Latest / The Learning Corner by Precursor / Episode #28: Fund 1 Over Performance Math, Media and Content Runs VC, Fund Manager Patience

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Episode #28: Fund 1 Over Performance Math, Media and Content Runs VC, Fund Manager Patience · The Learning Corner by Precursor

• 0:00
  For any content piece I could find on the Internet, I could easily find another VC who
• 0:04
  would say it's dead wrong.
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  I tell people, think of these things as inputs that should shape your thinking.
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  They should never tell you what to do or how to do it.
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  It's the week of April 14.
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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'll
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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 Steve Kim's LinkedIn post, which explores the theory around fund ones and
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  how they often produce some of the best performing venture funds.
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  The core argument is rooted not in the experience or hustle of the fund manager,
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  although that obviously helps, but more so in the math.
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  So fund ones statistically have fatter tails, meaning they're more likely to deliver either
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  outlier returns or dramatic underperformance due to the compounding effects of skill and
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  chance.
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  As a result, exceptional fund one managers can generate returns that outperform their more
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  established peers before regression to the mean kicks in with subsequent funds.
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  So the root of this fund one success is based in compounding effects of skill and chance.
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  So when I was thinking about this after reading it, my question was, is it possible for
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  experienced fund managers to quote, unquote, replicate skill and chance in later funds to
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  create this type of repeated outsized return from your perspective?
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  I always like reading Steve's work.
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  They're very analytical over there at Veritas, so it's helpful when you're a fund one manager
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  to get things like this published.
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  And so I think the answer to your question, Mia, is yes.
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  And I think it's for a couple of reasons.
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  When I think about what you have on your plate as a fund one manager, there is something
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  special.
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  Usually, if you raised your fund, you had some thesis on the world.
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  And if you outperform, usually that thesis on the world was true in that moment.
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  So if you're a specialist fund manager, maybe there was some inflection point in the category
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  that you are focused on that allows you to get into all of these really interesting companies.
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  Maybe it was a founder archetype where I think about, you know, the early days of Felisys when
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  Aiden was really focused on the ex Googler network.
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  Sometimes you have these moment in time, kinda like arbitrage opportunities that you see that
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  other people don't see that can give you outperformance.
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  The other thing on a practical basis is you're not as busy with the other stuff in this
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  business.
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  You don't have a legacy portfolio of companies to support.
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  You don't have a larger staff of people to manage.
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  The job is simpler, and in some ways, it's cleaner and purer.
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  And I think you can recreate this outperformance if you have another one of
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  these, like, big insights on a market shift, which is why I think so much of VC writing is
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  focused on trying to figure out, is x trend the next big paradigm shift?
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  Because if it is, it creates the situation where you can have dramatic outperformance.
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  Like, you know, if you were early on the Internet, if you were early on mobile, in some
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  ways, you were early on crypto, it's unclear to me that being early on AI other than sort of
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  some of the foundation models will end up being a great investment strategy, but we'll find out
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  soon.
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  So I think if you can recreate that beginner's mind and find one of these big technology
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  shifts and actually have the freedom and time to actually invest and take advantage of it,
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  then, yes, you can replicate the performance.
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  But that's a lot of conditional statements.
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  It's fascinating.
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  It also assumes that you're identifying the arbitrage opportunity way before everyone else
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  is, and to your point, have access to and can make those investments quickly.
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  But to your point, working in an earlier stage fund that has not as much infrastructure to
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  create barriers to make quick decisions probably is a is a massive way to kind of a
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  whole leg up.
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  I mean, the other thing I've been thinking about a lot lately is historically, capital has
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  been a business where general partners invest in their immediate network and that proximity
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  is a good signal for quality.
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  And the older you get, the fewer of your friends start companies.
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  Yeah.
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  The ones who are successful retire.
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  The ones who are unsuccessful kinda give up on entrepreneurship, and you get further and
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  further removed from where company creation is happening.
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  And I wonder if part of this is also the age at which most people tend to start their first
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  funds is usually when their friends are in their prime entrepreneurs.
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  So if you think, like, most fund managers I meet are somewhere between very late twenties
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  to mid thirties.
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  Yeah.
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  And oftentimes, that's a period of time where a lot of people in your network are either
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  starting companies or actively involved in managerial roles at meaningful companies.
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  And as you get older, your network gets further removed from company creation.
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  It's been my experience.
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  You have to work much harder to stay close to the metal.
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  Yeah.
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  It leans into another question, which is the dark side of fund one performance is that they
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  drastically underperform, as we mentioned earlier.
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  Taking into account some of the insights from Steve's post, I was wondering if we wanted to
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  zoom out on any specific trends that could lead to that outcome.
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  I was trailing down on some of the messages that were responses to his post, and a lot of
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  them were saying, like, the great ends of this take into account that folks have smaller
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  funds, writing until correctly valued companies and able to move pretty swiftly.
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  So I guess the opposite of that would probably create the inverse scenario of the dark side of
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  fund one outcomes being a little bit more underperforming.
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  Well, I think we've talked about this.
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  Like, the opposite of fortune is misfortune.
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  I talked to an LP this week who told me, like, it's really hard to escape a bad vintage year.
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  And he's like, the only way to escape it is to not play.
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  And so it's very possible, I think, about the COVID era.
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  It's possible that there were good fund one managers who simply chose a really bad market
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  environment in which to do their first fund.
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  Those first funds will underperform, and it's unclear to me whether some of those folks will
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  get a second shot.
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  And we might not actually know if they're any good because of the vintage year effect of when
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  they started.
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  And so it can cut both ways.
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  Like, starting at the wrong time can really set you up for underperformance.
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  I mean, it reminds me of the post that we talked to.
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  Forgot who wrote it, but it's not like, oh, I'm gonna start picking lower valued companies now.
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  You can't just start sacrificing on that just because you're like, this is how I'll continue
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  to win and maintain performance.
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  There's so much macro that you have no control over, which to those fund managers' defense
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  that will ultimately result in if the fund's gonna have another go at it, and a lot of that
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  was completely out of their control.
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  One of the biggest pieces of advice I got when I got started was from other experienced GPs
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  who were just like, make sure your first fund is awesome.
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  If your first fund is awesome, it will buy you a lot of time to figure things out.
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  And I think the same goes I know other venture firms who feel the same way about new GPs.
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  Make sure that their first one or two deals that they work on are awesome Yeah.
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  So that they get the reputational flywheel of being associated with a good company, and so
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  more good companies seek them out.
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  And if you can manufacture or create circumstances where that happens, it sets
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  everybody up for success.
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  Well, it's a good dovetail into our next topic, which is from Paul Smolera's blog, VC Content
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  Club, titled the next great VC firm will be built like a media company from day one, and it
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  outlines why content strategy will become table stakes for emerging funds.
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  He argues that attention, not access, will become the ultimate currency and venture,
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  winning the hearts and minds of founders starting with building belief and narrative
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  power at scale.
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  So the most successful firms will treat content creation like editorial strategy, building
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  repeatable formats and founder for storytelling and multichannel evergreen assets that extend
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  the firm's influence far beyond traditional sourcing.
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  And it's funny.
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  Aliyah, who's on our team, she commented to me that this piece reminds her of the recent New
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  York Times piece, what is venture capital now anyway, where it compared the new and old
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  guards of venture capital and what models are sustaining momentum over time.
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  Media and content were one of the key features in that piece that differentiated the more
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  cottage industry versions of venture capital from what we see today.
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  So my questions are, one, how much do you agree with this type of narrative?
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  And then two, how can you strike a comfortable balance of continuing to put founders at the
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  center while also living in this reality of building a more public brand for your venture
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  fund in parallel?
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  I think it is important to acknowledge that there are some established brands who simply
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  don't need to do this stuff.
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  Like, they don't.
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  They're brands that are well known to and by founders.
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  But I'd argue, you know, I've been in venture twenty plus years.
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  Even your Sequoia and Kleiner work harder to be top of mind with founders than they I'm not
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  saying they didn't work hard before.
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  I think there's a more of a recognition that there's more competition in the business.
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  And so if you just think about it and say, remove the word venture capital.
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  If you're in a business where competition is increasing and the underlying product money is
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  a relative commodity, what if it's like toothpaste?
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  Most of the energy and activity doesn't go into r and d and making new toothpaste.
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  No no offense to anyone who listens to this podcast who makes toothpaste.
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  But a significant amount of the energy goes into marketing the features and benefits of
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  your toothpaste, such that when the consumer goes to Target or their favorite store and sees
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  the wall of toothpaste boxes, they pick yours.
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  And I think in many ways, wooden venture was more of a cottage.
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  You know, the the post talks about like the whisper, the old whisper.
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  It was easy.
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  Founders just talked to other founders.
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  There were relatively few firms you could go to.
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  It was really important that founders said good things about you.
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  But we've dramatically increased the top of funnel of entrepreneurship, and not everybody
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  knows every firm.
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  And so if you're a brand new firm and you're trying to break in, I always tell people, you
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  should assume that the really good founders are getting advice about whose money they should
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  take.
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  They're getting that advice from other founders.
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  They're getting that advice.
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  How do you insert yourself into that conversation?
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  And content is one way you can do it.
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  And I think twenty minute VC and Tomas Timgas are, like, two really different polar examples.
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  You know, Harry makes a ton of podcasts and is really active, and I think that has been
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  unquestionably important for his brand even based on the most recent fund announcement that
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  they had.
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  And Tomas just kind of cranks out data informed posts on a regular basis and has been doing
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  that for a really long time.
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  And those are, like, content strategies that appeal to different audiences.
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  I also think there's another consumer for VC content that isn't the focus of this article,
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  and it's limited partners.
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  I think limited partners also wanna invest in funds that are brands.
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  And I think increasingly, we're moving to a world where individual GPs are mini brands, and
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  founders choose mini brands over firms.
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  I think it's been heading this way for a long time.
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  You know, some of this media is weirdly parasocial.
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  I've talked to founders and, like, you don't actually know that person.
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  You've just read a bunch of their articles and consumed a bunch of their Instagram stories.
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  You actually don't have a bidirectional relationship with this person.
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  You're a fan, which is great.
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  Like, you're fan.
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  Wonderful.
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  But I do think in most ways, I think it's a net positive for our industry that you can use
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  content to launch a new firm.
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  I think that I could name others beyond homebrew, and I think what Sarah's done with
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  conviction Yeah.
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  She's, I think, done a really good job of putting a stamp out there.
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  So the the two things I tell founders is or VC fund founders, people who are starting to own
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  funds, find a content format that you enjoy.
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  Because producing content in a format you don't enjoy will feel like work, and you will
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  inevitably quit doing it because at some point, there'll be something more important to do.
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  And second, make sure the content you're creating is attracting the kind of founders
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  that you wanna attract.
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  So if you wanna be a s h you know what poster on x and be snarky, be prepared to attract the
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  founders who respond to that stuff.
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  Yeah.
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  If that's not who you wanna be, don't do that.
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  People are like, well, I should I wanna write.
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  I wanna blog more.
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  I'm like, do you enjoy writing?
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  They're like, no.
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  I'm like, well, then you should pick a different medium because you're not gonna do
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  it.
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  I can tell who's writing with AI.
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  It's very obvious, everyone, as a PSA.
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  Some of it is very bad, and I the better I know the person I actually did tell somebody.
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  I was like, you need a new ghostwriter, and he's offended.
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  And I was like, no.
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  Your ghostwriter does not sound at all like you.
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  I'm stuck on your toothpaste example.
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  It's funny, and I'm thinking about myself in the founder's shoes.
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  I go into the supermarket.
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  I go select my toothpaste and the wall of toothpaste.
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  They all say that they basically do all these amazing things that are unique and different
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  and going to help and improve my health.
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  I assume they all do the same thing, and I think that's my question about this comparison.
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  At the end, I'm just looking for toothpaste.
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  I just need it to survive.
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  I've never had the outcome though of a toothpaste drastically being the reason why I'm
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  going to the dentist and having cavities.
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  So my question to you is, how much is that live in venture where it was marketed as such and it
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  actually does the inverse of what you wanted to creates a negative impact for the trajectory of
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  your company?
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  I think I've seen people with content create expectations for founders of what, you know,
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  the money I'll call the money plus bundle.
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  You're gonna get money plus something else, money plus advice, money plus platform
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  services, money plus this operator network.
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  I've certainly seen some toothpaste that purports to cure cavities.
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  And so people buy it, and they're like, oh, I still have cavities.
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  And I'm like, you know what?
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  Their go to market support team can't help you if you don't have product market fit.
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  It's not a failure of their platform team.
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  It's a failure of your company to find product market fit.
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  And I have seen people who've been like, wow.
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  I was promised the moon and the stars, and I I didn't get it.
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  I do think, for me, the toothpaste analogy stands because every now and then in
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  toothpaste, you get something like whitening or you get brightening or you get natural
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  toothpaste.
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  You you get these, like, different flavors.
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  And all those different flavors are designed to appeal to people with different preference
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  functions.
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  Yeah.
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  And so some people want Crest and Colgate because you can get it everywhere and it's very
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  reliable.
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  Other people like Tom's.
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  Other people want whatever the new Instagram influencer, social media toothpaste is.
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  I think about a lot of the people that I'd meet.
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  And it's funny when I talk to founders, they'll bring up like a Nicole Wischoff.
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  They'll bring up people who have what I would describe as, like, pretty strong points of view
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  online.
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  And I think it creates in the mind of founders a point of view about that investor in a way
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  that if you're just kinda doing your job and quiet, people might not know you and might not.
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  By the way, there are also people in this business who are wildly successful who produce
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  no content
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  Right.
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  Who do none of this stuff to, who are emerging managers.
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  And those people, I find, tend to be embedded in networks where content consumption of that
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  type doesn't matter.
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  And they've created something a little bit more proprietary, not to overuse the word, but for
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  their deal flow.
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  My one last question here, and again, putting myself in the shoes of a founder, Paul's claims
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  that the most successful firms will think like a newsroom about your entire platform, and I
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  can certainly see this executed well.
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  And so he mentioned Hunter.
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  I think Stephanie and Artemis does a good job.
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  Olivia at Forum has been starting to put out content of her own.
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  But like real life newsrooms, it's easy to start launching really biased content in favor
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  of your own fun, strategy, beliefs, and venture at large.
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  And I think from a founder standpoint, it does create a very noisy LinkedIn.
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  I just chatted with one of my other friends who's a founder, and she said, I can't even go
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  to LinkedIn.
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  I just feel like I'm so overwhelmed by self promotional content.
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  So founders are just perhaps a bit overwhelmed by content and just fall numb to old
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  narratives.
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  So I'd love to hear what you think about this and kind of how to guide founders in the
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  direction of how do you find people who are putting out the content that you like and also
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  being open minded about what that means.
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  I think you should never take something you read and immediately go implement it at your
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  company.
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  I don't care who wrote it.
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  After the Toby AI internal memo, a few people were like, we're doing this at my company.
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  I'm like, why?
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  You have 50 people.
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  Why?
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  Like, are you sure this is the right answer?
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  So I don't care who wrote it.
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  Don't blindly take someone's content piece.
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  Second, I often encourage founders, think about the lens through which this person views the
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  world.
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  And with that lens, why is what they're writing true?
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  And do you look at the world through the same lens?
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  And I think for any content piece I could find on the Internet, I could easily find another VC
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  who would say it's dead wrong.
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  Why it's great to be a solo founder?
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  Why you should never start a company alone?
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  Why you should raise the most money possible?
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  And so I tell people, think of these things as inputs that should shape your thinking.
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  They should never tell you what to do or how to do it.
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  You know, not everybody can watch two hours of content from one point of view and two hours of
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  content from the opposite point of view.
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  For some people, that's like very enriching.
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  They're like, oh, I have a more complete picture.
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  For other people, it's overwhelming.
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  It's too much to process.
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  So just be honest about who you are.
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  I was listening to this great, I almost put it in the channel this weekend.
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  There's a really good capital allocators interview with Howard Marks.
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  It's an older interview that Mhmm.
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  It's a previous interview, but she's talking about private credit.
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  And and talking about when he writes memos, he's like, I write memos when I have something
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  to say that I feel like others haven't said.
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  And I was like, that's kind of like my writing process too, which yields about one article a
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  month, maybe.
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  In some months, it yields nothing.
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  And so I think if you're like, hey, we're gonna post on LinkedIn every day, you will become
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  like cable news.
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  Hey, we're on for twenty four hours, so whatever we have to write about something
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  today.
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  What's the something?
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  And so I've never wanted to be beholden to a content calendar where, hey, it's Tuesday.
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  You gotta publish something.
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  And so I do think some people have taken the content thing too far.
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  I talked to somebody who's been in the venture services ecosystem for thirty years, and we
• 15:56
  were talking about Josh Koppelman at First Round.
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  And he's like, the thing that they got right is almost every piece of content they publish has
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  the founder as the core audience and has something valuable for founders to read.
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  It's very rarely about first round is awesome.
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  Like, round review is like, these are good articles, and these are situations you are
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  likely to encounter as a founder.
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  And here are some it's kind of a mini MBA.
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  Here are some frameworks to think about when you encounter this situation.
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  And I think, ironically, that's kind of the best way to get known is for creating things of
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  value, not by being self promotional.
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  Totally agree.
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  I would say, like, on LinkedIn, I try to diversify what things I engage with because I
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  know, similar to any other social media platform, it will create things that it thinks
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  that I like, and then all of my content will look very similar, and it'll all be saying the
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  same things.
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  And the one thing I will say is I echo, just find a form of content that you like to create,
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  but also that you're good at creating.
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  I personally, hence why we're doing a podcast.
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  I'm very long winded as pertains to writing, so I would never be launching venture reflections
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  like Charles would.
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  It's just not my medium.
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  Our final topic is a recent LinkedIn post written by Jenny Fielding, who's the cofounder
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  and managing partner at Everywhere Ventures, which reflects on the long feedback cycles of
• 17:05
  early stage venture.
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  She recounts how it took five and a half years of investing with no liquidity and plenty of
• 17:10
  second guessing before a surprise acquisition by a Fortune 500 company returned her fund
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  several times over.
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  So despite the success, she finds herself doubting her firm's momentum only to be
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  reassured by moments like recent week where five portfolio founders received term sheets
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  from top funds.
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  So she highlights the importance of patience to remain calm throughout the roller coaster of an
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  early stage VC.
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  I'm sure Jenny's sentiments ring true for a lot of early stage venture funds and managers that
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  we've talked at length here about the importance of patience in a market like the one
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  we're in, but also honestly always in venture.
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  Just wanted to get closing thoughts on that one from you.
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  That one definitely made the rounds in my PC manager WhatsApps.
• 17:51
  Like, the amount of public commentary in that article is maybe a tenth of the private
• 17:54
  commentary I've seen.
• 17:55
  Yeah.
• 17:55
  And I think if anybody other than Jenny wrote it, I'd be like, this is maybe a humble brag.
• 17:59
  But it's really honest because I know Jenny, and that sounds like her.
• 18:02
  I think for a lot of people, including myself, that's what 2023 and the first half of twenty
• 18:08
  twenty four felt like because we went from an era where I think a lot of LPs who invested in
• 18:13
  pre seed and seed stage funds were like, yes, we wanna see performance, but we also
• 18:16
  understand this is a long game and the performance won't show up overnight.
• 18:20
  And it felt like LPs were gonna give you the time for things to mature.
• 18:24
  And then between interest rates going up, public markets being volatile, LPs just needing
• 18:29
  liquidity, Suddenly, a lot of pre seed and seed managers, there was this very pointed question,
• 18:34
  like, where's my money?
• 18:34
  Yeah.
• 18:35
  Where's the DPI?
• 18:36
  And I think for a lot of us, I won't speak for everyone else, for me, it did cause moments of
• 18:40
  doubt where I was just like, wow.
• 18:41
  It has been a while.
• 18:42
  We haven't returned as much money as I'd like.
• 18:44
  What if collectively we're not as good at this job as we thought?
• 18:47
  And then, you know, you get a secondary here or there.
• 18:49
  You get some markups and you feel better.
• 18:51
  But I think this is the hardest emotional roller coaster part about being a VC.
• 18:55
  I told one of our LPs over the weekend, you know, I talk to a hundred to a 20 portfolio
• 19:00
  companies a month.
• 19:01
  Maybe 5% of them are just on fire doing great.
• 19:04
  The rest of them are somewhere between completely struggling and, like, chugging
• 19:08
  along.
• 19:08
  And the weight of doing that month after month, sometimes it's hard to just continually look at
• 19:12
  a big portfolio and a large basket of companies and say, like, where are the winners?
• 19:16
  And, you know, we have a few companies in our portfolio that emerged in the last two years,
• 19:20
  and that's a ten year old fund.
• 19:22
  And I assume the same will happen in funds two, three, four, and now fund five.
• 19:25
  We will have late breaking winners, and we will also have companies that we were really excited
• 19:29
  about for the first seven years that will falter.
• 19:31
  And so I think there was very little patience in our business, both on the part of LPs and
• 19:36
  GPs in the last two years.
• 19:37
  I think everybody wanted to to know, like, am I okay?
• 19:40
  Yeah.
• 19:40
  And it feels like slowly but surely we're going back to a new equilibrium, which will be more
• 19:45
  patient than that time, but probably not as patient as days past.
• 19:48
  Well, we are all out of time for today.
• 19:50
  Thank you, Charles, for stopping by the Learning Corner, and thank you to all our
• 19:52
  listeners for popping by.
• 19:54
  Please like and subscribe, and we will see you all next week.
• 19:57
  Thanks.