Latest / The Learning Corner by Precursor / Episode #98: Relevance Runway vs Cash Runway, 20VC Venky Ganesan Episode Breakdown On Seed Being An Option

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Episode #98: Relevance Runway vs Cash Runway, 20VC Venky Ganesan Episode Breakdown On Seed Being An Option · The Learning Corner by Precursor

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  We've always been a low ownership, high upside firm.
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  And for a long time, to see people were like, nope.
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  Gotta have 20% of the company, otherwise, can't do the deal.
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  Business model, portfolio construction, let me show you my spreadsheet.
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  Now people are just like, well, if the companies are big enough, it's more important
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  to be in them than to worry about how many basis points of ownership you have.
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  And I think this is the biggest change in venture in my career, which is that there's
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  really just one model in the business right now.
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  It's sort of $10,000,000,000 company minimum or bust.
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  If you can't demonstrate to people that you have one of those, the probability that you
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  will raise more money to keep going is incredibly low.
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  It's the week of October 5.
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  Welcome to the Learning Corner, a Precursor Ventures podcast.
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  Welcome to the Learning Corner by Precursor.
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  I'm Mia Farnam, and I'm joined by our GP and managing partner, Charles Hudson, where we will
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  be talking through the articles in Goodread that caught our team's tension over the past
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  week.
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  Our first piece this week is a post on x from Steve Vizalo over at Foundation Capital.
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  And the idea is that every startup obsesses over its cash runway.
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  And the clock it actually should be watching is its relevance runway.
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  Plenty of companies right now raised a big round a couple of years ago and have years of
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  cash on paper.
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  But the race they're really in is against becoming irrelevant, and that is more pressing
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  than any financial pressure out there.
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  He points to data integration and workflow tooling, a layer that got heavily funded over a
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  two to three year window with products that were best in class when they shipped.
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  And now a customer can get a good enough version with a few prompts and clutter codecs.
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  His advice comes in three parts.
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  Decide honestly where you are staying independent and find a home while there is
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  still a buyer if you cannot see a path back, or assume you will have to reinvent the product
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  more than once even past 50 or 60,000,000 in revenue and rebuild the vision because cash by
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  time, but it does not buy motivation.
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  He closes with a statement that nobody can tell you how long your relevance runway is.
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  Figure it out before your best engineer does.
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  Dee, in this piece, likely writing a bit to companies sitting on a lot of cash from 2021 or
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  2022.
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  Charles, how does the relevance runway idea apply at our stage, at the earliest stages?
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  I know we've been talking a lot internally about the importance of velocity and iteration
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  speed more and more with our founders at earlier stages.
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  I think it's really important at PreSeed and Seed, everything PreSeries A.
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  Because I think a lot of those companies are like, oh, I have a lot of money.
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  I don't need to worry.
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  I have three, four, five years of runway at our current burn.
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  And for a lot of these companies, people are the primary expense.
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  So if you have a small team and you don't have some crazy inference or compute spend, you
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  know, a 2 or 3, even a $500 round, you might have multiple years of runway, which I think
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  can give companies a false sense of security.
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  You can just say, oh, well, we're not gonna run out of money any soon.
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  And, you know, a long time ago, I wrote that thing about, like, the last 250 and how short
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  financial runways can actually drive people to have a level of urgency around solving a
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  problem that doesn't always exist when you feel like you have time to solve it.
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  And I've certainly met companies that raised a lot of money on one premise, that premise
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  didn't prove to be true.
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  And they've kind of continued to either chip away at the same problem or something else, and
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  I'm like, guys, the market has moved on.
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  Yes, you have runway and you have time, but that money has no insights.
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  That money and runway can't and won't tell you what you should do.
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  It's just the opportunity to stay alive and for a lot of companies and like staying alive isn't
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  the goal.
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  Building something meaningful is the goal.
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  And if you're not careful, you can miss your window or the market that you're in can move
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  without you.
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  I like that quote that he said, and you touched upon it just now.
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  Cash buy time, but it doesn't buy motivation.
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  Yeah.
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  Steve talks, people who can pull off a reinvention on your team, so say at that 250 k
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  moment, are likely the same people who have options elsewhere.
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  And so I've had that conversation countless of times with founders who assume that once
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  they've raised a specific large amount, talent will come.
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  One, that's that's not true.
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  Not in this market.
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  And then two, perhaps you can attract them to your team, but you have to incentivize them to
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  stay.
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  The question becomes, how do you instill that risk in founders is another reason why it's
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  important to stay quote unquote relevant without bleeding over into some of formative
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  things that we talk about all the time as well that feel ingenuine or poor use of time.
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  Like, there's this balance between, I think, relevance and then performative behaviors that
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  are just a waste.
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  I think there's this really interesting balance between knowing where the market that you're
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  going after is.
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  And like one of the one of the things that I see happen is people are working on a problem.
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  We'll take personal assistance as a relevant current example.
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  I think there were a lot of people who were like tinkering with ideas at the margin and
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  were building things, and they felt like they had a lot of time before they needed to deliver
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  on a product.
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  And then instinct and muse come out, and you're like, okay, well now there's no more time.
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  Because you have two companies that, you know, by all accounts are growing very quickly, and
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  people's perception of that category has changed.
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  So if you were like, oh, personal assistants are twelve to twenty four months away from
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  being relevant and useful, well well that day is now.
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  So if you had a plan that was based on you having a lot more time, that plan has to go out
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  the window.
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  And if you're not one of the people that's already scaling and you've been tinkering or
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  chipping away, I think it's gonna be hard to break through.
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  I could name eight or nine other categories where all of a sudden they become hot, capital
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  flows in, and there are companies that have the resources to continue on that path.
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  And if you're not one of those companies, you have to ask yourself, like, how am I gonna
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  respond to this moment?
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  And what am I gonna do?
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  What are we gonna change about our strategy to remain relevant, which is different than being,
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  like, financially viable?
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  And I think there's a lot of companies I made who are just like, oh, well the fact that these
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  other companies in our category have raised a lot of money changes nothing.
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  I'm like, no, it should change something.
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  It doesn't mean you have to go copy them, but the dynamic in your market has suddenly shifted
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  and changed.
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  And in some ways, we talked about this a lot when there are new emerging market and people
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  are engaging with tools and technology in a way that they haven't before.
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  Some of the first companies that come out with the biggest splash year rounds are maybe
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  earlier indicators of how people start interacting with those types of tools, and
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  there are learnings that are are taken from them.
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  So they're not always, I guess, companies in the end.
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  But it doesn't necessarily mean that if you were building and you're not one of the
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  hyperscalers, you get to kind of tinker alongside them.
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  I don't know if that's the best use of time.
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  There could be a scenario where in a couple years, we pop out and we're like, wow, we
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  learned a lot about how consumers interact with personal assistants.
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  And like, we would go...
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  We got that wrong with the biggest companies.
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  We talk about Webvan and Instacart back in the day.
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  Like, it took a couple other things to fall in place for mobile to be the place that people
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  felt comfortable about ordering things right away.
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  Here, I could see similar realization.
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  But if you've raised a small round trying to attempt to do the same thing, you don't get to
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  buy forty eight months of runway.
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  Like, you have to really figure out and have that conversation with yourself and your team.
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  I mean, principal advantage most startups have is speed.
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  And if you think about it in some ways, like, and runway are in, like, there's, a tension
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  between those two things.
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  Speed gives you the impetus to move quickly and get more done and to be fast.
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  And runway gives you, in some ways, the comfort that you have time to plan and be patient.
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  And I think runway is really, really useful post product market fit because it allows you
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  to make the kind of investments you have to make to scale.
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  And in some ways, I've always felt like there's the optimal amount of financial tension in an
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  early stage startup.
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  And I think pre product market fit, it's somewhere around eighteen months is actually
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  the optimal amount of tension.
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  It's enough that you don't wake up every day thinking like, oh my gosh, am I gonna be able
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  to pay my team tomorrow?
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  But it's not so much runway that you're like, oh, we have time.
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  And I think in startups, you never know how much time you have because the market can
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  change.
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  Particularly in this era, the bigger thing...
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  The reason I really like this post is like relevance is the issue.
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  People's attention spans for problems are really short.
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  And we go from talking about rag to reinforcement learning to inference, the
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  harness.
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  Like, people get fixated on new things and they pay attention to them for some short period of
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  time, we'll call it a quarter, and then something new captivates their attention.
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  So when, like, the market begins to get focused on the thing that you're doing, it really does
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  help to be ready.
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  I worry much more about companies that have too much runway as opposed to the ones that have
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  too little.
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  The ones that have too little always have urgency Yeah.
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  Because they're staring down the barrel of, like, the end.
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  Right.
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  And the ones that have too much, I worry sometimes they just get too comfortable or they
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  think that, like, the market will move at the speed that they want it to, not the speed that
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  it's actually moving.
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  The last piece I wanted to talk about here was Steve's point on this is the one of the best m
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  and a markets he's seen in years, and you can't see kind of that path back to relevant.
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  You should try and find a home while there's still a buyer out there.
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  It's such a difficult conversation to have with founders.
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  And also, the reality is, for most of those situations, if you can't find a path back to
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  relevance, the acquisition path is gonna look a little bit less juicy than likely the last
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  valuation that you raised at.
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  Wanted to ask you, what have those conversations looked like?
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  What's the right timing around those?
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  We've talked a lot about you definitely can't fundraise and look for an acquisition at the
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  same time.
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  Can you seek out relevance in M and A opportunities at the same time?
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  Or do you think about that in a similar way?
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  It's a it's a good point.
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  I think at some point you have to decide like, do we have an independent go forward company?
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  Yes or no?
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  If the answer is no, then the question is like, well, is there somebody who would value the
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  team that we have?
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  And I do think if you're working on problems that feel relevant in the moment, the surface
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  area of people you can talk to is just much greater.
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  But at the stage where we operate, pre seed and seed, I think most acquisitions tend to have
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  more to do with the relationship between buyer and seller.
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  How well do those companies know each other?
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  How well do those teams know each other?
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  Because usually you're not buying revenue, and you're rarely buying like a product capability
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  that's like a must have.
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  Usually you're like, oh, these people would be valuable to us as part of our team.
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  Either because of their like innate ability, or because they've worked on a really relevant
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  problem and we're, you know, they worked on image recognition and we're trying to scale up
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  our image recognition team and picking up this team of three people is a fast way to get
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  scale.
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  But I think when you're working on problems that aren't as relevant, the only other fewer
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  buyers, oftentimes those buyers also know that they're not as relevant.
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  Their ability to pay is limited.
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  And so I think in in startup land, I think we're getting a crash course in how quickly
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  markets can move.
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  And things that were once super important problems can become trivial overnight.
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  And things that weren't even on people's radar screens can pop up and become massive markets.
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  So I think we're in one of these eras where timing really does matter.
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  If we're using that logic, if it's early and you're approached by a potential acquirer, do
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  you consider that acquisition more than you did like three or four years ago just because the
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  window of invincibility over time closes a little bit quicker like I could imagine?
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  And I'm talking more about the acquirers at like the larger scale.
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  Someone who's like, listen, if I don't acquire you, I'll go down the block to your competitor.
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  Do you think people have to think about that a little bit more than they did years prior just
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  because the pace of change is I so
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  think Jason Lemkin is probably the person I've seen write about this the most.
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  I do think startups have this idea that like, oh, well acquirers are interested in us today
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  if we just keep going.
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  We can revisit this conversation in a year.
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  But maybe you can't.
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  Maybe they...
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  Maybe the company that's talking to you will have solved the problem either through
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  acquiring somebody else or through their own capabilities, or more importantly, maybe the
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  problem you solve will go from being the number one problem they have to the number five
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  problem.
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  And they're just like, well, we don't need to buy or we don't need to buy a solution to our
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  number five problem.
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  It can just remain the number five problem, we'll just deal with it.
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  So I've I've seen a lot of companies where you get one M and A offer or you get a series of
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  interest, and the company is like, well, we're gonna keep going.
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  We'll we'll revisit it, and the next wave of offers doesn't come for several years, if it
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  ever comes again.
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  And so I always tell people, the most dangerous thing you can assume is that because people are
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  interested now, they will remain interested.
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  And that, again, that you dictate the timeline.
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  And that if you decide, hey, this isn't something I wanna pursue right now.
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  If you continue to grow and remain relevant, sure, you'll continue to get other bites of the
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  apple.
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  But for many companies, that's not what happens.
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  They have a moment, and if they don't seize it, it's really tough.
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  Well, our last speed to speed, because it is just such a big one, there's just so many we
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  could go with, is the 20 BC episode with Benke from Menlo Ventures.
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  It's been making rounds on X.
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  Lots of discourse in different directions.
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  While While the interview is an hour, some notable moments where Bencki's framing is that
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  you have to think about the venture portfolio as a bunch of options.
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  Every c check is an option bet to see if a company is outlier.
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  On ownership, he would rather take 2% of a trillion dollar company than 20% of a
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  $100,000,000 company, which is what Menlo did with Ampropik.
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  Then he expects that if this cycle cracks, it will do so on a major debt free default rather
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  than equity market markdowns.
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  And he thinks Metro now has to beat the public index index by a thousand basis points because
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  every startup pays a tax to Nvidia, the hyperscalers, and the model labs, all of which
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  an LP can own with no fees and no carry.
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  There was ton of commentary on this episode, and I know Harry tagged you on x free for
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  thought.
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  Specifically, especially when they talked about seed and how it's structurally changed.
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  Bigger fonts just coming earlier.
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  Specifically during the portion where Venky admits Menlo is somewhat indifferent to seed
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  valuations because they're buying a seed at the table, which Harry admitted in the podcast that
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  this game is making his job harder as a smaller fund.
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  Venky upfront calls seed an option bet.
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  And then I'm gonna reference, like, Sarah Guo even piped it on x, strongly disagreed with
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  that strategy herself.
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  Obviously wanted to pause here for your thoughts on the episode itself, those portions
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  specifically.
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  To me, it's like really this whole conversation is fascinating because when I first got into
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  seed investing, the big multi stage funds vigorously denied that seed investing was...
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  And there's like there was a whole narrative which is...
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  Which was like, hey, if you as a founder really care about signaling risk, this notion that if
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  Menlo does your seed and doesn't do your a, it's gonna create problems.
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  So to avoid that problem, you shouldn't have big multi stage funds in your round early.
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  It's dangerous for you as a founder.
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  That narrative worked for a long time, and then I'd argue maybe five or six years ago coming
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  out of the pandemic, it stopped working.
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  I think a lot of founders were just like, either I don't care about signaling risk or I
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  don't believe that it exists.
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  And I think though for a long time, there were a lot of multi stage funds who were just like,
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  nope, seed is not an option.
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  It's not spray and pray.
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  We care deeply about our seed investments.
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  We try to treat them like first class citizens in the...
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  They said all the right things, whether they believe those things or not.
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  And Venge is just like, let's just dispense with the notion.
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  These are bets.
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  These are bets.
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  I think it's been true for a while, and I think we're in a place and venture where it's no
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  longer heretical to say that.
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  And I think part of it is when Harry wrote that post and asked me like, what do you think about
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  seed as an option?
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  I'm like, the customer for the seed round is the founder.
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  There was a moment in time where founders really cared about the signaling risk and there
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  was a strong preference to have seed specialists leading the...
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  Like, there was a moment where that was the case.
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  I don't think that that's the case universe anymore.
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  I think there are some repeat founders who are just like, I'd rather have 10,000,000 from
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  Sequoia and be left alone.
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  That's actually what I want.
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  I I know what I'm doing.
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  I know how to get in touch with them if I need something, but I don't need all of the
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  architecture and support of a specialist firm.
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  I want world class people to judge that I have a good a good team and a good idea to give me
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  capital.
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  And if for some reason I don't build a company that's worthy of clearing their series a bar,
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  no one should fund it.
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  That's the answer.
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  I don't wanna go find somebody who wants to give me a chance to keep going.
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  If I can't clear their bar, so be it.
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  And by the way, if I do clear their bar, they have the infinite money machine for me.
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  I don't have to worry about financing again.
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  And I think that's been a big shift, but that that started happening six or eight years ago
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  with repeat founders who just said, don't care about this signaling risk thing.
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  Care about any of this other stuff.
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  This isn't this isn't my issue.
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  I'm glad Finky came out and said it.
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  The other thing that, like, made me chuckle is, you know, we've always been a low ownership,
• 15:55
  high upside firm.
• 15:56
  And for a long time, deceived people were like, nope, gotta have 20% of the company, otherwise
• 16:00
  can't do the deal.
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  Business model, portfolio construction, let me show you my spreadsheet.
• 16:05
  And now people are just like, well, if the companies are big enough, it's more important
• 16:09
  to be in them than to worry about how many basis points of ownership you have.
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  And I think this is the biggest change in venture in my career, which is that there's
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  really just one model in the business right now, which is it's sort of $10,000,000,000
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  company minimum or bust.
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  If you can't demonstrate to people that you have one of those, the probability that you
• 16:30
  will raise more money to keep going is incredibly low.
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  There's just like very little appetite.
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  And you know, twelve years ago, people would have been excited for a 1 to $2,000,000,000
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  company.
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  And now people are just like, well, that's a series a or b stage company depending on the
• 16:44
  category.
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  That's not the game we're in.
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  And I think it's very hard for founders to envision of what a 5 to $10,000,000,000
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  opportunity looks like if you haven't been around one.
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  So that's been my experience.
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  And along that ownership piece, in the podcast, it was interesting watching Harry and Venky
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  joust about ownership and their perspectives on it.
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  Harry kind of, like, said out loud, like, it just feels like ownership's kind of out the
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  window, don't you think?
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  And then Venky did push back saying, no.
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  You still want ownership early because it is insurance for mid sized outcomes.
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  And once a company, it's an obvious outlier.
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  There's no alpha left.
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  It's just position sizing.
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  And I appreciated Harry pushing back and saying like, do you care about mid sized outcomes?
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  Is that something that you're even interested in?
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  What are your thoughts here?
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  Is it mostly hindsight bias too also?
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  I think one of the big things that's changed in the way that multistage funds approach seed is
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  in the like before times, not only was it spray and pray, it was spray and pray with small
• 17:35
  checks.
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  It's like, oh, we got a 100 k from a scout at this big fund, or oh, we got a 250 k check-in a
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  $2,000,000 round.
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  And so those firms were also buying relatively small ownership.
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  So so maybe to some extent, the signaling argument was at least intellectually
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  consistent.
• 17:51
  It was like, why would you take a little check from a big fund where their presence on the cap
• 17:55
  table is gonna influence the way people think about your company?
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  Now, at least when I see the multistage fund show up and see, they're buying like 10 or 15%
• 18:02
  of the company.
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  They're buying a lot.
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  And I think the question is, as a founder, how do you feel about your largest shareholder
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  being indifferent to outcomes that could be life changing to you?
• 18:13
  And I think if they're just indifferent, maybe it doesn't matter.
• 18:15
  If Venky or whoever it is just says, I don't really care if you wanna sell this company for
• 18:21
  a $100,000,000.
• 18:22
  You have my blessing.
• 18:23
  I won't give you any more money to get there, but I certainly won't stand in the way.
• 18:26
  Is that the worst thing in the world if you're a founder shooting for a middling outcome?
• 18:30
  Where it becomes, I think, a problem is if that person gives you a bunch of grief about the
• 18:34
  fact that you're not anthropic.
• 18:35
  Or if there's a small outcome that you wanna achieve and the person says no, keep going.
• 18:40
  I mean, can do what you want, but our firm will be disappointed in you if you don't find a
• 18:43
  better idea.
• 18:44
  I think there's the pressure of the weight of capital.
• 18:46
  I think if you have a 2 to $3,000,000 experiment and it doesn't work, two years later
• 18:50
  you're on to the next thing.
• 18:52
  If you raise a 10,000,000 seed round, you're probably gonna work on some version of that
• 18:56
  company for more like three to five years.
• 18:58
  And entrepreneurial lifetimes are You only get so much time.
• 19:01
  And I would imagine because there is more private capital in the market than there was
• 19:04
  years prior, even if Memo or another mega fund doesn't come in to your round, you will find
• 19:09
  somebody else to fund you in some capacity after whether or not there 's signal attached
• 19:14
  to If you wanted to continue your journey tinkering around, you likely could because
• 19:18
  Yeah.
• 19:18
  People are hovering around the hoop in a way they hadn't prior.
• 19:22
  And to be clear, I think most of this discourse about multistage firms investing in seed is
• 19:28
  primarily about consensus founders or consensus categories.
• 19:32
  I think those firms have pushed back and say, no, we do everything.
• 19:34
  I tend to find them showing up the most in the things that have momentum or in the people
• 19:39
  whose backgrounds are easy to underwrite.
• 19:41
  So I think the silver lining for other people is if you're if you're in the we want to fund
• 19:46
  consensus founders in consensus categories and seed business, that business has been getting
• 19:51
  harder and harder every year for a decade because the multistage firms feel like they
• 19:55
  wanna be a part.
• 19:56
  If you're willing to look to the left or the right of consensus to find different profiles,
• 20:00
  I find that there's less competition there.
• 20:03
  Now those companies are sometimes harder to finance.
• 20:05
  They're harder to get people excited about.
• 20:07
  But if they work, they can easily rejoin the mainstream later.
• 20:11
  So I just think, to Harry's point, yes, seed has gotten harder because the multistage firms
• 20:16
  have adapted, and they're, like, permanent players in this category.
• 20:19
  Last piece, and it was a good sound bite from the podcast, Penke says, Menlo's going for
• 20:25
  broke.
• 20:25
  Like, they're going all in.
• 20:26
  They're throwing everything basically in one direction to be one of the biggest players to
• 20:31
  ever sit with adventure.
• 20:33
  Do you feel like the going for broke approach applies to everyone now in venture in a way
• 20:37
  that maybe a a couple years ago you would have said everyone can kind of have a different
• 20:41
  strategy.
• 20:41
  What's your reflection on that statement?
• 20:43
  This is the most concentrated version of venture capital I've ever seen, both in terms
• 20:48
  of capital and attention focused on a pretty narrow category.
• 20:52
  I'll never forget this.
• 20:53
  I won't name the person who said it.
• 20:55
  I was hanging out with somebody twelve years ago when I was first getting started in
• 20:58
  Precursor, and I was telling him about our strategy, and he goes, you know, I have a
• 21:02
  friend who invested in three optical networking companies in the .com boom when he named it.
• 21:07
  They were all big outcomes.
• 21:08
  And he's like, that guy was never right about anything ever again in his venture career and
• 21:13
  it didn't matter.
• 21:13
  I'm like, what do mean?
• 21:14
  He's like, well, those outcomes were so massive and so large that like, it didn't matter that
• 21:19
  he never found a second thing.
• 21:21
  He was so right about one category and one moment that he's done for generations.
• 21:26
  And that's always stuck with me, and I think there's a lot of people right now who are
• 21:29
  looking at AI in the same way and saying, if these companies turn out to be what we think
• 21:33
  they are, there's nothing else that matters.
• 21:36
  There's nothing else that will matter that we could be doing now, and probably, candidly,
• 21:40
  there'll be nothing else of this scale that we could do in the future.
• 21:42
  And I said this to our team this week.
• 21:45
  I give Menlo a lot of credit because I think the strategy that they employed was largely
• 21:49
  available to anybody who wanted to take it at the time.
• 21:52
  There were lots of other venture firms who I think were trying to figure out, hey, like how
• 21:56
  do we how do we make ourselves even more relevant than we are today?
• 22:00
  And it...
• 22:01
  And you know, I think they decided, hey, AI is a big theme.
• 22:04
  We could remain the Menlo of old or we could go all in on AI.
• 22:08
  We could try to get into one of the most, you know, I don't think most people really thought
• 22:12
  Anthropic would end up being as consequential.
• 22:13
  I wouldn't even ask I wouldn't even ask them to tell me that they thought it would be this
• 22:18
  consequential.
• 22:18
  That's not the point.
• 22:19
  I think they made the decision that, like, hey, we're gonna bet the firm on this AI thesis.
• 22:23
  If we're right, we're kings.
• 22:25
  And if we're wrong, we're probably actually no worse off than we were before, which is a fund
• 22:29
  that's gonna have some storytelling and some work to do to continue to exist.
• 22:33
  And I I give them a lot of credit because I think there's probably dozens of venture firms
• 22:37
  who are looking at the same fact pattern, and Menlo chose to do what they chose to do, and
• 22:42
  others didn't.
• 22:43
  And so I think it is also important to remember in this business, and I think it kinda connects
• 22:47
  with some of the things we were talking with Rob Goh about in the previous episode, if you
• 22:51
  don't like the position you're in, you should change it.
• 22:54
  You should change something about your strategy.
• 22:55
  You should change something about your firm.
• 22:57
  You should change something about your approach.
• 22:58
  And as much as I like joke with some of my friends who are now deep tech, hard tech,
• 23:02
  defense tech specialists who used to be in something else, I'm like, at least you've
• 23:06
  recognized that the times are changing and you should change too.
• 23:09
  Well, we are all out of time today, but thank you Charles for jumping in.
• 23:12
  Thank you to our listeners for listening as well.
• 23:14
  Please like and subscribe and we'll talk with you all next week.
• 23:17
  Thank you.