Latest / The Learning Corner by Precursor / Episode #73: Startups Need Better Stories, The Value-Add LP Era, Agile Funding Is Back

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Episode #73: Startups Need Better Stories, The Value-Add LP Era, Agile Funding Is Back · The Learning Corner by Precursor

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  I think there is this tension that you highlighted, which is I think startups are
• 0:03
  like, we very much wanna put our customers front and center, but we also very much wanna
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  be in the prime position in that market map.
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  And being on that market map requires being loud and attracting attention to us.
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  And I think attracting attention to yourself is something you can do quickly.
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  Highlighting your customers takes time, attention, and care.
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  If you're like, I want the just add water solution, the easiest thing to do is to try to
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  attract attention to the company.
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  It's the week of March 30.
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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 RGP 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 read of the week is a piece from Ashley Meyer from Coalition on her Substack
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  titled, we need better stories, a timely call to action aimed directly at startup founders.
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  Ashley's core argument is that the tech industry's biggest players have essentially
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  forfeited the narrative because their storytelling is built for investors, not
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  people.
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  And the headlines that reach mainstream audiences as a result range from depressing to
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  doomsday.
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  She makes the case that startups actually have three structural advantages right now.
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  Their survival depends on building stories around customers, not cap tables.
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  They can embrace uncertainty in ways that a trillion dollar CEO simply cannot.
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  And in a fragmented media landscape, they can find and own niche audiences that the
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  hyperscalers also cannot.
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  She also points out that the companies winning the last few years made a fundamental branding
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  error by casting themselves as the hero of the story when historically the best brands, think
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  Apple, think Nike, made someone else the hero.
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  Ashley closes with a thought that in a moment where optimism is actually the contrarian
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  position, founders who are willing to tell a bigger, more honest story about who wins, if
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  they win, have a genuine opening to breakthrough.
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  I do like that last piece, Ashley's question she poses to founders in search of these better
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  stories.
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  Quote, beyond your cap table, who wins if you win?
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  When you construct your narrative with someone or something else as the hero, your own growth
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  becomes much more powerful.
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  Charles, how can founders accomplish this without coming across as disingenuous?
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  I think if this is done right now, you likely, as a founder, also have to address the fact
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  that there's growing skepticism about the ulterior motives and prioritization that exists
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  as your core as an AI startup.
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  I just think about a lot of the billboards I saw in San Francisco a year and a half ago.
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  It's like, these are not comforting messages for normal human beings.
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  Fire all the humans.
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  Never hire a human.
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  Like, these are not really narrative arcs that are gonna pull people in.
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  They're just not.
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  And I think at times, it's not even just that tech talks to cap tables, but tech just talks
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  to itself.
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  You know, I think if you think what are the things that are really animating people about
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  AI, it's job loss and human irrelevance.
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  And I think there are some companies whose message is this is inevitable, and we are going
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  to usher this in as quickly as possible.
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  It's not really a recipe for popularity.
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  I think even you look at the the messaging differences between Anthropic and OpenAI, and
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  neither of those companies I would describe as, like, humble, but the messaging with Anthropic
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  at least has the hint of restraint.
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  Also, people aren't dumb, and I think sometimes I hear these messages like, there's nothing to
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  fear.
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  This is all gonna be fine.
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  Creative destruction.
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  We'll explain that to somebody who's, like, 24 year old college graduate kid works in a call
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  center or in a customer support role.
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  That person is on the front.
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  Like, you can't really gaslight that person because they're watching this happen to them in
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  real time.
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  And so I think there's actually, like, two issues.
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  You know, Ashley is a very talented communications professional from her pre and
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  investor.
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  But I think there's, like, two issues.
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  One is the narrative, which is how do we talk about these changes and what they mean for
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  people.
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  And the other one is, like, what's the reality, which in some cases probably is hard to spin.
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  And I've been spending a lot of time reading about these data center protests and these
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  other ways that people are trying to find a way to have agency against AI because AI feels like
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  this amorphous Leviathan that's like happening to them.
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  And I think people are hungry for some way symbolic or real to feel like they're doing
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  something to maybe slow this stuff down.
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  And I just don't think most of the messaging I see that comes from tech companies ever asked
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  the question, what would a normal human being who doesn't work in AI in a nine four x x x zip
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  code think of this message?
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  I do like Ashley's points throughout the piece that for these massive companies, they
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  absolutely have to exist in the doomsday spiral, in the certainty that this is where
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  it's headed because they are speaking directly to investors.
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  They're trying to send out signal to the public markets ahead of a possible IPO before the year
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  closes.
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  That piece, I think, gets lost to obviously the everyday consumer.
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  And then I think normal everyday startups see the behavior of the larger tech companies and
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  think that they have to mirror the same stuff.
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  So that's kind of how the pattern matching begins.
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  Have you started to see founders try to make that narrative distinction when they come to
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  pitch us?
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  How does that actually look in real life?
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  And is that a real advantage in attempting to walk this line to draw in attention for
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  fundraising to then go off and build for the ideal customer?
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  Like, can can you just do two things, basically, that are separate?
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  I think the irony is Ashley's right.
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  There are good stories.
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  We have companies in our portfolio and others that I've met where AI is having a huge impact
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  on a small business person who's able to now do a lot more than they could before through
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  technology.
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  There are lots of good examples of the way that this technology is making things better, and I
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  don't think people have figured out how to tell those stories.
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  And I also think one way people have sought to break through the noise is to make wild,
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  ridiculous claims because those claims get attention on x Yeah.
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  And then they get debated.
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  And so I think what Ashley said is also good advice for VCs.
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  Because I've always felt like, hey, if we're gonna promote our portfolio company's progress,
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  the focus should be on them, not us.
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  It shouldn't be, like, a three paragraph essay about we're so brilliant for having given this
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  company money.
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  That's about you, not about the company.
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  And so I also think in general, for anybody who's trying to, like, lead a movement, shining
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  a light on other people is a great way to do it.
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  Yeah.
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  And so I think people would be well served to listen to what Ashley's saying.
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  Because I I think it'd be harder if I'm like, there are actually no good narratives.
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  There's tons of them.
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  They're just not organized or not told well.
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  And I would say that the protagonists of those stories are heroes.
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  They are people who are, like, having their lives changed through technology and that, you
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  know, like, the for all the criticism of the drug companies, the drug companies understand
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  that.
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  If you're gonna sell a very expensive cancer drug, it sure does help to have cancer patients
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  talking about how this drug saved their life.
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  Ashley mentioned Apple and Nike as these glowing brands from previous times that they
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  made the hero other people, not themselves.
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  Yeah.
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  And then kind of calls upon startups to try and do something similar, which I agree with.
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  Those companies products companies.
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  They're consumer heavy, and so you can touch, feel, and really relate to the products.
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  Like, how do you bring that same energy if you're not a consumer start up?
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  I mean, you mentioned a couple of companies that I know in our own portfolio that directly
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  touch small businesses.
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  You know, I look at the granola bus and billboard campaigns in San Francisco.
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  I think they're trying to make granola feel like a human superpower.
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  For you, I think there are other products that I've used that are trying to help people be
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  more responsive to the people that they care about or to send better merch.
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  I I think putting you about the hero the story, you can do it in b two b too.
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  You know, I tell people, like, what is a customer case study done right other than
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  making one of your customers look like a rock star for using your product?
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  And I think there is this tension that you highlighted, which is I think startups are
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  like, we very much wanna put our customers front and center, but we also very much wanna
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  be in the prime position in that market map Mhmm.
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  That, like, whatever VC is building right now.
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  And being on that market map requires being loud and attracting attention to us.
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  And I think attracting attention to yourself is something you can do quickly.
• 7:56
  Highlighting your customers takes time, attention, and care.
• 7:59
  And again, if you're like, I want the just add water solution, the easiest thing to do is to
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  try to, like, attract attention to the company.
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  I think a lot of this will happen also in, like, health care infrastructure too.
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  Like, you talk to a lot of founders who are building there right now, a lot of them say the
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  same message of, I'm not trying to remove specific people of the care continuum.
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  I'm basically trying to make them refocus their energy and the things that require their energy
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  and let them build care that's personalized.
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  I want this to be almost invisible and just elevate And everyone's I think that's an
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  industry where it's Well, spot on next piece is an essay from Pavel Prada at Murph Capital
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  titled The Value Add LP Era.
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  And it makes a compelling argument that the value add model that transformed venture
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  capital twenty years ago is now playing out one layer up at the LP level.
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  The court thesis is a familiar one where for decades capital was the scarce resource in
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  venture, so GPs were largely passive check writers.
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  But as capital got commoditized and the best founders started selecting their investors, GPs
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  had to become genuinely useful to stay competitive.
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  Pavel argues that that same dynamic is now unfolding for LPs because sub a $100,000,000
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  emerging managers spend roughly 40% of their time on fundraising and IR alone.
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  And an LP who can compress that timeline with introductions, narrative support, or
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  operational help is giving a manager something more valuable than just a bigger check.
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  He also makes the case that AI is flattening diligence across the board.
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  And when everyone is processing the same data with the same tools, a durable edge becomes
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  access and reputation, not information.
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  The piece touches on the same conclusion Venture reached twenty years ago.
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  The allocators who win are the ones that GPs are calling before they're in market, not
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  because they have better models, but because they've actually been helpful.
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  His core parallel is that LPs are roughly where VCs were in 2005, right when folks showcased
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  other structures and offerings that made the passive check writer model irrelevant.
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  Do you think that that analogy holds up?
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  And do you think most LPs are actually equipped and structured to deliver, quote, unquote, real
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  value to their GPs portfolios or GPs themselves?
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  It's interesting.
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  I think there are some value add LPs.
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  I will say this.
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  There is a dynamic where getting into particularly new hot competitive funds is hard.
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  And last year was the first year I had some of our LPs call me and say, can you put in a good
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  word with this GP?
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  I was like, wow.
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  You must really wanna be in their fund.
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  And of course, was happy to do it.
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  I think the difference is LPs and GPs actually do live in different worlds.
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  One of the things I'm consistently surprised by is how much more one of my favorite LPs is is,
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  like, we don't hunt in packs the way you do.
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  If you're a GP, you have other GPs that you like co investing with that you're on boards
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  with.
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  Like, there's a lot of this, like, interaction among GPs that's just part of our job.
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  And if it isn't happening, we find ways to manufacture it and make it happen.
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  And when I talk to my friends on the LP side, they're just I I'll I'll meet two allocators
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  that both work for foundations in the same city.
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  And I'm like, well, you guys must hang out.
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  They're like, no.
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  How?
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  They're like, we just don't.
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  And so I think the nature of the work is different.
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  Also, think the things that are helpful as a Jeep, at least from my perspective, things that
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  LPs can do are helpful.
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  One, help you see things about your own pitch story or organization that are getting in the
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  way of other LPs saying yes that maybe you don't see.
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  In the same way that a good VC can look at a start pitch deck and say, let me tell you why
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  this deck isn't working.
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  In the same way with VC, there are a few very high signal LPs where if you get them, it's a
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  signal to other people that like, oh, those people see everything and have a good have good
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  judgment if you have them.
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  It's great.
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  And I think good LPs really help you think through future of the firm, organize like, big
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  strategic decisions.
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  They really can.
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  But I read this post, I was like, I really want the world to be this way.
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  I'm not entirely sure that it will be that way on average for every GP.
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  And I think who's gonna benefit from this ironically is gonna be just like in startups.
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  The premium tier, most highly sought after managers are going to be able to ask harder
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  questions of LPs.
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  You know, one thing that would be hugely value add is, why don't you just agree to do my next
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  three funds?
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  Agree to do it today.
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  That would be a huge value add for the GP.
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  Yeah.
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  Because now you know you've got this person locked in, and I don't think we will see the
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  same level of frenzied competition by LPs to get into funds in the same way that we've seen
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  GPs compete to get into the hottest startup names.
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  That was a thought that I had that I wanted to push back on because the FOMO concept
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  materializes different.
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  For LPs, like, there are not as many cons oversubscribing a fund that there are in
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  oversubscribing around.
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  Like, there's just more fees.
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  Like, for founders, there's dilution risk.
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  There's all these other things that you can kind of basket in.
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  So is that kind of where you're coming from?
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  Like, the full class is structurally different.
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  I I think also, like venture, you know, a big part of the reason we have this value add is
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  Andreessen sort of came in and raised the expectations across the industry of, like, what
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  you should get from your VC, but not to get all MBA.
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  That's, like, a good challenger strategy.
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  Like, if everybody else isn't doing this and I'm a new brand, how do I differentiate myself?
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  Mean, candidly, when Screentor got started, I think there were some ideas about there are
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  some things we could do as a as an LP that weren't being done in the same way,
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  predominantly mostly, like, having more GP involvement in the decision making and review
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  of prospective managers, and also trying to foster a community on the back end that I think
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  are valuable and are different than what other LPs do.
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  And so I do think that, like, there are some people I've met, I won't name them because
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  they're they're rather private, who are legitimately raising the bar of what GPs can
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  expect from their LPs.
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  Okay.
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  I need one person.
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  For me, like, the team at Virtus has raised my expectations bar for what a really supportive,
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  helpful, good LP can do to help make your life better as a GP.
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  In the same way as a founder, not everything that a GP or a board member does to help your
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  life, is a strategy thing.
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  Sometimes it's just like taking you out to dinner and letting you vent.
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  Sometimes it's helping you see something that you don't wanna see, but like doing it in a way
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  that gives you like, it's not all these, we've closed the candidate for you or we like
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  retweeted your blog post.
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  It's not always those things.
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  Anything else that you feel like from a GP perspective would genuinely add value from an
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  LP that might be different from people who
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  would expect?
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  One, at least in my observation, one fundamental difference.
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  A really well networked GP can always get you access to capital that you don't have.
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  They they will always be able to find someone in their network who doesn't know you who will
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  invest in their company.
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  I have found there are relatively few LPs who can make direct intros to other allocators who
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  will then follow their lead.
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  Again, because their business isn't
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  Each strategy is completely different.
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  Yeah.
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  And if you think about it, if you're an LP in a fund, if you're on the LPAQ, maybe see the
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  other big investors couple times a year, and then you see them at the AGM.
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  So maybe you get two or three touch points.
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  And a company where I'm really involved, I'm talking to my co investors at least once a
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  month.
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  It's just a different rhythm and a different intensity.
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  Well, our last piece of the week is a LinkedIn post from our friend Jenny Fielding at
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  Everywhere Ventures.
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  In the post, Jenny is making the case that we are firmly back in the era of what Paul Graham
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  originally called high resolution fundraising.
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  The idea that instead of raising one large round all at once, founders raise capital in
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  smaller tranches as they hit milestones and generate momentum.
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  We saw this approach explode during the pandemic when founders were stacking safes in
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  real time and then watched it kind of fall out of fashion when the market corrected in 2022
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  and investors demanded a little bit more structure.
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  But back in today's age, Jenny argues the pendulum has fully swung back.
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  And in an AI driven world where a two person team can build a feature, sign a pilot, and
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  increase their company's value in the time it takes a traditional VC to begin their standard
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  diligence process, agile funding just might make more sense.
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  She does flag that the approach comes with real risks, including messy cap tables and safe
• 15:30
  stacks that can create almost like debt sandwiches down the road.
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  But our bottom line is that if you have the data, the customers, and the velocity, you may
• 15:37
  not need to wait for a lead investor to give you permission to grow.
• 15:40
  I wanted to hear your perspective on this type of fundraising because I think we've seen it
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  play out in so many different ways here.
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  More specifically, are there specific tells that indicate that a founder or a company is a
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  strong candidate to approach capital raising in that more agile manner than others.
• 15:55
  Yes.
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  I'm seeing this in full force again at YC.
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  And in some cases, I'm like, what's the point?
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  Okay.
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  You raised at eight.
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  Two weeks later, you wanna raise a $100 at ten.
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  You're saving 25 bps of dilution.
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  Is it really that important?
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  To either one of us, is it that important?
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  The thing I found is that you end up with this very weird cap table with, like, 17 safes all
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  with different caps.
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  And if you think it's hard for founders to keep track of a bunch of safes with a single cap,
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  it's really hard.
• 16:23
  And then you get in this to this question of, like, well, what matters if someone's like,
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  well, we signed a pilot deal with this company, so I wanna raise a higher valuation.
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  I'm like, pilot?
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  What does that what does that even mean?
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  What are you even talking about?
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  And so I think it comes down to we are in a world, I think, with AI where there's a lot of
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  I think every time this happens, it's almost always because of FOMO.
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  It's always investors feeling like, if I don't get into this thing, it's gonna run away from
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  me, I'm never gonna catch it again.
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  And so if I have to pay this escalating stair step thing, I'll do it.
• 16:51
  And I think in the end, for most founders, I actually think it's the wrong idea, but I will
• 16:55
  not win that argument.
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  And so I think I've seen some companies where, like, the step up is, like, quite meaningful.
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  Like, I've seen y comedy companies where the valuation doubles after demo day, and, like,
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  I'm not entirely sure, like, why.
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  Other than the only way this works is if you as the founder have the leverage to say this is
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  the price, and you will either pay it or I won't include you.
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  And most founders don't have that leverage.
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  Some do.
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  And I think the ones who do have it use it, and they use it aggressively.
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  I mean, whole premise of making it successful is based on the assumption that there will be
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  continuous interest on your company, and it will grow in a period of time that you can
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  forecast.
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  Because if you miss out on any part of that interest in the next, like, four to five
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  months, your smaller raise that you did now falls apart, and you have less swings at the
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  bat to do so.
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  So you almost especially in today's age too, where in two, three months, not just your
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  features have this opportunity to change, but the competitive landscape shifts and changes as
• 17:46
  well.
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  So that's why I feel like, oh, this feels like agile funding in today's market is gonna look a
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  lot different than in 2020 Oh, yeah.
• 17:52
  One.
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  It feels to me like gas prices.
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  They go up a lot faster than they come down.
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  And it's not like, oh, we missed our last two milestones, so we're gonna give you a break.
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  No.
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  That doesn't happen.
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  So I think this is always, to me a sign of a heavily FOMO induced market when people are
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  willing to pay dramatically higher prices for the same asset when relatively little has
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  changed.
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  And so I think right now, again, people who are looking at investing in AI companies are more
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  afraid of not getting in than they are of overpaying, and that's why you're getting some
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  of this behavior that you're getting.
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  When founders give you a reason as to, like, why they're raising a smaller round and one of
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  the reasons being they wanna protect on their delusion, how do you absorb that response?
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  Because in my brain, I'm like, of course.
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  Like, of course, I know that that's something that you think of, but I that certainly cannot
• 18:39
  be the driving reason as to why you're raising a smaller round.
• 18:41
  It just, like, doesn't work for me.
• 18:43
  I think continuous fundraising is also You're, like, constantly talking to people, and you're
• 18:47
  constantly and it breaks.
• 18:49
  No founder I know is, oh, the peak operating efficiency of my company was at the middle of
• 18:52
  my fundraise.
• 18:53
  No one says that.
• 18:54
  So I think the one nice thing about these sort of more modular fundraisers where you raise all
• 18:57
  the money at once is they have a discrete beginning and end, you and get to get back to
• 19:01
  work.
• 19:01
  And this continuous fundraising or high resolution thing, you just end up fundraising
• 19:06
  longer but at a lower intensity.
• 19:08
  I oftentimes ask people, like, why is the thing that we're talking about a significant
• 19:12
  milestone or change?
• 19:13
  And the real risk with with raising these little increments is that the next time you go
• 19:17
  out, whatever progress you've made will be insufficient to garner more interest.
• 19:21
  And right now, have people's time, attention, interest, so why not capitalize on that and get
• 19:25
  the amount of money you need plus a cushion to get to the next milestone versus, like, trying
• 19:29
  to be, like, we're raise $2.50, then we're gonna, like, close this customer and raise
• 19:32
  another $2.50.
• 19:33
  I'm like, okay.
• 19:33
  Like, you're introducing a lot of financing risk to the business by doing it this way.
• 19:38
  And I think, in general, my view is, like, the savings in dilution to me are not oftentimes
• 19:45
  worth it relative to the financing risk we're introducing to the company.
• 19:49
  We are all out of time today.
• 19:50
  Thank you, Charles, for hopping in.
• 19:51
  Thank you to our listeners for jumping in as well.
• 19:53
  Please like and subscribe, and we will talk to you all next week.
• 19:56
  Thank you.
• 19:56
  Bye.