Latest / The Learning Corner by Precursor / Episode #20: AgTech and Venture Capital, Signs of a Failing Company, What The Heck Does Pre-Seed Even Mean?

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Episode #20: AgTech and Venture Capital, Signs of a Failing Company, What The Heck Does Pre-Seed Even Mean? · The Learning Corner by Precursor

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Think the beauty of investing in at the people and idea stages, a lot of it is picking the
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right people.
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And if you pick the right people and idea, you will learn a lot along the way, and you'll
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mostly learn good lessons because they'll be successful.
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It's the week of February 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 Farnham, 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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Topic number one is an essay by Sarah Nollet from Tenacious Ventures, where she acknowledges
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that agtech has been historically viewed as a sector that doesn't work for venture capital,
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but pushes back on that narrative asking whether investors are simply approaching it
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with the wrong mindset.
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Throughout the essay, she highlights a few key issues.
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Agtech doesn't fit the typical VC timeline.
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So the industry has longer adoption cycles and requires patience that a lot of funds just
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don't have.
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Customers have very different incentives.
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Farmers aren't purely optimizing for profit.
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They manage risk in a way that doesn't always align with a rapid tech adoption.
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And then many ag tech startups fail because they're applying SaaS style expectations to a
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sector that doesn't operate like software.
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So think vertical farming.
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Nollet suggests that instead of writing ag tech off as uninvestable, investors should actually
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rethink how they structure deals, measure success, and engage with the sector.
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So Sarah makes a really strong case that ag tech isn't necessarily broken.
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It just doesn't conform to the standard VC playbook.
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So, Charles, do you think there's an opportunity for more specialized capital in ag
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tech similar to, I don't know, I was thinking about biotech, pharma.
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Investors have evolved their own unique models.
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Yeah.
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I read this, and I was like, this sounds like most enterprise software to me.
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And, you know, we've got a handful of ag tech companies in the portfolio, whether that's
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AgVent or Bountiful.
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And there were certain parts of this essay that resonated with me.
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I do think the buying behavior of this customer is different, but I think it's the same every
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time we've had a fintech that wants to sell to big banks.
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I've been like, hey.
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Selling the big banks or credit unions, it's hard.
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They're slow.
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They're big enterprises.
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They don't buy the way you want them to.
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And one of the things I've learned that I do think makes agtech maybe slightly unique is it
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does feel like it's a sector where the buyer wants to really feel like you get their
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problem.
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And I think it is one of the ones that's kind of harder to waltz in.
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If you think any venture sector that ends in tech, biotech, fintech, prop tech, they all
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have their own idiosyncrasies that you have to understand if you're gonna get into them.
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In my experience, investing in agtech companies has largely been positive.
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But I do agree with her that the timeline for adoption can be slower because a lot of these
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folks have adopted digital technology to varying degrees.
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For me, the big reminder is that before you write off a sector, I think it's worthwhile to
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at least think about what are the dynamics at play here and what would it take to be
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successful.
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And I found the flip side of agtech buyers being slow to adopt is once you convince them
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and win them over, they're pretty good customers.
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And I just think, particularly with one of our portfolio companies, there have been a few
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crucial moments where the CEO had to make some important strategy decisions.
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And I think reflexively as a VC investor, I had one answer, and before I gave him that answer,
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I said, let's just talk about, like, what do your customers actually want?
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And it did turn out that the right answer for that business was the opposite of the advice
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that most VCs were giving him, and the business he built was sort of at odds with what
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conventional wisdom was at the time, and it's turned out to be a very good decision.
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I always love reading pieces like this because it's a reminder that if you're going to invest
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in a subsector, you should make sure you understand the subsector's dynamics.
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I don't think any category, maybe one or two, are truly uninvestable under under any
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circumstance.
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It's interesting that vertical farming became one of the first areas that investors love to
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flock to because I think the models felt familiar.
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Dumb cash in, wait for it to grow, etcetera, etcetera.
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I think to your exact point, that's where we got it wrong.
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We didn't really understand the end customer, the issues with supply chain, the long horizons
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for actually how to optimize that model in a way that made sense.
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And so then not AgTech's fault, they took a beating of investors writing it off because
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they saw a specific area within that sector that didn't work in the traditional venture
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model.
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And I think the other thing I've come to really appreciate is the intersection of markets can
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be really complicated.
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So I think some of the vertical farming, it was like ag tech plus robotics.
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Two markets that operate very differently on different timelines that require different
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skills coming together.
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I think that was always gonna be hard.
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One thing I guess that's been running in my brain, just because my prior background was
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life sciences and healthcare and more biotech.
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I've found that it is difficult for funds who maybe take one or two bets into an area that
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requires such deep research or deep thinking into the area and a long horizon to understand
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it.
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How do you make it work when you're making one or two bets within a space like AgTech that you
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have to have a lot of conviction and patience for?
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I think the freedom in making, call it, 80 to a hundred investments per fund is that I don't
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think I would do 80 to a hundred of anything, of any one theme.
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You know, we've done some things in electric vehicles.
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That started with one investment, and I was like, oh, I now know more than I did before.
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Not enough to be dangerous, but more than I did before.
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And I think the beauty of investing in that the people and idea stage is a lot of it is picking
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the right people.
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And if you pick the right people and idea, you will learn a lot along the way, and you'll
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mostly learn good lessons because they'll be successful.
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And if you don't, I think the hard thing is always, Hey, did I pick the wrong team?
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Or is this a category that's inherently flawed?
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A few years ago, I was like, oh, digital health is too hard for startups, or wellness fitness
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is too hard for I would say two years ago, everyone's like consumer fintech is over, and I
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guess it's back now.
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I think investors fall in and out of love with these categories usually based on their most
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recent experience.
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How should you, as a founder within a space like AgTech, evaluate the right types of people
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to bring on your cap table who can understand the types of pills you need to swallow in order
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to make a strong cut and feel confident about this investment?
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I think there's a real argument for having some specialists at the table, and I think this is
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even more true in regulated industries.
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So if you're doing fintech or something in bio or digital health where there's a regulatory
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component and there are things you simply should know that you are or not allowed to do.
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I think having minimum one of those people around the table is great.
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I think there's diminishing returns to having, like, three specialists around the table.
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I think as a founder, the most important thing is finding an investor who generally trusts
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your judgment but knows when to push you to think harder about a problem.
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And one of the nice things about being a noob in some of these categories is when someone
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says, well, we're gonna do this thing, you're like, why?
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And they're like, what do you mean why?
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I'm like, I don't know anything.
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What's explain to me.
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This is not Socratic.
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I'm genuinely interested in understanding how you reach that conclusion.
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And I find that's one of the things I enjoy most about being a generalist is that it's this
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license to just ask a lot of why questions out of a place of really actually wanting to know
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the answer.
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Moving on to our next topic, Jason Lemkin has seen thousands of startups over the years.
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And in a recent piece titled nine signs a startup isn't going to make it, he outlines the
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key red flags that suggest a company is heading for failure.
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A few notable signs included being too slow to hire VPs and create a strong leadership layer,
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being just too slow in general, a lack of deeper understanding of the competitive
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landscape and surprises that maybe you just don't foresee.
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So when this article came out, I know you mentioned that you've seen all nine signs.
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Funny enough, I'm sure any investor would have claimed that they screened for all of these in
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diligence.
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So how do you think we, as investors, miss sensing these signs earlier on, if it's even
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possible to send, and has it ever become easier to suss out any specific
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sign?
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Sometimes I read things, I'm like, oh, that's a little too close.
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Wow.
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Jason has identified a lot of the behaviors.
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It's funny.
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I realized I have been trying to build scaffolding at our firm to identify these
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things, and I've been working my way backwards from when they show up.
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As you know, we have this thing we do about six months after we invest where we take inventory
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of the company and, like, what have we learned?
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And I've found the most important thing at six months is product velocity.
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In that slideshow, a lot of it boils down to speed.
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And not just speed, but like velocity.
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Are you moving quickly in the right direction?
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A lot of dimensions, but a lot of it comes down to speed.
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And I found the companies in our portfolio where product velocity is good at six months
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are generally successful and on track.
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And the reason I typically try to take this snapshot at six months is if you do it after
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your first check-in with the company, you might get a false signal.
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And if you wait to a year at pre seed, it's probably too late to do anything about it.
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But at six months, you can evaluate the company, and you can change your plan as a VC
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for how you wanna advise and manage this investment.
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And so I started looking at the companies that weren't fast, and I was like, well, what are
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what are some of the characteristics?
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And one of the big ones I started noticing is people who have previous startup experience,
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not necessarily as the founder, but having been in a zero to one or very small startup, I think
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your sense of pacing and urgency is just better.
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You have some sense of what kind of startup get done in a day and what does good and speed feel
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like.
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And I found that people who didn't have that experience, some of them were able to naturally
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acclimate because they were just naturally aggressive, urgent people.
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But a lot of people were just sort of like, well, what what am I supposed to get done
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today?
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And I'd have people who'd, you know, they would tell me, well, this is gonna take a quarter to
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implement this feature or do this thing.
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And I'm like, a quarter?
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That sounds like a two week sprint to me.
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Not to go, well, we got a plan.
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We did the reason.
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I was like, oh, the more we talk about this, the more I'm learning about how you think about
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speed and process.
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And this is simply too slow.
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And one thing I found that doesn't work is telling people just go faster.
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Doesn't mean anything because in most cases, they think they're moving as fast as they can
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and they think they're working hard.
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And so I think when you tell people go faster, I found a lot of startup founders natural
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defensive immediate response to that is, well, I'm working really hard.
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I'm like, that wasn't what I said.
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I didn't say work harder.
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I said go faster.
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And it's funny me, you know, I bring people out on these field trips and this was the big
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unlock for me.
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We've had some founders not in the Bay Area and I'm like, this person doesn't have a good speed
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meter.
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And I've brought those folks out to the Bay Area and had them work out of our office and
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meet founders here.
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And invariably they come back and go, oh, that's what I'm supposed to be doing?
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Oh, we had no idea people were doing that, that they were working in that way.
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They were working that quickly.
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Oh, we've we've I was like, yeah, you thought you were at the maximum, but you were at some
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weird local maximum.
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Velocity is so important, both in the product side, but as Jason highlights too, on the org
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side, building up the org, hiring the right people, starting to scale.
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I also think hiring on third party vendors, if that's the support you need, and then also
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knowing very quickly when to stop using them.
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If it's Amazon growth teams that you're bringing on or a third party group to boost up
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any sort of increase in sales, if it's not working, move on.
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You have to kiss a lot of frogs and the longer that you wait with something that's not
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working, it's just to drag on the amount of money that you're spending and you're not
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seeing the output that you need to.
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And the, the thing you just said is the lesson that a lot of people have to learn.
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I always tell them like, somebody that isn't working isn't going to magically start working
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at a startup.
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You have to actually fix it.
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Well, we're not really happy with our growth team, but we're going to give it one more
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month.
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I'm like, why?
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You just told me you're not happy.
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There are lots of other agencies you could go hire.
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If you're not happy with these people, why would we give them another month?
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And it's not usually so much about the money.
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It's about the time.
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I think as this nature of round nomenclature gets more confusing, I think increasingly, most
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investors are like, tell me how much money you had, show me where you were at time zero, and
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show me where you are today.
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Those are the data points I kinda need to figure out.
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Is this a good company?
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There are other signs here that Jason mentioned, like manipulation, sociopathic
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behavior.
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And I know we're trying a precursor to try and capture some of the intangibles earlier.
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How have you been able to assess that angle at the earliest stages?
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It's very hard because the sociopathic manipulative people are, are generally quite
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charming and pleasant.
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And if fundraising
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They're good at fundraising.
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They're also good at telling you exactly what you wanna hear.
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And oftentimes you think, wow, these people are really on it.
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They've got great answers to all of my questions, but then they're like, oh, but it
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wasn't true.
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It was what I wanted to hear, but it wasn't true.
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I've had a few situations where we've had people that I would put in that bucket.
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And when every time it becomes apparent, that's what we're dealing with.
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I'm like, if I'd really had my antenna up, there were signs.
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Oftentimes the signs are, there's a couple of really good people who leave and you're like,
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wow, that person was great.
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They leave and the seal CEO has like, God, I didn't want him anyway.
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Or he's like, really?
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Or the person who leaves doesn't really want to get into the nature of why they left and you
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get clues.
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And I think earlier in my venture career, I always sided with the CEO.
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And then if you had a few situations where I was like, that's the right thing to do in every
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case, except when the CEO might be intentionally or unintentionally up to
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something.
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It's hard to know when you're in one of those situations and having been in a few now, I sort
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of trust my instincts.
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If I feel like this might be one of those, I'm like, well, let's investigate it and make sure
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it isn't.
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And also to acknowledge the reality that every startup is high pressure.
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To claim that there is not going to be a level of that in every situation is tough.
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So it's trying to discern what's the level of normal, reasonable pressure that exists in
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startups to keep things going versus what's truly just blatant toxicity that bleeds out.
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Getting close to people who are VPs, their first junior hires that they made after the
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seed going into the A, if those people come in, come out pretty quickly, those people are
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really essential to making sure that the team is on track, but those people churn in and out,
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it's a sign or at least something to look into.
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And it's delicate.
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I don't think most CEOs want their investors or board members interrogating their staff.
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There's a right way to do this, but I think what you said is spot on, which is figuring
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out, well, who are some of the culture carriers?
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Who are some of the people who ought to have a pulse on what's happening at the company?
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I think when you lose those people, it's like, oh, something even if it's for a better
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opportunity or whatever, you're always like, oh, we lost something there.
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Our last topic of the day is more of a question posed by our friend Peter Walker from the Carta
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Insights team around what actually is a pre seed around.
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Through a mix of exercises, the Carta team filtered in on the non priced rounds that
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occurred on their platform, and it ended up with the pre seeds taking the form of safe
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rounds from 500 ks to $2,400,000 So Peter asked the LinkedIn community basically was what they
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found right.
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And does that sound like the correct description of precede rounds?
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So the question was on a post on LinkedIn that received quickly a 30 comments.
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So naturally, that's where I spend time scrolling to see everyone's different takes and
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perspectives, yours included.
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What does it actually say about the world of early stage investing that there was so much
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chatter around what precede actually is and what the nomenclature means in our ecosystem.
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I think two years ago, I told one of our LPs round names are meaningless, and they were
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like, what do you mean?
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I go, well, when founders can choose what they mean, they don't mean anything anymore.
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And if we had a strict definition, this would be very easy.
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Because whenever LPs ask me, hey.
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What's happening with seed round valuations?
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I'm like, well, which seed rounds are you talking about?
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Are you talking about the normal ones that are, like, 2 to $3,000,000 Are you talking about the
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kind of mango jumbo ones that are 4 to 5?
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Or are you talking about the ones that people who leave OpenAI and start brand new companies?
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Like, which ones are you talking about?
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And I tend to think about it differently, which is within those buckets, the dynamics are
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really different.
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So, you know, we talk about three kinds, institutional seed, celebrity seed, pre seed.
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I think of those as three different things.
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And I've always felt like a pre seed round is a small amount of money designed to help a
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company figure out if the thing they're building is worth building.
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And for most ideas, you can accomplish that on 1 and a half million dollars or less.
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And, you know, when I was at Encore a long time ago, people used to race bridge rounds.
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And then I said, no, no, no, no, no, don't call it a bridge.
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Bridge has, like, a bad connotation.
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That's where the seat extension came from.
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People were like, bridge sounds bad.
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This is not a bridge.
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This is merely a seed extension because if you called it a bridge, you were kinda failing the
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IQ test.
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It's continued enthusiasm.
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That's right.
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It's an
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extension of the excitement that we've had.
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And then everyone's like, well, seed extension.
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Well, now that means bridge.
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So now we're gonna call it a seed two.
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And then we had post seed, and we keep creating these things with the hope that the new name
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removes the ick of what it really is, which is a company that needs an interim financing in
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between rounds.
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When I started the firm, pre seed was pretty pure, mostly because there weren't that many
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people doing it, and there was no strategy around the pre seed and, like, what you call
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it.
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And now I routinely meet companies like, well, we raised a $5,000,000 pre seed.
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I'm sorry.
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Calling a $5,000,000 round a pre seed doesn't lower my expectations of what you should have
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gotten accomplished.
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It's funny now that seed round people, this is the largest seed round raised in the state of
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Montana.
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I'm like, great.
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It sounds more like the series a to me than the seed round, but if that helps.
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The thing that it's made hard is a lot of the arguments I try to make to LPs about why pre
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seed is a good category to invest in.
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It's that you're capturing good ideas earlier, and that like some of those companies will
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graduate to seed, and you will see kind of like a conversion, and you can measure how good we
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are at picking these ideas.
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But now that like what a pre seed seed is is blurry and what a seed is is blurry, like, that
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conversion math has become really hard to understand.
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It's not just like the the point of pre seed is to capture good ideas early period.
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And as Hunter Walk would say, seed is a process.
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Most of our companies are gonna raise multiple rounds.
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So even when I do investor intros now, I've just stopped saying they're raising the seed.
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I'm like, they're raising $3,000,000.
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I don't know what to call it.
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They're raising $3,000,000.
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Here's where they are.
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I hope you're interested in the company.
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The end.
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I don't even know the ins and outs of how other investors think about their benchmark.
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If you say pre seed, they'll say this is a really big one.
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So just tell me how much they're raising, and then we'll move on from there.
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Last question.
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Who do you think benefits the most by having this clarification?
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Is it us as investors or founders?
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I think a lot about right now in AI investing land.
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I think honestly, investors clarification because founders kind of control and run that
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market dynamic right now.
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If they're like, I wanna raise a $6,000,000 seed.
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People will write that check, and they will call it a $6,000,000 seed.
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I've concluded that a seed round is any round that a seed investor invests.
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And, like, this is my new conclusion, which is that a lot of people are like, hey.
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I have a seed fund.
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Anything we do is seed because I said so, whether it's a 15 or $20,000,000 seed round.
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One group who I think at least is intellectually honest about this is Ed and
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Elliot at Boldstart.
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They're just like, we invest in inception.
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We invest at the very beginning.
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Sometimes the very beginning looks like 500 on five.
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Sometimes the beginning looks like 20 on 200, but we wanna be there at the beginning.
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And this is sort of the thing I think about the most for our model.
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I have a similar mindset to them, which is my goal.
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No one can really be first the first round because first round brilliantly owned that by
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naming the firm First Round Capital.
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But I think to me, pre seed rounds are about what needs to be approved.
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And we don't do a lot of the deep tech, hard tech, climate tech stuff that either needs or
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has the ability to raise $20,000,000 out of the gate.
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I think that's my new working definition is that a seed route is anything that a seed fund
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invests in.
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Yeah.
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It's whatever people wanna call it, basically.
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That's right.
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We are all out of time for today.
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Thank you, Charles, for stopping by.
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Thank you to our listeners.
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Please like and subscribe, and we'll talk to you all next week.
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Thank you.