34
  tailwinds that support this business that we couldn't have envisioned.
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  So it's a good reminder.
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  And it's funny, I also get all these calls from investors who are like, I'm looking at one of
• 3:42
  these companies that you're looking at and here's all my concerns.
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  I'm like, yeah, I share your concerns.
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  I just happen to think the founder is going to figure them out.
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  That's why I invested.
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  If you have those concerns and think the founder won't figure them out, you should
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  absolutely not invest in the company.
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  Yeah.
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  That's where I always find it to be interesting to have conversations during diligence with
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  other investors Yeah.
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  And being like, we can go back and for hours on what our concern, but I don't know if we're
• 4:05
  ever gonna be in the middle.
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  I guess back to the point about the acquisitions piece, I feel like we have our own
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  really good model of finding a way to get comfortable around what does an exit path look
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  like for a founder.
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  How important is that in pre seed land?
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  I think even some of our best companies that have pivoted entirely.
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  I just don't think you know who's gonna buy what.
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  If you had told me five years ago Elon Musk would own X, I would have said, what are you
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  what are you talking about?
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  Like, how?
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  And so I think VC's ability to predict who will own what asset or who will value what asset,
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  it's really hard to know.
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  So I instead say, look, can we build a valuable company?
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  If you can get to a 100 or a 150,000,000 in revenue with good margins and still room to
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  grow, that's a good business.
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  Now I used to say that's good enough to go public, probably no longer good enough to go
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  public.
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  But you have built an interesting business with value, and I tend to find interesting
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  businesses with value are valued by other people.
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  And so the buyers, I feel like, tend to show up at the moment that you need them.
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  And your ability to forecast, oh, Google or Meta's gonna buy this, you don't I shouldn't
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  say you.
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  I don't know what Google and Meta plan to buy at any given quarter.
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  And so I find it kind of a useless exercise.
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  Right.
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  Because those buyers, they evolve their strategies as well.
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  While you're pivoting and changing the people who have billions of dollars of overhead to
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  buy, they change every quarter.
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  Yeah.
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  And I can think of many acquisitive companies today that didn't exist or weren't thought of
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  as buyers five to seven years ago.
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  So if you started a company five to seven years ago, those companies, they didn't exist.
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  They weren't on your radar screen.
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  Yeah.
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  I don't know.
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  I I feel like somewhere along the line, someone put that in a diligence memo.
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  I like, oh, that's a good question to ask.
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  But it's actually not like a good question.
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  It's like a CYA.
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  Right now, do you think founders today are still as good at articulating their what if it
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  all works out vision?
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  Or has the current climate created a more cautious storytelling?
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  Or is there just like a clear unknown that they're unabashfully acknowledging?
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  One thing I thought about after I read Colin's article is I've worked with some people who are
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  just fantastic storytellers and their ability to infect you with their vision for the world.
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  I went to the the Limitless launch event with with Dan, and Dan, like, told a very
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  aggressive, compelling, and at times both frightening and interesting vision of the
• 6:21
  future.
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  But I watched Harry from that presentation be like, I think he's mostly right.
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  I think this is where the world is headed.
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  And, like, now the only question is what company or set of companies are gonna get us to
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  this version of the future?
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  And I feel like this is the most important part of a pre seed pitch is can you convince me
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  that, a, you're right about where the future is going, and when it goes the way that you think
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  it will, when everything goes right, that you're gonna win.
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  It's gonna mean something material for your company.
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  Occasionally, people will pitch me on ideas and I'm like, I agree with you, but if you're
• 6:48
  right, actually the thing you're doing isn't the most important.
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  The more important thing to be is x, or the more important thing to be is y.
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  And you've articulated an important vision of the future, but not one where the outcome is
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  you building an interesting, enduring company.
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  Right.
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  And with founders who are building in AI, that future state is so uncertain.
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  So what gets you comfortable there?
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  Or do you just not talk about it and you just wanna hope that what they're building in the
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  short term actually has value?
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  I tend to think more like the short term doesn't matter.
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  What's the end state of the problem there?
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  Like, we have a portfolio company we know in common.
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  Like, they've told me what they think the end state of their category looks like, and I'm
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  like, I largely agree with you.
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  Now the question is, is there a good business to be built in that version of the end state of
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  your category, and will you win it?
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  But I tend to just try to think there's so much noise in AI and things are moving so fast.
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  There there are some, like, natural endpoints to these experiments.
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  I'm like, well, if we get to that endpoint, if we get to the endpoint where such and such
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  process can be run autonomously with very little human input, what is a good looking
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  business that benefits from that trend look like?
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  Well, next topic, Hadley Harris from ENIAC posted on X how seed math was broken with
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  potential answers to the question, why do VCs keep piling into seed?
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  Bill Gurley replied to the post around the broken math behind modern seed investing,
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  especially for mega funds deploying 5 to $10,000,000,000 annually.
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  Bill argues that for large funds, seed investing is no longer about returns.
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  It's optionality to find the next billion dollar deployment target.
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  Founders may unknowingly become collateral damage in this model as mega funds optimize for
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  outlier bets and use seed as a lottery ticket.
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  The thread raises hard questions about alignment, incentives, and whether early stage
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  capital today truly supports long term founder success.
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  I've heard a few different points of view on whether founders should care at all if they are
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  considered essentially one of many different options in a larger funds portfolio.
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  At what inflection points do you think a founder could or should be most likely to care,
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  if at all?
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  I think it depends on what your expectation is.
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  I think for a long time, a big part of the CBC promise was, you're gonna get my time and
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  attention.
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  I'm gonna care about your company.
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  I'm gonna spend time with you.
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  There's a cheerleader who's like, oh, I don't want that.
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  Right.
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  I want the money, and I essentially want to be left alone.
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  Not because I don't like you, but because I think I know what I'm doing.
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  And I will reach out to you as I need you.
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  And some of these people are repeat founders.
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  Some of these are time founders who are very capable.
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  Some of them are time founders who maybe have more confidence in their ability to operate
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  independently than is warranted.
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  But for whatever reason, if your primary value prop and pitch is money plus a bundle of time
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  and advice, if you're like, I don't want your time and advice, that's actually not an
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  attractive bundle.
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  The single vector here is money works.
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  I also think there's more nuance having talked to people at multistage funds about how they
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  think about seed.
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  I think you should always I feel like every episode I talk about motivated reasoning.
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  It's okay.
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  I think when you're a seed investor where the only thing you do is seed, you have a lot of
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  motivations to discredit the motives and intentions of a multistage firm that
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  participates in seed, and to say they're just doing spray and pray, they don't care about
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  you.
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  Whenever I talk to my friends at big multi stage funds, they're like, look, we're trying
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  to solve for a couple of problems.
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  One is, how do we have enough intel on what's happening in the market to get a sense of the
• 10:05
  landscape?
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  Because remember, they're gonna make most of their money in series a and series b.
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  Yeah.
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  But if you put yourself on the seeds of a multistate firm, you don't wanna have to figure
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  out some new category when the hot company shows up in your inbox and you have two days to
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  make a decision.
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  You wanna say, oh, you're doing agentic workflows for insurance during our seed
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  program.
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  Because remember, the seed program's not just about the investments you make, it's about the
• 10:27
  friends you made along the way.
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  So, you know, if you're open for business in seed, you're gonna meet a ton of companies.
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  You're gonna be like, oh, wow.
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  We met 10 interesting agentic insurance companies at seed.
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  So you've got a little bit more of landscape.
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  Also, if you're a big multistage fund, you also don't want the pick please Instagram problem,
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  where you decide early on to place a bet on a company.
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  And even if your conflicts says, we'll invest in anything, the founder of that other company
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  might say, oh, they're in my competitor.
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  I don't even wanna pitch them because if they don't make me an offer, they're gonna obviously
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  forward all my materials on to my competitor.
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  And so there's a real risk that by being too aggressive in seed, you actually block yourself
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  out of the companies that you really wanna be in at a and b.
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  And I think if you're a big multistage fund, you can't afford to not be in seed.
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  Yep.
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  Even if 50% of your motivation is data gathering and r and d, and 50% of it is, like,
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  you actually think you can make money investing in these companies.
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  But the presence of those firms, you know, as my old boss said, it's really hard when someone
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  makes your job their hobby.
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  And I think if you're like, hey, I'm a seed firm.
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  I have valuation and round size parameters that are pretty important to make, which is I think
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  the original genesis of of how these posts.
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  There are parameters that make sense if you're a dedicated seed fund, and there are parameters
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  that make sense if you're a multistage fund where seed is part of a strategy, and I don't
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  have to think.
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  I know that the multistage firm's presence is pushing up valuations because seed entry price
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  is not what they're optimizing for.
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  They're optimizing for total dollars put to work over the life of a winning company, most
• 11:58
  of which will be a, b, c, and d dollars, not seed dollars.
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  So why do you care if you're one of these firms what the seed entry price is doesn't really
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  matter to you?
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  Right.
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  And a $100,000,000 seed fund at a mega fund is like a drop in the bucket, and so they're
• 12:11
  willing to kind of place it across companies that are above the line to make sure there's
• 12:15
  exposure there to double down.
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  That's the Yeah.
• 12:17
  Idea.
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  Because if you wanna write this notion that, oh, I'm a small seed fund.
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  I'm gonna get into these hot companies and then I'm gonna double down.
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  I'm like, no, you're not.
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  You can't.
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  You can't.
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  Because the whole point of the seed program for the multistage firm is to position them to
• 12:30
  write a very sizable check-in the a and the b.
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  And if that company performs as expected, it's gonna be very hard for you to do that.
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  So I I struggle with the price doesn't matter at seed crowd.
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  I think it does matter within bands.
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  Look, if you're in a chime under a 100, you're probably happy.
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  Yeah.
• 12:45
  You're happier if you're in under 10 than you are if you got it at 50, but you're still
• 12:49
  probably happy either way.
• 12:50
  Actually, let's double click into that because I think we've been talking about that
• 12:53
  internally.
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  I think we're gonna see a backlog of companies going public that maybe a majority of investors
• 12:58
  will make money, but then there are some who entered in above the price that it went public
• 13:02
  on.
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  And we've talked about how it's not completely a bad thing.
• 13:05
  Can you expand on that a little bit more?
• 13:07
  Yeah.
• 13:07
  Think there's this article, like, all these IPOs are down rounds.
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  I'm like, so what?
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  Right.
• 13:11
  Like, who cares?
• 13:11
  Yes.
• 13:12
  The public markets have a different valuation on this company than the private markets do.
• 13:16
  It happened to Dropbox.
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  It happened to Uber.
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  It happened to a lot of companies where there was a moment in time where the private markets
• 13:23
  were more enthusiastic.
• 13:25
  And I don't think you judge the success of a company by the way that it trades on the tick
• 13:29
  of an IPO.
• 13:31
  I think you have to look at you know, there were times when people thought Facebook
• 13:34
  wouldn't figure out mobile, and Facebook just got whacked as a stock.
• 13:37
  And it turns out, not only did Facebook figure out mobile, they dominated mobile.
• 13:41
  And so I don't know.
• 13:42
  I think this notion that, well, because Chime is going out at a price less than its last
• 13:46
  public yeah.
• 13:47
  If you paid that price, you're probably not psyched
• 13:50
  Yep.
• 13:50
  Because you're gonna be underwater at the day of IPO.
• 13:53
  But if you're gonna hold the stock for some period of time, it might not matter.
• 13:56
  Right.
• 13:56
  There's still a write off period
• 13:57
  about that.
• 13:58
  Totally.
• 13:58
  For our last piece is Omni's q one twenty twenty five venture beacon.
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  Shout out to actually one of our friends, Zolaka, listener of our podcast and contributor
• 14:06
  to the report.
• 14:07
  The report reveals a cooling and recalibrating venture landscape.
• 14:11
  Here are a few key themes that bubble to the top.
• 14:13
  Deal sizes experienced broad based compression, 7.5% to 31% reductions across most stages.
• 14:20
  AI continues to dominate investment themes, capturing 30% of early stage activity and 60 of
• 14:27
  late stage capital deployment.
• 14:29
  Round dynamics reflect a shift towards supporting existing portfolio companies with
• 14:34
  the number of extension and follow on rounds rising.
• 14:36
  One alarming theme is the growing prominence of investor protection mechanisms, higher
• 14:41
  liquidation preferences multiples above one x and pay to play provisions.
• 14:45
  These themes overlap with a lot of what we've observed and discussed in our recent episodes.
• 14:49
  So more general question, what are your thoughts on what the combination of these
• 14:53
  shifts and what they mean for venture?
• 14:55
  I think it says a lot about what's happening across the industry.
• 14:58
  I think at Seed, and I've been in a bunch of these conversations lately, they've been
• 15:01
  fascinating, there is this question about what do we do with all of the companies that aren't
• 15:05
  yet series a ready?
• 15:07
  Do we continue to extend and support them to see if we can get them to grow to the place
• 15:11
  where they're interesting to the series a investors?
• 15:14
  Or is that throwing good money after bad?
• 15:16
  There is no consensus as far as I can tell.
• 15:18
  I think everybody thinks their portfolio companies are great and should get bridges and
• 15:22
  extensions in everyone else's problem.
• 15:23
  I don't see how that's possible, but I think there's a little bit of that vibe in the air.
• 15:27
  So that's not surprising me that there are more bridges.
• 15:29
  It's harder to get an A done than just about any time in my career.
• 15:33
  And I think it's interesting for a while, was like, wow, all of the energy is these gigantic
• 15:37
  LLM mega rounds, and maybe we're taking a little bit of a pause on those for a while.
• 15:43
  And so it's good to see that it's not all the activity isn't just big chunky.
• 15:47
  I mean, there's that one period of time where it was like Databricks Yeah.
• 15:50
  OpenAI, Anthropic, like all huge sums of money going to three or four companies.
• 15:55
  And I do think the pay to play and liquidation preference, I think that is continued cleanup
• 16:01
  from 2021 of companies that made that money stretch.
• 16:04
  We've had a couple in our portfolio of companies.
• 16:06
  They they made it through SVB.
• 16:08
  They made it through 2022, and they made it through the interest rate cycle and v one of
• 16:13
  tariffs.
• 16:14
  And they finally got money.
• 16:15
  The new money was like, the old cap table doesn't work.
• 16:17
  We're pushing the reset button.
• 16:18
  And as an investor, you've gotta decide if that's something you wanna be a part of.
• 16:22
  Not easy.
• 16:23
  I think it
• 16:23
  was last week we talked about Vera Walker's data on bridges and a low graduation rate to
• 16:28
  series a, but it seems like everyone continues to do them.
• 16:31
  Do you think it will actually end up going away ever or is there just a I guess it ties back to
• 16:36
  our topic of is there some lingering optimism that eventually they'll turn it around, we're
• 16:40
  not ready to shut it down.
• 16:42
  There's probably a lingering conversation.
• 16:43
  I don't want this to shut down while my fund is raising.
• 16:45
  There's so many conversation topics there, but what's your thought?
• 16:48
  Like you, have a certain amount of cynus notice.
• 16:52
  But seriously, I do think quitting on companies is hard, and especially if the founders are
• 16:57
  working hard.
• 16:57
  And look, think there's a set of seed investors who believe the current graduation rates are an
• 17:02
  overcorrection and an overtightening, and we are going to return to an era of higher
• 17:07
  graduation.
• 17:08
  So if you can take these companies through the trough, when we get back to 40 or 50%
• 17:13
  graduation, these companies will find a home.
• 17:15
  I'm deeply dismissive of that argument.
• 17:18
  I think we are in a world where a smaller percentage of companies will graduate because
• 17:22
  of math, because we've created many more pre seed and seed stage companies in search of
• 17:27
  series a rounds, and we've not created a similar amount of series a capital to fund
• 17:32
  those rounds.
• 17:33
  So there's an imbalance.
• 17:34
  The only way for the imbalance to get solved is we either need fewer seed companies, not gonna
• 17:39
  happen.
• 17:39
  Right.
• 17:40
  Or you need lower graduation because there's only a finite pool of capital available to do
• 17:44
  those As.
• 17:44
  So I think it will take years of sustained graduation, and in the meantime, people will
• 17:50
  continue to support those companies, some out of a belief that they're good companies, some
• 17:54
  out of cynicism or a desire not to have them fail at an inopportune time, whether it's a
• 17:58
  fundraise or something else.
• 17:59
  And eventually, we'll adjust.
• 18:01
  And by the time we adjust, the world will change again.
• 18:03
  One last question.
• 18:04
  One really interesting takeaway that I read here has been a shift in what stage mega deals
• 18:08
  have been occurring across, largely tied to AI.
• 18:11
  Over the last five years, mega deals have started happening earlier in the company life
• 18:15
  cycle with approximately 60% of mega deals in 2023 and 2024 happening at or before the series
• 18:22
  c.
• 18:23
  Yeah.
• 18:23
  And my question is, what does that amount of money raised so much earlier than a founder had
• 18:29
  anticipated?
• 18:30
  What does that do to the success roadmap of their company, if it affects it at all?
• 18:34
  I always worry that I've never met a founder who's like, my intention is to waste 30,000,000
• 18:39
  of this $60,000,000.
• 18:40
  But I think injecting large amounts of money into companies that have had modest amounts of
• 18:45
  money, it's really hard.
• 18:46
  Right.
• 18:47
  It's really hard to stay disciplined.
• 18:49
  It's really hard to put that money to good use.
• 18:51
  It's really hard to not have that infusion of cash change your culture, change who you hire,
• 18:56
  change the projects you take on.
• 18:57
  Yep.
• 18:58
  But I think the biggest venture firms have more money than ever, are more incentivized to find
• 19:03
  outliers.
• 19:04
  And so if you think about it, I think this is just the torrent of cash that's been raised
• 19:08
  coming downhill.
• 19:08
  And you're like, well, look, if I can find the outlier at the b, that's better than waiting
• 19:12
  till the d.
• 19:13
  Yep.
• 19:13
  And if you're like, well, I need the outliers, so what if I pick five companies in five
• 19:18
  different spaces that I think are the winners, and I anoint them all at the b?
• 19:22
  Even if I go three out of five, I don't need to go five out of five.
• 19:24
  Two or three out of five.
• 19:26
  It probably works for my fun Mac.
• 19:27
  Yep.
• 19:28
  So We will see.
• 19:29
  We are all out of time today.
• 19:30
  Thank you, Charles.
• 19:31
  So glad we get to do this in person And thank you to our listeners.
• 19:34
  Please like and subscribe, and we'll talk with you all next week.
• 19:36
  Thank you.
• 19:37
  Bye.
• 19:37
  Bye bye.