Latest / The Learning Corner by Precursor / Episode #30: Pre-IPO Company Talent Wars, Winning Fast as Fund Managers, Tariff Impact on Startup/Early Stage VC

Transcript

Episode #30: Pre-IPO Company Talent Wars, Winning Fast as Fund Managers, Tariff Impact on Startup/Early Stage VC · The Learning Corner by Precursor

• 0:00
  I wonder if that dynamic will shift sometime later this quarter where people are just maybe
• 0:05
  slightly less enthusiastic about AI and slightly more concerned about tariffs, but we
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  still don't yet have a big meaningful company that's in tech world, in startup and VC world
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  that's been like, tariffs blew up my business.
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  It's the week of April 28.
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  Welcome to The Learning Corner, a Precursor Ventures podcast.
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  Welcome to the Learning Corner by Precursor.
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  I'm Mia Farnam, and I'm joined by our GP and managing partner, Charles Hudson, where we will
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  be talking through the articles and Goodreads that caught our team's attention over the past
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  week.
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  Our first topic is a piece titled Figma, Plaid, and the battle to retain talent at almost
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  exited startups by Upstarts Media, which explores the rising talent war happening at
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  startups that are just shy of an exit.
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  Companies with strong fundamentals, late stage traction, and serious potential to go public or
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  be acquired, but not quite there yet.
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  So because the IPO window remains tight and m and a is sluggish, these almost exits are
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  increasingly vulnerable to top talent being poached by other tech companies or even early
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  stage companies offering more equity upside and excitement.
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  So employees at these companies could oftentimes feel trapped in limbo.
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  Equity may be overvalued from the latest fundraising round.
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  Liquidity is unclear, and growth has plateaued.
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  And the article highlights how startups in the zone must shift their narrative from the rocket
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  ship mentality to a resilient operator and get creative with comp and growth opportunities to
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  retain high performers while waiting out market conditions.
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  We often talk about the benefits of staying private longer from the POV of the founder,
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  which is more control, less scrutiny, fewer distractions.
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  But this article really highlights the downstream cost of that decision.
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  So for employees, it can feel like being stuck in startup purgatory, working at a company that
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  operates like it's public, but without the liquidity.
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  Even when the tender offers are available, they often come with tricky tax implications and
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  limited access.
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  So wanted to get your baseline thoughts on this piece as well.
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  Yeah.
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  First off, really glad to see Alex Conrad writing again under Upstart, so I'm happy for
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  him.
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  I wonder how many hoops we're gonna continue to jump through to recreate and solve all the
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  problems of the public market and the private market.
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  And when I read that article, was oh, there's a lot of built in assumptions here.
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  And the one thing I learned from my time at Google, I was there, not immediately post IPO,
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  but maybe a year, a year and a half after the IPO.
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  You know, there's some people at these big newly public companies that are hungry for
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  another startup adventure.
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  Those people I find tend to leave fairly quickly.
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  I'd argue some of them might have already left Figma in particular.
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  Then you have the second set of people.
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  They like the big company experience, but they wanna be on the next private soon to go public
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  company.
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  Like, when I was at Google, there was a clear exodus of people to Facebook.
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  Once it was pretty clear that Facebook was working, there was another exodus of people to
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  Pinterest.
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  So I think the other thing is you get these people who are at these big company purchase,
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  and they can see, well, what's the next rocket ship with a similar trajectory that's maybe two
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  to three years away?
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  And I don't wanna go to the zero to one startup.
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  And then I think people forget some of these people are gonna make life changing wealth,
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  they're going to change their lives.
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  They're gonna open a flower shop, or they're gonna write, or they're gonna stop working in
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  startup tech ecosystem stuff.
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  But I do think it's interesting that these companies do become vulnerable, but I think in
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  two dimensions.
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  One is even without the liquidity, I don't wanna get too technical.
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  You know, with RSUs, in many cases, you own the shares.
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  They're not like stock options without going through the whole tax and exercise.
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  And when they come due, it's a different mechanism when you can walk out the door with
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  the shares in hand fully owned versus, oh, I need to stay here because I can't afford to
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  exercise or the exercise period post departure is too short.
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  So I think it's a really interesting dynamic, and I think the companies are sort of in
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  different places because at least Figma has stated its intention to go public, and I
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  believe they've even filed the confidential s one.
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  So they appear to be on the path, whereas Plaid is not on that path.
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  And, you know, Plaid, if you click through some of the links in Alex's article, some of the
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  stuff they do with RSUs, I think, was tied to the pending Visa acquisition that didn't go
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  through, but they did that anyway.
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  And there's a bunch of company specific tax obligations I'm withholding with RSUs that I
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  would encourage you to, a, consult your tax adviser, and, b, there's actually a pretty good
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  article on Carta about how to think about the flowchart of when taxes are due with RSUs.
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  My sense is the people that I know at Plaid, and this is totally anecdotal, are very
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  interested in remaining in the fintech ecosystem and starting new companies.
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  And the people I've met at Figma have a more heterogeneous set of interests about what they
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  might do next.
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  Also, based on today's prices, Figma is about three times as valuable as Plaid, so that might
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  also have something to do with it.
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  But I think it's fascinating.
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  In the past, the window between when a company was gonna go public and it went public was
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  relatively small, and then you got liquidity, and then people could make their own
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  independent decisions.
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  So you'd start recruiting people up to the IPO, but you wouldn't stop just when the company
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  went public.
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  So I'm very curious to see how companies continue to manage this.
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  It feels to me like Stripe is doing the best job, but I'd also argue that's probably because
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  Stripe shares are highly in demand.
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  And whether you do it through a tender offer or some other mechanism, there's just a lot more
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  ways to get liquidity.
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  Speaking more specifically about Plaid, if they end up going public, I don't think they're
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  gonna do it in the next one or two years.
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  But if they do, do you think they'll just end up having the same issue of once they go
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  public, people were still thinking and debating about leaving, they're just gonna leave?
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  And how much is that an actual threat to the company?
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  I think notional wealth and easily converted to liquid wealth, I've observed most people behave
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  differently.
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  It's one thing when you're like, oh, based on the four nine a or based on the last round's
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  price, my ownership in this company is worth x.
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  And it's different when you're like, oh, I can log in to Computershare or I can log in to
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  whatever system we use, and I can actually see shares available to sell.
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  And if I push that sell button, money will show up in my account.
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  And maybe, yeah, it's subject to some restrictions.
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  I think it's just really different.
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  And I think it causes people to ask the question like, a, do I wanna be here anymore
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  and why?
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  I have friends at Google who are still there from when I left Google in 02/2007.
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  I have friends who are still there, and it's partially for the money, but partially because
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  they enjoy the work and they like the people, and they've kind of figured out how to be at
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  Google.
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  And the idea of figuring out how to be at another company is fundamentally uninteresting
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  to them.
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  And so it's very hard to assume that you can get in the minds of people.
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  But what I will say is liquidity does present people with a different set of options than
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  they have when they're just wealthy on paper.
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  The article also highlight how fragile the final stages of a startup can be.
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  Yeah.
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  What have been some of the warning signs you look for in these almost exited companies or
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  later stage companies in general that suggest that there's a little bit of talent attrition
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  brewing and how detrimental or impactful it can be?
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  I was interested to see just how much of the company, the Core Weed founders sold it before
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  the IPO.
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  I thought that was pretty irregular.
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  I think the other interesting thing is in Silicon Valley, it is very gossipy.
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  So if it's a value based company with lots of employees, you get a sense from people.
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  I will say this.
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  My friends who were at Google really did feel like there was a lot of upside on the other end
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  of IPO.
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  So most of them, a, made so much money in the IPO or shortly after that.
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  There wasn't this crushing pressure to leave, but a lot of them also felt like Google had a
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  lot of room to run.
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  And my friends at Facebook, it was similar.
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  They had a lot of confidence in management's ability to find the next thing.
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  And so I always worry if my friends are like, yeah, I'm dumping all of this stock, or if
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  investors are like, I'm dumping all of this stock as soon as it hits liquidity.
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  Might tell me that they're maybe top ticking the IPO or maybe there isn't as much
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  interesting stuff on the other side once the company's public.
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  But it's hard to know.
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  Well, moving on to our next topic, it's from a recent X post by Josh Kobelman highlighting the
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  importance of VCs not only winning big via the power law, but also winning fast.
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  He walks through an example showing that even if you could generate a strong forex gross
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  return as a fund manager, the longer it takes to return capital, the more it drags down your
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  IRR, potentially to the point where you underperform public markets like S and P 500.
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  It seems like the large exit that's fast is obviously the dream.
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  Everyone wants a whiz in their portfolio, a company created roughly years ago and exits for
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  $32,000,000,000.
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  I scrolled through the comments on this post, and Adam Draper worded something that I was
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  thinking about while reading the original one, which is, quote, how do you think about not
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  having control over speed of when exits are dictated by the IPO market or the acquirer?
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  So I wanted to get your reaction to that as well.
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  Oh, I have, like, so many thoughts about this.
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  I'm glad Josh post when I talk to people who are running funds, this is very much in the
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  zeitgeist because we talk a lot about how, oh, you know, liquidity is hard to get.
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  There's another more subtle shift.
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  I talked to an LP at an event not too long ago, and he said, I think all of you guys have to
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  get ready for a world where Venture shifts from a cash on cash multiple business to an IRR
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  business just like your peers.
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  Inventor has kind of had this, I don't wanna say exception, but, you know, because we run
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  closed end funds that eventually do get liquidated unlike other vehicles, you could
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  always argue that, like, hey.
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  It we're really playing the long game.
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  We're trying to give you the biggest multiple of cash on cash.
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  And that's okay if you're gonna fully liquidate and distribute the fund in ten to twelve years.
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  You can make that argument.
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  But when you tack five more years onto that, it's reasonable to say, well, I let you hold my
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  money for seventeen years.
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  The seventeen years part is a big component.
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  I could have done other things with that money, particularly in the out five years.
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  And I think venture is moving more to a business where I think we are gonna be judged
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  both on total amount of proceeds we return multiple, but also the implied rate of return
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  on those.
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  And I think that's a new mindset for venture, and I think it's kind of for the reasons that
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  Adam said.
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  For the most part, as a VC, you don't have that much control over the timing of wins.
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  But if you play with the chart that Josh had, other things can happen.
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  This is, like, my concern for pre seed funds is you can have a really backloaded fund that ends
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  up having amazingly good IRR, but looks horrible for the first eight to ten years
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  because you don't get early wins, and you don't get early markups.
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  And then you get this big lumpy liquidity in years nine through 13.
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  And suddenly, a fund that looked like a super underperformer actually starts to look quite
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  attractive, but you had to wait a long time for the realizations.
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  So I'm very curious to see how if LPs start looking at VC funds through the lens of IRR and
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  they already are, shouldn't say.
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  But if the IRR becomes a stronger weight, what do you do with younger funds, particularly seed
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  and pre seed funds, where the managers have pretty much told you, even with secondaries, we
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  can't really move the needle on the lumpy transactions for ten to twelve years.
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  I think there are gonna be some LPs who say, one, an IRR basis venture has become less
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  attractive relative to other things in my portfolio, and maybe I wanna do less of it.
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  And I think it's a reminder to managers, and, you know, this is the thing I've talked to a
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  lot of my friends about.
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  It is important to understand how the people that give you money get graded.
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  Yeah.
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  And we have some LPs who get graded on IRR.
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  And so if it takes us a long time to get them their money back, we are impacting their bonus.
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  We are impacting their perception inside of their firm, and we are, generally speaking, not
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  helping them get ahead in life.
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  Sometimes there's nothing you can do about it, but I do think it's important as a fund manager
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  to really understand.
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  And we have other LPs who are just like, I don't get comped on IRR.
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  It's, like, not part of our comp formula.
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  I mean, I care about it.
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  But and I've always been more like, our bonus is tied to IRR.
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  And at the end of the year, if you don't do a good job on IRR, I will make less money.
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  I don't know if any of you Chris Duvos.
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  He's got a very funny story.
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  I won't say it.
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  It's a really good story.
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  If you ever bump into Chris, you should ask him to tell you his story about where tricycles
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  come from.
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  I think one of the good things that's coming out of these liquidity conversations is it's
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  forcing GPs who maybe didn't always think as much about the pressure that LPs are under
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  institutionally to better internalize the challenges that LPs face and to better
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  appreciate what LPs are up against.
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  And I think it means that venture funds are gonna continue to be scrutinized differently,
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  not just on how much money did you give me back, but, you know, as I say internally, we
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  can't always change the destination of precursor, but we can change what it feels like
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  to get there.
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  And I think there's gonna be a lot more conversations, not just about, did you get me
• 11:43
  to three to three and a half, but how long did it take, and how long did I have to wait to
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  start getting my money back?
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  Yeah.
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  To your earlier example of an LP asking funds to maybe not just win fast, but win more
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  creatively, how much of that thought process from the LPs perspective is due to the fact
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  that they're hearing that early stage fund managers are actually open to more secondary
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  opportunities than prior years?
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  I my sense is I think LPs have patience, but not infinite patience.
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  And I think for a while, was like, well, these are ten year funds, but every now and then,
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  they're longer because you have some pre IPO company that you don't wanna you know, I think
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  Will Quist had a thread not too long ago where he talked about slow ventures starting to
• 12:21
  distribute private shares.
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  In spite of all the chaos that might cause on cap tables, that's another way to solve this,
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  which is like, I'm just gonna give you the shares instead of me holding them.
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  Now there's all this complexity about how do you think about carry, and will the companies
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  allow you to do it from a transfer?
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  There's a bunch of practical questions, but the sentiment is, hey.
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  This is another way to push this problem back to LPs and say, I'm not holding these shares.
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  You are.
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  And I think it's gonna be really hard, but I think the message from LPs has been pretty
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  consistent.
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  If it's gonna take longer for these companies to get public or to get liquidity and you're
• 12:52
  gonna ask me to go along on this ride, I need you to be more aggressive in finding ways to
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  get me money along the way.
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  Yeah.
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  And some of that's gonna be secondary, and who knows what other creative technique I think
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  this is why you have continuation vehicles being a bigger thing.
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  People thinking about what are other ways I can get LPs who wanna get off the merry-go-round,
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  let them off.
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  And so venture is growing up and becoming a full part of finance.
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  Yeah.
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  And I think that's why there are way more comps between private equity and venture capital than
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  I've seen prior.
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  And there was a good quote also in the threads of you can't buy a car with IRR.
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  The holding periods across private equity, that's been longer too than the usual two to
• 13:27
  three, three to four years.
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  But in most cases, you would expect private equity to have some sort of an exit or a
• 13:32
  landing spot and return money back.
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  We think that's where the differences between the two assets of classes is there is a fair
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  share of fund managers where there is no money returning back at all even if you wait.
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  And look, think also in venture, I've seen some high IRR funds.
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  I'm like, yeah, you had a really huge exit at the beginning.
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  That's actually not a repeatable, controllable thing, whereas in private equity, it is.
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  And I will say this, I've seen the returns for a couple of really long tendered venture funds,
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  and they have high double digit lifetime IRRs.
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  I won't say what fund it was, but they had a very high, well above the S and P rate of IRR
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  over a thirty year period.
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  I'm like, that's actually pretty I'm not gonna say it's repeatable, but that's pretty
• 14:08
  consistent.
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  Well, our final topic covers a research piece from Apollo's chief economist on how new
• 14:13
  tariffs are rippling through The US economy.
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  Firms are reacting fast.
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  Earnings expectations are falling.
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  CapEx plans are being slashed, and inventories were stockpiled ahead of the tariffs.
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  So nearly all early indicators are pointing to a broader slowdown.
• 14:27
  On the consumer side, things aren't looking too optimistic either through the report.
• 14:32
  Sentiment is dropping across income groups.
• 14:34
  People are far more worried about losing their jobs and feeling less optimistic about the
• 14:38
  economy.
• 14:38
  You're already seeing this behavior shift.
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  So folks rushed to make purchases before tariff hikes hit.
• 14:43
  Credit card minimum payments are creeping up, and international tourism is slowing, and
• 14:47
  delinquencies are rising.
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  The report ends with a warning that all of this could add up to that tough combo of slow growth
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  and stubborn inflation, which makes life harder for both policymakers and investors.
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  So early on when news of tariff shifts happened, I know we wanted to be as thoughtful
• 15:05
  as we could about how we talk to our founders about predictions just given the unprecedented
• 15:10
  circumstances we're operating under.
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  Looking at this data and taking into consideration the shifts and changes we've seen
• 15:16
  in the past few weeks, how has your thinking been shaped as it pertains to downstream VC and
• 15:22
  maybe more specifically consumer startup impact?
• 15:25
  Yeah.
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  I mean, I think there was a lot of back and forth beginning.
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  At some point, was like, well, let's just wait for two things.
• 15:30
  One, let's wait to see where these tariffs sort of settle and if they're gonna stick.
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  But we're in a moment where it feels like right now we're gonna live with them for some period
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  of time.
• 15:38
  Who knows?
• 15:39
  By the time we publish this, something could have changed.
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  Second, I tend to go to people who have a good macro view on these kind of things, because I
• 15:45
  think people who understand macro can connect the dots on, well, if this thing happens, this
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  next thing happens.
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  This was one of the first analysis I saw that kind of, like, could connect the dots between
• 15:54
  tariffs and downstream effects on people.
• 15:57
  And I've long believed that in general in business, people are good about insuring
• 16:01
  themselves against known risks.
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  And the things that people can anticipate happening or feel likely to happen, they
• 16:08
  generally have good plans for.
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  It's usually the things that are unexpected.
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  So for example, like, almost no company I knew when SVB happened had really thoughtfully
• 16:16
  prepared for what happens if the company that holds my money goes out of business or there's
• 16:20
  a general bank run.
• 16:21
  The same thing happened in the global financial crisis.
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  Most people are like, well, what happens if the entire financial ecosystem grinds to a halt?
• 16:27
  Most people are like, why?
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  That wasn't something I was insured against.
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  And I think people have prepared for the first order effects of tariffs.
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  Oh, what happens if my input prices go down or go up rather?
• 16:37
  What are we gonna do with our supply chain?
• 16:38
  The thing I like about this rather grim fintech that Apollo put together is there's bunch of
• 16:42
  second order effects that happen, which is what happens to city tax revenue if tourism goes
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  down and the city has a tourism tech?
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  What happens to the airline business if people stop both visiting United States or Americans
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  stop traveling abroad during the summer?
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  What happens to public sentiment if Christmas presents don't get here on time because they
• 17:01
  have to leave the ports in China on boats?
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  And I think there's all of these downstream effects that will happen that I think most
• 17:07
  people, including me, have not fully metabolized.
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  And I feel like there will be things that happen due to tariffs that will impact the
• 17:14
  startup ecosystem that none of us have really insured against or have planned for.
• 17:18
  It's interesting.
• 17:19
  This has been one of the, like, most telegraphed things I've seen where when I've
• 17:23
  talked to VCs, they're generally making the fewest changes to how they operate.
• 17:27
  Yeah.
• 17:27
  You know, during COVID, a lot of people just said, we are slamming the door on new
• 17:31
  investments for a while.
• 17:32
  There's nothing that could come in my inbox that would get me to move.
• 17:35
  SVB, the banking situation was like that, but not for very long.
• 17:38
  But there's period of time people were like, we are closed for new business.
• 17:41
  Global financial crisis.
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  People were like, this is gonna be bad.
• 17:44
  And, know, I told a journalist, it feels to me like the tailwinds and desire to put money to
• 17:49
  work in AI are stronger than the headwinds of tariffs.
• 17:53
  And I wonder if that dynamic will shift sometime later this quarter where people are
• 17:58
  just maybe slightly less enthusiastic about AI and slightly more concerned about tariffs.
• 18:03
  But we still don't yet have a big meaningful company that's in tech world and startup and VC
• 18:08
  world that's been like, tariffs blew up my business.
• 18:11
  Right.
• 18:11
  I think if VC starts seeing that in their portfolio and the the place I could see it
• 18:15
  happen is actually b to b SaaS, where companies are just like, our business is down due to the
• 18:19
  macro stuff, and as a result, we're gonna buy less software.
• 18:23
  I think until it starts to hit in boardrooms of software companies, I think a lot of VCs, my
• 18:27
  sense is there's, like, these tariffs definitely impacts you if you're a hardware
• 18:30
  company, definitely probably impacts you if you're CPG.
• 18:32
  But if you're a b to b SaaS or AI company, to date, the feeling has been kind of, like, maybe
• 18:36
  this isn't as big a deal for them.
• 18:38
  Yeah.
• 18:38
  I think about Shopify Yeah.
• 18:40
  And what the change in traffic will look like there.
• 18:42
  In COVID, they saw an uptick, and it was very good for their business.
• 18:45
  This time around, not sure how that'll shift and change.
• 18:48
  And then I see a lot of chatter within 3PLs, venture backed 3PL solutions, and how to get
• 18:53
  stuff from one end of the country to the next.
• 18:56
  Even if you're housed all your operations in The United States, can get realistic with how
• 19:00
  it'll all work to get your entire product from one door to the next.
• 19:03
  I think that there's going to be so much more impact broader than just even in our own
• 19:06
  precursor land CPG companies that I know are now debating, do we eat the tariffs, or do we
• 19:10
  pass it along to the consumer?
• 19:11
  And even if we ate them, will it still incentivize them to buy if they're delinquent
• 19:15
  on their credit cards for buying food?
• 19:17
  Yeah.
• 19:18
  And I think the other thing is it's clear to me that there was some amount of inventory
• 19:21
  stockpiling.
• 19:22
  So it could be a while before people feel it because there are companies that have inventory
• 19:27
  that they can work their way through that's pre tariff cost of goods sold, and, like, we'll
• 19:31
  see.
• 19:31
  I'm very convinced that whatever the impacts are on the startup it will look obvious in
• 19:36
  retrospect, but it is not obvious at the moment.
• 19:38
  Agreed.
• 19:38
  Well, we are all out of time today.
• 19:39
  Thank you, Charles, for stopping by.
• 19:41
  Thank you to our listeners for hopping in as well.
• 19:43
  Please like and subscribe, and we will talk to you all next week.
• 19:46
  Thank you.
• 19:47
  Bye.
• 19:47
  Bye.