Latest / The Learning Corner by Precursor / Episode #74: Round Names Are Dead, How To Ask For Advice, Private Wealth Goes Direct

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Episode #74: Round Names Are Dead, How To Ask For Advice, Private Wealth Goes Direct · The Learning Corner by Precursor

• 0:00
  Particularly with our portfolio founders, I usually will just ask them, in the absence of
• 0:04
  this conversation, if I weren't available, what would you do?
• 0:06
  And usually, they have an idea.
• 0:08
  Since you kinda know what you wanna do, like, do you wanna talk about?
• 0:10
  Do you want me to push back on your idea?
• 0:11
  Do want me to give you more options?
• 0:13
  Do you want me to, like, poke holes?
• 0:15
  This happens a lot with hiring decisions or termination decisions.
• 0:19
  And usually if I ask, what would you do?
• 0:20
  If the person will say, oh, I would hire this person or oh, I would pivot for sure.
• 0:24
  Sometimes the best thing you do is just what I hear from you is not a lack of conviction and
• 0:27
  clarity.
• 0:28
  To me, you sound quite clear.
• 0:30
  It's the week of April 6.
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  Welcome to the Learning Corner, a Precursor Ventures podcast.
• 0:38
  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
• 0:49
  week.
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  Our first Goodread this week is a piece by Ashley Smith from Vermillion Cliff Ventures
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  written off the back of a TenCrunch article she contributed to on seed round pricing.
• 0:59
  The short version is that round names don't mean much anymore, and Ashley argues that they
• 1:04
  probably shouldn't.
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  Pre seed is sitting around 10,000,000 posts.
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  Seed is around twenty five to thirty million per CartaData, but YC Demo Day companies were
• 1:12
  priced at around 40,000,000 or more, and Sunsee Browns have been priced 10 x that in the
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  headlines.
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  She traces the inflation to a few converging forces, large funds moving earlier, and writing
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  massive checks that distort the benchmark platform bet mentality where investors are
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  pricing for the next AWS rather than the company in front of them.
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  And lastly, what she candidly calls the y c tax.
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  The piece is especially useful for founders with her core warning being that pricing your
• 1:36
  drowned too aggressively is one of the fastest ways to make your next round harder.
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  Because you're not just setting a valuation.
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  You're setting a bar you have to clear in the next twelve to eighteen months.
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  Ashley is pretty direct that the math stops working for smaller funds above a certain
• 1:50
  valuation threshold and that it's pushing funds like hers to back founders even early, like
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  before product and sometimes before they've even left their job.
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  Do you think that that's now a feature of early stage venture or a bug caused by both the
• 2:04
  bubbled market and where we are right now just on valuations?
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  It's a great question.
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  I feel like this post gets written every five years because every five years, it gets
• 2:13
  distorted.
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  I think part of it is that a seed round is anything that people call a seed round.
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  So there are no hard and fast definite mean, we have our own internal definitions, which I
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  think are useful for consistency's sake.
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  But whenever I read these articles, I think about there's two competing forces in venture.
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  I say there are people who are price discipline believers, where, like, entry price matters,
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  and the price at which you get into a company does have a meaningful impact on the returns
• 2:38
  you can generate.
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  And there are people who I think are much more focused or I would say kind of outcome
• 2:43
  maximizers, are that, hey, over time, the scale of winning companies gets bigger and bigger.
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  So entry price is something that you should only worry about if you don't get it.
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  And the answer is both.
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  Like, there's almost, you know, to date, if you invested in Anthropic at anything under
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  50,000,000,000, which is objectively a very large number, you're probably feeling pretty
• 3:04
  good about your investment at this point.
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  And if you invested in SpaceX at even crazy valuations, you still feel pretty good.
• 3:09
  Right?
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  I think the question is, does the presence of outliers change how you should behave on
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  average?
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  And your two choices are like, well, no, outliers are outliers.
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  So on average, entry price does have a pretty profound impact on your returns.
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  But when you're dealing with an outlier company, it doesn't matter.
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  The reason that seed has this dispersion is different people are playing different games.
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  Some people are playing a game where, like, hey, on average, entry price matters because
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  while there are outliers, the vast majority of companies are gonna exit within the range
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  that's known.
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  There will be exceptions, and the question is like, do you make exceptions for exceptional
• 3:42
  companies?
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  And there are some people who say, I only want the exceptional companies, and the exceptional
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  companies are born into life expensive.
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  So to me, this is the other question, which is, is there a correlation between entry price and
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  exit price?
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  And some people have done research to say, yes.
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  The very best companies start off life blessed and expensive.
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  They start off expensive and they stay expensive.
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  That happens sometimes.
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  And in other cases, companies start off cheap, become expensive, and stay expensive.
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  And so, you know, there was that thing floating around with Brian Chesky where he was like, we
• 4:10
  were the most expensive company in our OIC batch, and that got done at 3,000,000,000.
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  So to some extent, if you'd asked me five years ago, does $25,000,000 post money valuations
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  work for seed funds?
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  I would have said no.
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  And today, I'd say, I think it does.
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  What it all comes down to for me is I kind of have in mind multiple that I'm trying to
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  underwrite.
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  It's usually 200 x price appreciation minimum on a new deal.
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  And so the more expensive the company upfront, the more I have to believe that that company is
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  going to be exceptional.
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  And if at some point it isn't exceptional, it probably won't work.
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  And as one of our LPs told me, he said, I don't really see much difference between losing all
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  your money on a deal that you do at five posts and a deal that you do at 50 posts.
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  You still lost all of your money.
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  The difference is the amount of money you can make if you get it right on five posts versus
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  50 posts is pretty extraordinary.
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  And going back to how Ashley's approaching sourcing, and I know a lot of funds are doing
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  this.
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  We talk about this a lot.
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  The amount of outbound that's happening.
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  Cold is increased dramatically.
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  It's an entire sourcing mechanism for VCs that definitely didn't exist years ago, and
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  certainly, outbounding people who, you know, still have their jobs at their current
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  companies and haven't left and haven't become founders.
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  From your standpoint, how do you kind of think about that as a sourcing mechanism to finding
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  the best founders?
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  The one nice thing about outbound for a lot of VCs is you don't have to think about what are
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  the incentives of the person who are introducing me to this company.
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  Are they introducing me to this company because they're already an investor?
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  Are they introducing me this company because they're an angel?
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  Are they introducing me to this company because they're somehow getting compensated?
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  An outbounder, like, I picked the company and I sent the email.
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  I think the other reason you have all this dispersion, seed investing used to be something
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  that only seed funds did, and most seed funds had the same fund size returns parameters.
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  And so you kinda kept everything in the same lane because all of the funds had the same
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  constraints.
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  And then when you inject in y c, you inject in multistage funds, suddenly you have a bunch of
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  people who have different objectives with seed investing and have different talents as for
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  entry price.
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  And so I think outbound to me is, like, another way for people, to ask this point, to try to
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  get in front of price appreciation.
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  Yeah.
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  It's like if I can find these people before their fundraising, if I can find these people
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  before other people know they're great, if I can just find these people early, then I've got
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  a shot at getting access to them before the world knows how great they are.
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  Then the question becomes like, well, what what makes for a good outbound message?
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  And I think sometimes it's a domain from which it comes.
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  So if it comes from the domain of a fancy DC fund, I think a lot of founders will pay
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  attention.
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  But I also think founders are getting smarter about outbound.
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  They're beginning to understand what outbound is, that it isn't that maybe they're not so
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  special, that maybe they're part of a list or part of a scrape or part of a data dump that a
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  VC got their hands on, and that's why they're giving this message.
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  And I think in the end, what's really happened is the highly sought after founders, for
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  whatever reason, have more choice.
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  More choice in whose money they take and on what terms and how much than they ever have had
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  before.
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  Ashley does pose a question at the end saying, like, should we just get rid of round names
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  altogether just because the round names stop making sense when the benchmarks themselves
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  aren't useful?
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  From your perspective, what do you think?
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  In the land of precedes c through series a, I would say.
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  I would like to get rid of round names, but I don't think that's gonna happen.
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  They serve a purpose as a signifier.
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  What happens now though is, you know, I will sometimes send the same message.
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  I'll tell one person, hey, this company is raising a 2 to $3,000,000 seed round when I
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  know that's the round size that makes sense for their firm.
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  There are other multi stage firms that are like, hey, this company is raising a
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  $10,000,000 seed round.
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  I wouldn't send the $10,000,000 seed round intro to a firm that focuses on 2 to $3,000,000
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  seed rounds because they'd be like, that's too big for me.
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  It's also caused me to be a bit more flexible in both maximum round size that I'll consider
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  and maximum valuation because some of the companies I'm interested in are not raising on
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  terms that have historically made sense for us, but where I think those companies are good
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  enough that the terms we're raising on will make money.
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  Well, our next topic is a piece by Oren Hoffman titled How to Ask for Advice Without Wasting
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  Everyone's Time.
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  And it's a really good breakdown of what separates people who get real useful guidance
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  from the ones who leave every conversation with nothing.
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  The core argument is that vague asks are the enemy.
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  Showing up to a conversation with, I'd love to pick your brain.
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  It's essentially asking the other person to do all of the thinking for you.
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  Oren's rule is simple.
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  If you cannot articulate a specific question, you are not ready to ask it yet.
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  And before you bring something to a person, you should first bring it to AI because people
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  should be reserved for judgment calls, pattern recognition, and lived experience you simply
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  cannot prompt your way into.
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  He also makes the case that advice askers should be surgical about who they go to for
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  what, treating their asks like a portfolio across the people best positioned to answer
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  each specific question.
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  The piece closes with what might be the most overlooked piece of the professional etiquette,
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  closing the loop, telling someone what you actually did with their advice, even if you
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  went a different direction, is what turns a one time ask into a really long lasting
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  relationship.
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  Oren in the piece makes this distinction between asking for advice and asking for
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  validation, and says most people can tell the difference within sixty seconds.
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  Yeah.
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  So from where you sit, how often do you feel like someone comes in already knowing what they
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  want to hear?
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  A lot of the time.
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  Particularly with our portfolio founders.
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  I usually would just ask them, in the absence of this conversation, if I weren't available,
• 9:21
  what would you do?
• 9:22
  And usually, they have an idea.
• 9:23
  Then the only question is, since you kinda know what you wanna do, like, do you wanna talk
• 9:26
  about?
• 9:26
  Do you want me to push back on your idea?
• 9:28
  Do you want me to give you more options?
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  Do you want me to poke holes?
• 9:31
  What what can I do?
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  This happens a lot with hiring decisions or termination decisions or a lot a lot of these
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  CEO level things that the founders who deal with, usually they know.
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  And usually if I ask them, like, what would you do?
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  If the person will say, oh, I would hire this person or oh, I would like pivot for sure.
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  Then I'm like, well then you sort of know.
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  Then sometimes the question is like, well, what's holding you back from making this
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  decision right now?
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  And so, well, I mean, I don't know.
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  Maybe you give more time, maybe this.
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  And I'm just like, you sound pretty convicted to me.
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  Sometimes the best thing do is just what I hear from you is not a lack of conviction and
• 10:00
  clarity.
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  You to me, you sound quite clear.
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  One of the things I thought about Oren Oren is a great thinker.
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  Of the things I thought about in this post is during COVID, during the boom of micro VC small
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  funds, I had so many people who were like, I wanna pick your brain about starting my fund.
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  And me, every one of these calls was the same hour.
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  It was fifty nine minutes on choosing a fund admin and an LPA and LP targeting, and then one
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  minute at the end on what made that person special and unique.
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  So I basically just made a well, it's quite long, multi hour long video series.
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  That's video, text, or audio, whatever whatever you want.
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  And I tell people, hey, I'm happy to talk to you about your fund.
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  I have these videos.
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  I'm gonna give you an hour.
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  If you watch the videos first, we will have a much better conversation because we will spend
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  more time talking about the things that are specifically of interest about your fund.
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  If you don't watch them, I will still give you the hour, but there's only hour you're gonna
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  get.
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  And we're gonna kinda spend it on basic stuff.
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  And the other funny thing is I've had three people who've watched the videos and said, my
• 11:05
  conclusion is I don't wanna start a fund.
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  Listen to all of this.
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  It sounds like it's not as much about investing as I thought.
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  It's a lot more about firm management and fundraising.
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  I'm like, great.
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  Well, do the videos serve the purpose, which is we didn't even have to have a conversation.
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  And I built that thing because I realized I was having the same conversation with people over
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  and over.
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  And I wanted to give people who hadn't self qualified themselves yet a tool, other than
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  say, like, come back to me when you figure it out.
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  I'm like, hey, here's something I put together.
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  Seems to help people.
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  You should check this out.
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  And it's been a really useful tool.
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  And there's a lot of there's a lot of times when people will ask me, oh, I want pick a
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  brand.
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  I'm like, well, what what do you wanna know?
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  What's the thing you wanna talk about?
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  I've also found sometimes I'll tell people, he has a point that, like, you wouldn't ask
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  someone who's an excellent skier about the best golf courses in America.
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  Sometimes people ask me questions.
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  I'm like, I don't know anything about how to get into private equity.
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  Like, I don't.
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  I might have a friend if you send me something qualified.
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  I had one of these experiences lately that's, like, very much in line with what Orin
• 11:59
  mentioned.
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  I was at an event, and I met a guy, and he's like, hey, I noticed you know a bunch of people
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  I know at OpenAI.
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  I'm interviewing there.
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  He and I talked for, like, five to ten minutes.
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  If I sent you something, could you forward it on to your friend at OpenAI?
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  I was like, sure.
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  Happy to.
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  So he sent it to me, and I wrote to my to friends at OpenAI.
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  Was like, hey, I met this guy at an event.
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  He seemed seemed pretty good.
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  We had a good conversation.
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  He's applying.
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  He asked me to put in a nudge.
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  I forgot about it.
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  Three weeks later, he sent me a text.
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  He's like, oh, I got the job at OpenAI.
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  I think what you did probably helped.
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  Just wanted to, like, let you know I got the job.
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  Same thing.
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  I interview candidates for our portfolio companies.
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  I always tell them, like, even if you decide not to join this company, I'd love to hear what
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  you decide to do in the end.
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  I do the same thing.
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  I try for every person who sends us a intro for a founder to meet.
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  I always try to send them, here's the outcome, either we invested or we didn't.
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  And if we pass, here's the actual email I sent to the founder so you can see what I told them,
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  and you can judge whether it was useful or and I'll be like, oh, this is great.
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  Thanks for letting you know.
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  Most people don't tell me what happens with these intros.
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  One thing that you said also is for advice givers, knowing when you don't have something
• 12:58
  valuable to say and just saying that outright, just being upfront.
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  I don't have a specific perspective on it.
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  I think venture is notorious for people feeling like they have to have an opinion on everything
• 13:08
  or they have to be able to like nudge and find a connection into giving output.
• 13:12
  I actually think it from being on the operating side, when you can quickly tell me I am not the
• 13:16
  right person to speak to about this, that's equally as valuable because it makes the wild
• 13:20
  goose chase so much shorter.
• 13:21
  Yeah.
• 13:22
  And I certainly have people ask me questions or ask me about even our founder sometimes, and
• 13:27
  the founder asks, they'll be like, does anybody know somebody at such and such company?
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  I'm like, I don't know anybody at that that German insurance company.
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  I don't.
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  Sorry.
• 13:35
  So I do think in general, it's it's helpful to be able to know your and also know the domains
• 13:40
  where you're helpful.
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  And like sometimes founders like, oh, I have like a product question for you.
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  I'm like, well, depending on the product, I may or may not have a perspective on this.
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  He argues that the best advice askers treat it like a portfolio.
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  So what I mentioned in the intro, they're really surgical about who they go to for what.
• 13:57
  Is there more a version of where you've seen founders get it wrong?
• 14:02
  More specifically around, like, maybe spreading too thin and gathering too many opinions.
• 14:06
  I'm speaking more specifically about, like, deck feedback when founders kind of reach out
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  to, like, 16 different investors, everyone on their cap table.
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  I just feel like we can be a little bit more strategic about what we go to for what things.
• 14:16
  One thing that's worth remembering is there are some things that are highly, highly, highly
• 14:21
  subjective deck feedback.
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  There maybe isn't an objective answer to deck feedback other than, like, everybody likes
• 14:28
  different stuff.
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  And if you're going to ask a bunch of people for deck feedback, you should be prepared to
• 14:33
  get conflicting advice versus, you know, what's the right size option pool given my hiring
• 14:38
  plan?
• 14:38
  You're more likely to seek consensus in that answer, if that makes sense.
• 14:43
  And so I do think it's worth understanding what is the range of allowable and acceptable
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  answers for the question that I'm asking.
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  And if it's a really subjective taste based thing, you shouldn't expect convergence.
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  I also always tell our portfolio company vendors, I'm like, who on your cap table do you
• 15:00
  think is the best person?
• 15:01
  If you could only ask one person, who would you ask?
• 15:03
  You don't have to socialize everything with every investor every time.
• 15:08
  You can just decide, oh, these two people have good instincts on people.
• 15:10
  I'm go with these two oh, these two people have good instincts on fundraising.
• 15:13
  I'm gonna go with these two people.
• 15:14
  Oh, these two people have good instincts on ex you don't have to socialize everything with
• 15:17
  everybody.
• 15:18
  Our last piece is an episode from TechCrunch's Equity Podcast featuring Mitch Stein and Ari
• 15:24
  Schottenstein from Arena Private Wealth.
• 15:26
  It's a Midwest based firm that just led a $230,000,000 series b into an AI chip startup.
• 15:33
  In February alone, family offices made 41 direct investments, nearly all tied to AI.
• 15:38
  The broader trend here is that private wealth and family offices seeking other paths to
• 15:42
  access venture returns beyond being LPs and funds themselves where they're subject to fund
• 15:47
  structures and fee layers.
• 15:49
  They want direct exposure.
• 15:50
  They want ownership, and increasingly, they have the infrastructure and the appetite to go
• 15:53
  to it.
• 15:53
  The conversation gets into what arena is actually building, how they source deals, and
• 15:58
  what the due diligence process looks like when you're a private wealth firm playing in a space
• 16:01
  that institutional VCs have traditionally owned.
• 16:04
  Family offices going direct really isn't entirely new.
• 16:07
  But definitely, the scale and speed here feels different, especially just on the podcast
• 16:11
  itself when we were listening, and certainly with AI as the magnet, which they flow through
• 16:15
  a lot in the piece.
• 16:16
  From your vantage point, does it feel like a structural shift or more of a cycle driven
• 16:22
  moment in that everyone does want a more concentrated piece of the hottest thing?
• 16:26
  Can it be both?
• 16:27
  It's maybe both a top of market activity and a change.
• 16:30
  You know, Megan from Altimeter, I think has some of the best insights on LP stuff, was
• 16:35
  like, hey.
• 16:35
  Part of the reason you're seeing this decline in fund flows to VC funds is LPs kinda know the
• 16:40
  seven to 10 names, and Samir from Alkates written about this and others.
• 16:43
  The LPs know the half dozen to a dozen companies they really feel like they need to be
• 16:47
  in.
• 16:48
  They can get access to those companies directly.
• 16:50
  So you're like, well, why would I wanna go invest in a fund and have to deal with the long
• 16:54
  hold period when if there's like a handful of names I really want?
• 16:58
  I'm like, well, in some cases, you're paying with all the layered fees, crazy fees to get
• 17:02
  access to those companies.
• 17:03
  And I think in some cases they're like, I don't care.
• 17:05
  I just wanna be in Anthropic, and I wanna be in SpaceX, and I wanna be in OpenAI, and I wanna
• 17:09
  be in David Ritz.
• 17:09
  And I don't really care.
• 17:10
  And I think every time you have one of these inflection points it happened in the Uber
• 17:15
  Dropbox in that era too, but that was more secondaries than SPVs.
• 17:18
  And it turned out that in many cases, the prices that the last private money in paid were
• 17:23
  higher than the trading price in public.
• 17:25
  And so I think we're in one of those moments right now.
• 17:27
  We're gonna we're gonna learn a lot.
• 17:29
  If SpaceX and some of these companies go public as planned, we're gonna learn very soon whether
• 17:34
  we got the pricing right
• 17:36
  Yeah.
• 17:36
  And whether, like, the pricing of those is right.
• 17:38
  But I do think there is so much money coming into private assets.
• 17:42
  You're gonna see more people running experiments and just saying, well, maybe we
• 17:45
  don't need to go the VC route.
• 17:46
  Maybe we can go direct.
• 17:48
  And also, me, I think it's worth mentioning, some of these companies just have insatiable
• 17:51
  appetites for capital, And that's the other dynamic here.
• 17:54
  Think for b to b software companies, maybe other than Databricks, most of them don't have
• 17:58
  the capital needs that sort of would make them going outside of traditional venture either
• 18:02
  necessary or attractive, but the AI companies need all the money they can get their hands on.
• 18:06
  So some of these new channels are actually coming online at precisely the time when these
• 18:10
  companies need access to new pools capital.
• 18:13
  I think that's a good call out because, I mean, we've seen within our own portfolio family
• 18:17
  offices coming in and leading rounds for industries where investors on the institutional
• 18:22
  venture side have kind of fallen out of favor in that, and they're willing to take on longer
• 18:26
  holding periods for it.
• 18:27
  And they've been really strategic in helping them expand and grow, and and they are strong
• 18:32
  partners.
• 18:32
  But it just kinda depends, I guess, if you are the the private investment or family office
• 18:36
  firm that's doing this, how much work you want to do to source the right deals.
• 18:41
  Yeah.
• 18:41
  Because there's different legwork required in each industry.
• 18:45
  I think with AI, I mean, there's a bunch of, like, really well known family offices that if
• 18:49
  they wanted to get into any of the name brand companies, they could just because they're the
• 18:53
  the name and the domain name of who they represent.
• 18:55
  The access is just as strong as a tier one mega fund.
• 18:59
  But if you're not that, I do I do wonder what does that diligence process look like when
• 19:03
  you've traditionally done something entirely different and relied on institutional VCs to
• 19:07
  run that process, and now you're Yeah.
• 19:09
  You're in housing it yourself.
• 19:11
  And I know that in the podcast, they did talk a lot about leaning on the co investors around
• 19:16
  the table to help them do the diligence.
• 19:18
  Wanted your opinion on that.
• 19:19
  What might be the pros and cons of relying too heavily on that?
• 19:22
  You know, we co invest with our LPs with some frequency in the later stage deals, and I think
• 19:26
  it's important that everybody understands what they're signing up for.
• 19:29
  I think the one thing is in a fund, especially in a fund with a larger portfolio of cars, you
• 19:33
  lose a little bit of money a lot of times, and you don't see it because the line items go
• 19:38
  away.
• 19:38
  When you do a concentrated investment in a single company, when it works, it feels great.
• 19:42
  When it doesn't work, it can feel awful because it's a concentrated loss too.
• 19:46
  And so I do think it's important that the new capital investing understand that even late
• 19:50
  stage companies can be bad investments in two ways.
• 19:52
  One, the companies can fail.
• 19:53
  That's lower probability.
• 19:54
  But second, you can bid them up to prices where it takes a long time for the companies to grow
• 19:59
  into those valuations.
• 20:00
  And right now, all of this stuff only goes up.
• 20:03
  Every time you've passed that around for one of these companies, the next one's gotten done at
• 20:07
  a higher price.
• 20:08
  And that is the kind of dynamic that really pulls people in.
• 20:11
  You would think family offices should be just up to date around like secondaries selling off
• 20:16
  positions as institutional VC should be?
• 20:18
  Or
• 20:19
  I don't think it's usually as import I think one thing is I've met some family offices who
• 20:23
  are extremely sophisticated.
• 20:24
  They're LPs in the biggest and best funds.
• 20:27
  They're close to the GPs in those funds.
• 20:29
  They've met the underlying companies themselves.
• 20:31
  They have a point of view.
• 20:32
  They're effectively like a VC fund without a brand name.
• 20:35
  I've met other people who are like, oh, I did some diligence on this company with a GP of
• 20:39
  mine who's not an investor of the company and doesn't have any additional insights.
• 20:43
  I'm like, well, I'm not sure that that is as valuable as, you know, the most sophisticated
• 20:47
  family offices we work with could do this job.
• 20:49
  It's just like they have a million other things to do too.
• 20:52
  So they pick a handful of managers that they trust.
• 20:54
  And when those managers come to them and say, I have a company that's really working, they pay
• 20:58
  attention.
• 20:58
  Well, we are all out of time today.
• 20:59
  Thank you, Charles, for jumping Thank you to our listeners for jumping in as well.
• 21:03
  Please like and subscribe, and we will talk with you all next week.
• 21:05
  Thank you.
• 21:06
  Bye.