Latest / The Learning Corner by Precursor / Episode #64: Hubristic Fundraising's Hidden Costs, VCs Can't Win Talent, SaaS Death Greatly Exaggerated

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Episode #64: Hubristic Fundraising's Hidden Costs, VCs Can't Win Talent, SaaS Death Greatly Exaggerated · The Learning Corner by Precursor

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  I think the bigger point is recruiting and hiring is a management task.
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  Your board or your investors can maybe help you close people that are on the fence.
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  But if you're relying on them to source, vet, and deliver basically close ready chemistry, I
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  think you're doing entrepreneurship all wrong.
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  It's the week of January 26.
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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 Goodreads that caught our team's attention over the past
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  week.
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  Our first topic is a post on X by Jason Lemkin titled, Rex and the pros and cons of hubristic
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  fundraising.
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  Rex was obviously recently acquired by Capital One for north of $5,000,000,000, minting itself
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  as a top performing exit in less than ten years.
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  However, that did not stop people from questioning whether this exit should be deemed
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  an undisputed success story.
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  Jason claims this stems from the consequences of hubristic fundraising.
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  When companies raise at valuation that require only the rarest of outcomes, the highest of
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  revenue multiples, and create expectations for an exit path where anything less than a
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  $20,000,000,000 exit is considered a massive failure.
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  He walked through some of the pros and cons of the fundraising approach, and the pros being
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  attracting talent and capital.
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  It keeps competitors at bay.
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  However, from a con perspective, it changes the motivations of the talent you bring on,
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  possibly clouds decision making, and the bar for success becomes more and more impossible to
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  reach.
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  Ledkin warns this dynamic is roaring back with AI.
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  Companies like Thinking Machine Labs raising $2,000,000,000 at seed at a gold billion dollar
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  valuation with no product.
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  And while these companies may achieve incredible outcomes, founders and investors
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  likely need to deeply consider whether this siren call is truly a survival choice or a
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  dangerous trap.
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  Yep.
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  There were a lot of pieces written about the Brex exit, and I appreciated that Jason's piece
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  made it clear that two things can happen at once.
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  It can be ludicrous that a $5,000,000,000 exit is scoffed at.
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  And also, it's not that difficult to understand how people got to that conclusion.
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  Yeah.
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  So what were your thoughts on the piece?
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  I really like the frame.
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  I have so much to say about it.
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  First of all, there are a lot of takes I read.
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  I'm like, do people not understand liquidation?
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  I was like, look how much money the last round.
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  I'm like, late stage investors are pretty good at downside protection.
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  I have not seen the waterfall, but liquidation preferences exist for a reason.
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  And the total consideration was well north of liquidation preference.
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  So there are probably people who made less money than they expected, but I don't feel bad
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  for anybody on that cap table.
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  Second, I think if you look at the distribution of outcomes, when you invested really mattered,
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  and the people who did early, I'm quite sure, are very happy with this outcome, and they
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  should be.
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  But I think this is just what modern venture capital has become.
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  It's become chasing these, like, very far outlier outcomes.
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  And as long as you're a management team that understands, if I continue to raise in this
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  way, I'm signing up for these, point 1% outlier outcomes.
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  And anything that isn't that will feel like less than success.
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  And there's room between failure and less than success, but you won't make everybody who gave
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  you money happy.
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  And the other thing is I talk to portfolio companies all the time and they're like, I
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  don't understand how did my competitor how did this company raise these three successive
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  rounds?
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  And I'm like, well, some of this is king making activity.
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  Some of this is Bill Gurley had some comments about the observer effect.
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  I do think we've also gotten to this, like, weird memetic cycle where, like, a company
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  that's hot raises more money, so people assume that it's hot Yeah.
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  So they raise more money.
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  And I was like, what are they gonna do with all that money?
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  I'm like, I don't know.
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  I'm personally very interested to see what happens with companies like Cursor
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  Yeah.
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  That really were on its hair and were able to quickly raise round after round after round.
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  And a year ago, I would have said it's very unlikely that Cursor is not the winner in
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  coding agents.
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  And now I think it's a much more contestable category.
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  So I think with some of these early AI companies, we're gonna see more things like
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  this.
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  Yeah.
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  We've seen it already.
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  We saw this with Character.
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  We've seen it some other companies where the ultimate consideration didn't look great if you
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  were on the cap table.
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  But this is moderate venture capital.
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  It is like these home run outlier outcomes are kind of all that matter for the big funds.
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  And if you take their money, you are signing up to build one of those.
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  And if you fall short, you fall short.
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  Yeah.
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  I know we had this question go around internally during our team chat about this, but
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  it's kind of like chicken or the egg who created the dynamic of movers' big fundraising.
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  Is it because bigger funds are motivated to move larger sums of capital out the door and
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  then are willing to take the risk on higher valuations as a result?
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  Or is it because founders know that they have all the leverage and therefore can kind of,
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  like, steer a conversation whatever direction?
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  What's your perspective?
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  Yes.
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  And I think the other thing and then Jason kind of mentioned this, think maybe in the comments.
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  Secondaries really did change this whole game.
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  Because it'd be one thing if you're a founder and you're like, oh, I'm common and I'm long
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  every time we raise money.
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  I'm not taking anything off the table.
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  Maybe that changes your calculus.
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  But if you're like, hey, at this really inflated series c price or series d price, I
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  can take $10.15, $2,550,000,000 dollars off the table and put that in my pocket.
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  Now I really can play for I can basically gamble for the big outcome, and I'm already
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  taking care of myself.
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  I don't know if founders would have the same motivation to chase these high valuations if
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  they were looking up at that liquidation preference stack and saying, like, if I don't
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  clear that, I could build a really great multibillion dollar company and walk away with
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  nothing.
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  Yeah.
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  So I do think, like, the founder secondaries, but I also think the big funds really wanna put
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  money to things that have momentum and are working.
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  And if you have momentum and are working, it takes a certain discipline to say no to that
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  $500,000,000.
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  Yeah.
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  And then you brought up yesterday, guess, too is a good example.
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  At every valuation, which people deem from the outside that's too high, the number of rides,
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  like, it continued to crawl up higher.
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  So that's not the first time, but one of the first that people were saying, you can
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  continuously make five to 10 x over and over and over again, even when you think the ceiling
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  has already arrived.
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  You did Anthropic at a billion.
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  You're feeling very good right you're feeling very good right now.
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  Yes.
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  Very
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  good.
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  We talked through as a team also the different pros and cons that Jason listed that come out
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  of hubristic fundraising.
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  And the one that jumped out the most from a con perspective for me was that you start to
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  attract mercenaries, non missionaries.
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  Instead of the people who join simply because the mission is too good to pass up, people
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  sometimes crowd around your company because the outcome itself is the prize.
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  Charlotte, have you seen this manifest across companies in real life and like Yeah.
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  When do you start to see it unfolding?
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  It's so funny.
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  I tell our portfolio companies there are only two kinds of hiring problems.
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  Hiring problems of fame and hiring problems of obscurity.
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  Yeah.
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  Hiring problems of obscurity are like, no one's heard of your startup.
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  How do you get people to care?
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  How do you get them to interview?
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  And it's so hard.
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  Then you raise a series a and you do some press and people have heard about your company.
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  Then you start getting these people who are very qualified, very good at interviewing, and
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  are basically joining your company because they think they're getting in on a rocket ship early
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  and they are more mercenary.
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  And sometimes founders are slow to adjust their expectations and their lens, and so I always
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  tell people, hey, we're a hot company now, hey, we're a company that people desire.
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  Be more careful about who you let into your organization.
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  But I think Jason kind of framed it the right way.
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  The mercenary people will stay on the rocket ship as long as it has momentum and it's
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  growing.
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  And as soon as that's not the case, they're gonna leave, and you should expect them to
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  leave.
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  And a lot of this, I feel like, is you're signing up for a set of rules in a game, and
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  the worst thing you can do is sign up and play a game where you don't actually understand what
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  you signed up for.
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  Well, our next topic is a brief post from Orin Hoffman on LinkedIn, walking through the
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  reality that VCs cannot help win talent in today's market regardless of what they tell
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  founders.
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  In today's war for AI talent, Orin claimed this benefit is most certainly overpromised and used
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  more as a mechanism to close the deal as opposed to staying true to it when a founder
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  need the support.
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  This post got so much good chatter in the comments since this is something that firms
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  have marketed as an asset for years.
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  Some founders and VCs deeply agreed with the statement, and then others did have some strong
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  opinions against from personal experiences of their own.
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  So wanted to pause for your thoughts here first.
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  I think on average, Oren's right.
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  And I think this is one of those things, you know, Orin's both an investor and an
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  entrepreneur.
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  But I think Orin's right.
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  I think on average, VCs cannot do much to help you with hiring.
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  Now, if you had a world class AI engineer and you had a partner at a very top tier firm where
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  you reach out to the person, maybe it has an impact.
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  I have seen some people's platform teams be very good at helping to service candidates, but
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  I think the bigger point is recruiting and hiring is a management task.
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  Your board or your investors can maybe help you close people that are on the fence.
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  But if you're relying on them to source, vet, and deliver basically close ready candidates
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  for I think you're doing entrepreneurship all wrong.
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  Yeah.
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  So my view has always been, what I can help you with is, is there someone on the fence who
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  needs a little bit of a nudge or wants some perspective, or if you as a founder want a
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  second set of eyes on the candidate, happy to do it.
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  But the notion that your early stage VCs are going to deliver candidates, there are very few
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  people who can do that at scale.
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  And I'm talking with a handful of founders right now.
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  We're facing the issue of close around hooray, and now they have to hire.
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  And I think they're almost faced with, I don't even know where to start because I have to
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  possibly search through all of the folks that I don't wanna give any time in order to find the
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  right people.
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  Is there actually a way to make that more efficient beyond just going through referrals?
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  Or do you just have to kind of go through the process and be patient?
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  I think becoming good at hiring is a CEO skill.
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  Just like fundraising, just like strategy, just like planning.
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  And I don't think there's any shortcuts you have to figure out how to hire well, which
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  usually means you have to spend a lot of time on hiring.
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  And so you're like, it's inefficient.
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  I'm like, you know what else is is bad?
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  Randomly letting non performing people into your company is bad.
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  So hiring is hard because finding fit for a start up with people who will be effective,
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  good additions to your culture, and believe in your company's mission, it's hard because it's
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  supposed to be hard.
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  Yeah.
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  So I don't know.
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  I we have some terrific recruiting founders in our portfolio, and almost all of them treat
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  recruiting as a first class priority.
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  They work on it every single day, and they are always thinking about ways to up level the
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  talent in their company.
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  And I think the people who are as maniacal about recruiting as they're about product
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  generally end up building great companies.
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  Yeah.
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  And what are the modes typically look like for those types of founders?
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  Are they just constantly out in the ecosystem trying to meet new people, or are they just
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  always keeping an ear on the ground for good folks that come their way?
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  I talked to one of our founders, who's a really good recruiter, he's like, I do something every
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  day.
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  It's like sometimes that is sending a third message to somebody who I've been trying to get
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  to know who hasn't responded.
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  Sometimes it's grabbing coffee with a friend of mine who I think maybe knows people Yeah.
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  Who might be in the ecosystem.
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  Sometimes it's getting perspective on a hire that I know I'm not gonna make for a year, but
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  I wanna get this person's hiring a CFO.
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  He's like, I have a VP of finance.
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  I don't know what it's like to have a CFO.
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  So I've been asking a bunch of people, hey, I'm thinking about hiring a CFO in a year.
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  Like, what do I need to know if I'm gonna kick the search off in a year?
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  Yeah.
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  So I think most people hear recruiting and they think I'm just, like, blindly sending LinkedIn
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  messages.
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  That's that's not what it That's not it.
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  There's a lot of activities that go into recruiting, and this person has a snack for
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  having good people show up at the right time.
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  I think it feels they're always thinking about how do I get our recruiting needs out into my
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  network in the ecosystem?
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  How do I find people who might be a good fit for our company?
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  I think that's a good balance because I've also seen some folks take a different route, which
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  they just when they meet great people, regardless of what they need is, they just hire
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  them, which I think you could do that to a point, and then you might have over indexed on
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  a specific archetype of person Mhmm.
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  And leave like a massive
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  hole of
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  key positions that you need to hire for.
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  And I think there are times to be opportunistic.
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  But if you find somebody who you think is great, who's gonna bring something special to
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  the company, by all means hire them.
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  Even if we weren't in this talent war for AI talent, is it still a fair statement to say
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  that VCs still are overpromising as it pertains to making large impact from a hiring and
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  talent?
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  I think most VCs who say that can't deliver on it, they they just can't.
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  I think it's mostly because most candidates aren't influenced by your choice of investor.
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  Yeah.
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  Investors can do a lot of things that are helpful though.
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  They can publicize your job listing.
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  They can get it out to more people.
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  They can encourage people to apply.
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  They can share there's a lot of things they can do, but not all those things will be directly
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  attributable to making hire.
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  Yeah.
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  And so it's one of these things where it's asymmetric.
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  Like if they tell you they can do it and you believe it and you make a decision based on it,
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  it was a good investment by that firm to tell you that message.
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  Yeah.
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  Because you can't be like, oh, because you didn't deliver me my CTO, I want my shares
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  back.
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  There's no take backs.
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  So some of this, I think, is, as Oren mentioned, marketing.
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  But there's a few firms, I think, that can actually deliver.
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  Yeah.
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  I think maybe someone from the outside would instantly assume the people who deliver are
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  these bigger mega funds that have the brand that lures in.
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  Do you have some examples in your brain that you're like, no, not as much of a brand, just
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  like really good at closing time?
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  I know some smaller funds that have really strong kind of cult communities around them.
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  Yeah.
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  And that they're able to get people in that cult community into their portfolio companies,
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  but not because they're good at recruiting, it's because they've built a community of
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  people who trust and respect the person at the center of it.
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  Yeah.
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  So when that person says, hey, this is an opportunity you should consider, people take it
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  seriously.
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  Yeah.
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  It's hard to believe that people would leave their cushy job to come work for a startup just
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  because of the brand.
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  It would be maybe the person who's behind the brand that like then along the ride to tell
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  them like, no, this is worth paying Our last piece is written by Sanya Oja titled The Death
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  of Sass Has Been Greatly Exaggerated
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  Mhmm.
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  And pushes back against the narrative that SaaS as a business model is dead, arguing instead
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  that while AI is changing the rules, the game is far from over.
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  She tackles the misconception that because AI make building software easier, enterprises will
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  just generate tools in house, stating that the massive effort required in standardization
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  Yeah.
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  Management, and institutional memory is a huge blockade.
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  While vibe coding lowers the cost of trying things, it doesn't lower the cost of being
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  wrong.
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  Placing a premium on reliable software that enterprises don't want to build themselves.
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  Yeah.
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  She also touches on sender fatigue, how enterprise customers are now questioning
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  whether switching from incumbents to new AI vendors offers material enough improvement to
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  justify the disruption.
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  And that all reethrodes in AI lead back to data.
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  Mhmm.
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  Meaning, every serious AI deployment depends on the various systems, the ERPs or a HRISs, CRM,
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  that incumbents already own and control.
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  Yeah.
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  And incumbents sit inside the massive workloads that drive enterprise decisions.
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  So they do benefit from moving slowly.
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  She closes with a balanced view.
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  Incumbents have real advantages, but no guarantees.
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  Yeah.
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  So they have to replatform around AI and rethink workloads to survive.
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  However, the death of SaaS has not arrived quite yet.
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  Do you feel like, actually, within your own circles, Charles, that they're taking the side
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  that SaaS is is dead?
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  Or
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  It's the, like, avant garde position to take that SAS is dead.
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  And it's interesting.
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  I have a a friend who wrote on LinkedIn, hey, I got rid of all of these software tools because
• 14:39
  I don't wanna pay for them.
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  I've built my own.
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  I'm like, that's cool.
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  But Part of what you're paying for in the software is like maintenance Mhmm.
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  Upkeep, uptime, and future releases.
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  So you fired your CRM provider, but now you're the CRM You
• 14:51
  are it.
• 14:51
  So you are it.
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  So like everything you want the CRM to do, you now have to code.
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  And I was at the Stanford Investor Summit last weekend, which is awesome.
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  And in one of the sessions, someone made a comment.
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  It's one thing to vibe, code a prototype over a weekend.
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  It's another thing to launch a production system that's 99.99% uptime it works.
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  And I think I worry that people are looking at prototypes and saying, oh, well, I prototyped
• 15:14
  Salesforce in a weekend, therefore Salesforce is dead.
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  I'm like, well, you prototyped a version of Salesforce that works for your very specific
• 15:20
  set of circumstances that you've played with for a week.
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  You haven't actually found all the rough edges yet?
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  And so I think what we're gonna learn is that most people don't actually wanna be in the
• 15:29
  business of maintaining these apps that they build.
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  It's fun to prototype.
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  It's fun to test things out.
• 15:34
  Yes.
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  It makes it feel like it's easier to build things.
• 15:36
  But it's funny, I spend a lot of time in Cloud Code.
• 15:38
  My big takeaway is I would much rather use Notion with Cloud Code and have Cloud Code do
• 15:43
  the hard parts of setting up and configuring databases in Notion than do it myself.
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  So my conclusion is Notion is actually a far more valuable software product to me.
• 15:52
  I could you could substitute Notion for Airtable.
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  I have three or four tools.
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  I'm like, wow.
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  This tool is way more valuable to me now that I have Cloud Code who can talk to it and do
• 15:59
  technical things that are slightly beyond.
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  I think this notion that everyone's gonna run their own ERP or CRM system.
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  I mean, the other reason in companies you hire vendors is so that you can yell at them when To
• 16:10
  things go blame.
• 16:12
  Right.
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  You don't wanna be the person who hard coded or who vibe coded the ERP system.
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  Because then you have to fire someone.
• 16:19
  Yourself.
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  Yourself.
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  And
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  then when the ERP system goes down, the CEO's in your office saying, you know, why did the CR
• 16:25
  why did they
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  It's so much easier to say like, oh, it's Yeah.
• 16:27
  Some Salesforce people.
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  That's right.
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  And I think maintenance upgrades and feature development are not trivial.
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  And then there will be some people who build bespoke things that only work for them, and
• 16:38
  they're gonna have an amazing experience.
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  I think in the end, what we're gonna find is the number of things that people really throw
• 16:44
  out and throw out for good is gonna be a lot smaller than
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  that.
• 16:46
  Yeah.
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  For me, her point on vendor fatigue being a large reason why SaaS isn't dead yet was really
• 16:51
  impactful.
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  So when enterprise customers purchase traditional SaaS based software, that's
• 16:56
  typically a decision that took months.
• 16:58
  Oh.
• 16:59
  There were competitors discussed.
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  There was like a whole dog and pony show.
• 17:03
  Mhmm.
• 17:03
  And entire implementation teams stood up on-site to launch and maintain the system.
• 17:07
  So the fatigue is actually deep leverage that SaaS has over newer tools that AI brings.
• 17:12
  Charles, do you feel like enterprise customers have become tired or more critical?
• 17:17
  Or perhaps both about the emergence of shiny new AI tools come to replace legacy stuff.
• 17:23
  Everyone I know who works on AI transformation tells me it's really hard, and that it takes
• 17:28
  longer, and the results you get from ROI are not nearly as immediate as management teams
• 17:33
  would like to see it make.
• 17:34
  So it's like every other technology project in the history of time.
• 17:38
  Yeah.
• 17:38
  Takes longer, doesn't give you what you wanted as quickly as you thought, it's more expensive
• 17:42
  than you think.
• 17:42
  I think what you are seeing though is as things like net revenue retention and gross revenue
• 17:47
  retention and churn, I think we sort of were getting to a place where to some extent SaaS
• 17:51
  vendors might have done this to themselves.
• 17:53
  Making it hard to cancel, changing pricing plans, all in an effort to extract more money
• 17:59
  from customers, I think, created a fair amount of resentment Yeah.
• 18:02
  And frustration on the part of customers that, like, these are all very tricky dark arts.
• 18:06
  You didn't just tell me, hey, we're taking you from $12.
• 18:08
  I'll never forget when our Slack bill went up, I like, wait, what happened?
• 18:11
  Yeah.
• 18:11
  And they changed the window over which they measure an active user.
• 18:15
  And I'm like, well, it's your right to change that, but this feels hostile to me.
• 18:19
  Yeah.
• 18:19
  And makes me think this vendor doesn't have my best interests at heart.
• 18:22
  So I do think in an effort ironically driven by a lot of the SaaS metrics that investors are
• 18:27
  public and private are obsessed with, I think there's some software vendors who might have
• 18:30
  gone too far.
• 18:31
  Yeah.
• 18:31
  And so it's natural that customers are responding to that by thinking about
• 18:34
  alternatives.
• 18:35
  I was also thinking about how SaaS can't be dead yet just by the nature of how these
• 18:39
  massive enterprise customers are just structured internally.
• 18:42
  There's a procurement team That's right.
• 18:44
  Their budget set up for years, and they sign off, like, once, twice a year to change the
• 18:50
  pace at which they make those decisions and get those greenlit.
• 18:52
  It's the same group of people actually in the decision pool that would be involved with their
• 18:56
  AI tooling, and you're asking them to completely reshuffle the way that they make
• 18:59
  those decisions.
• 19:00
  Yeah.
• 19:00
  Like, unfortunately, like, you can't make a 20,000 person company operate as quickly as a
• 19:06
  10 person company.
• 19:07
  I mean, at Precursor, when we see a new tool, we run it by.
• 19:10
  We, like, see if it checks out with security, then we're like, go ahead.
• 19:12
  Try it out.
• 19:13
  That doesn't work.
• 19:14
  It's 20,000.
• 19:15
  Especially if it's a multi million dollar tool.
• 19:18
  Tool.
• 19:18
  Can you imagine the amount of decision that has to go through?
• 19:21
  You only had to allocate that for one tool.
• 19:23
  And now you're like, how do I branch this out and do a decision matrix for six, seven, nine
• 19:27
  different tools, and then I'm gonna manage it myself.
• 19:29
  It's just a little unrealistic for how it's done today.
• 19:32
  I think the smart SaaS vendors that I've seen are trying to stall for time Mhmm.
• 19:36
  And telling their customers, we have AI things that are coming.
• 19:39
  Look.
• 19:39
  Here you go.
• 19:40
  Look over here.
• 19:41
  Yeah.
• 19:41
  We're gonna catch up.
• 19:42
  And I think a good example is Google.
• 19:43
  I think Google, like with Gemini, really did catch up and close the gap.
• 19:47
  And I'm sure if you were thinking about moving off of G Suite, you may be like, well, Google's
• 19:51
  like giving me some of the AI stuff I want.
• 19:53
  It's pretty good.
• 19:54
  Maybe we don't have to move after all.
• 19:56
  Yeah.
• 19:56
  It'll also be interesting to see what the chatter is internally at one of these larger
• 20:00
  enterprise customers if they are trying to look at the internal infrastructure of, okay, if
• 20:05
  this is coming down the road, how can we restructure and get our teams in a place to
• 20:09
  make these decisions quicker?
• 20:10
  Because that has to work before any of this
• 20:13
  else Totally.
• 20:13
  Comes to roost.
• 20:14
  So it'll be interesting.
• 20:16
  Well, we are on time, Charles.
• 20:17
  Thank you.
• 20:17
  It's always so fun to join in person.
• 20:19
  Thank you, our listeners, for jumping in as well.
• 20:22
  Please like and subscribe, we will talk to you all next week.
• 20:24
  Thank you.
• 20:24
  Bye.