Latest / The Learning Corner by Precursor / Episode #56: VC is Hard, Unconcentrated Fund Math, Cluely Growth Updates

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Episode #56: VC is Hard, Unconcentrated Fund Math, Cluely Growth Updates · The Learning Corner by Precursor

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  We now have this narrative channel, which is x company got to y amount of millions of dollars
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  in z amount of time.
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  I'm sick of seeing these charts, which are like, we're the fastest company to get to
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  1,000,000 in ARR.
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  We did it in thirty two hours, and the last company did it in thirty six hours.
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  It's great to get out of the gates.
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  I don't wanna dampen people's enthusiasm for early momentum, but I also wanna remind them
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  it's early momentum.
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  It's the week of November 10.
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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 and Goodreads that caught our team's attention over the past
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  week.
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  Our first piece is a LinkedIn post by our friend Ben Choi from Next Legacy.
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  That was a very brief but very direct statement on stage at the most recent Kaufman Fellows
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  Summit in London.
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  Ben said, quote, VC is hard if your performance doesn't get you your partners well.
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  I know Ben rarely posts.
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  So I was excited to see this one, and I know everyone else was as well.
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  Wanted to get your thoughts on everything first, and then have a couple questions of my
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  own.
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  Yeah.
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  I I think it's very rare for Ben to post.
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  I wish he would post more often.
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  Second, I think it's rare that LPs post things that are spicy, or at least make me sit up and
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  say, wow.
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  That's like a very honest and very true thing that you don't hear that often.
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  You hear lots of anodyne things about portfolio construction and reserve ratios and the
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  mechanics, but I thought this one was really important because this is a conversation I've
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  been having with a lot of people who are contemplating the future of their participation
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  in the venture industry.
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  And it could be, should I stay at my fund?
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  And is this a good home for me?
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  In other cases, the issue is, am I good enough at this job to keep going?
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  And in other cases, it's like, hey, is my firm gonna be around independent of whether I wanna
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  be in or should stay in venture?
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  And I just think it's been interesting to have an LPZ because I think a lot of the
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  conversations I have with people, though that is truth.
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  There are some cases where if your performance isn't good, you're not gonna stay in the
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  industry.
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  And in some cases, the politics inside of some of these firms, if you don't manage them
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  correctly, you're not gonna stay at that firm.
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  I really wish more LPs would share wisdom and insights like this because I think it's helpful
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  for people to remember how this business works.
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  And the most important thing was the first thing you said, is VC is hard.
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  Yeah.
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  I think sometimes people forget.
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  This is a very hard business.
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  It's really hard to make money over time and venture.
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  Very few people do it, and it's a hard business.
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  And I think we're gonna go through another wave of continued exits from the industry.
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  I think it's just a reminder that it's a hard business to get into, and it's even a harder
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  business to stay in.
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  It's funny.
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  Have a friend who's a partner at a big law firm, and it's the same thing.
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  He's like, everybody wants to make partner, but once you make partner, you have to stay
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  partner.
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  And staying partner in some cases is harder than making partner because you've got a seat
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  that other people want, and you've gotta produce and perform at a level that allows you
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  to stay in that seat.
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  And I've certainly seen people where they've gotten pushed out.
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  And maybe it wasn't a performance issue, maybe it was someone just didn't like their deals.
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  Or maybe there was a new leader at the firm, and that new leader and that person were at
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  odds with each other, and that person's descendants meant that the other person had to
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  leave.
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  We're also going through a fair amount of that in the industry too.
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  I think some of that is personality clash, but some of it's like you have new leadership at
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  some of these places.
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  Those leadership teams or leaders want different people in different seats and want
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  different balance of who does what.
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  It happens.
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  It's not fun, though.
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  When you make partner in any fun firm, it's not a permanent thing, but I think people mostly
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  think of it as, like, the almighty ever glowing position.
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  And maybe assumes that once you're a partner in a true partnership, everyone's working
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  together, and we've all decided to buy in on this relationship.
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  So it's an interesting also call out to just know that from a even junior perspective,
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  looking around at your fund and being like, would I want to stay in business with all the
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  people around me and pay into it every year as well?
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  And I think this is part of what makes generational transition at these firms so hard
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  is you can be at a place where, like, I've been very happy here under such and such leadership,
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  under such and such regime, or under this era.
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  It was fun to be a venture capitalist from 2017 to 2021.
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  Things went up.
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  It was great.
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  Less fun '21 through '23.
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  And I think there are gonna be people who are gonna wake up or look up and say, hey.
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  Am I as enthusiastic or as excited about my role here as I was before?
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  And then and for some people, the answer will be no.
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  This is no longer as exciting or interesting to me because, like, the job has changed.
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  The people I work with, the kind of companies I invest in, the way that the markets work.
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  Well, our next topic was a piece written by Stefano Bernardi from Unruly Capital titled
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  should you build a concentrated fund?
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  He challenges the prevailing belief among many LPAs that outperforming in venture demands an
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  extremely concentrated portfolio and heavy follow on investment in the winners despite the
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  appeal of the great picker myth, the idea that some GPs have this magical touch or insider
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  access leading to an unusually high unicorn hit rate, the evidence shows that broad
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  diversification has consistently outperformed such concentrated bets.
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  Stefano points out that top investors don't get there by finding mythical outliers, but by
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  taking more shots and widening their exposure.
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  It's not really clairvoyance.
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  It's more simply showing up often and increasing the surface area for luck and power
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  Yeah.
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  Outcomes.
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  Obviously, we agree with this thought process as we don't run a concentrated fund strategy as
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  well.
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  But what aspects of this piece do you think Stefano outlined really well from your
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  perspective?
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  Of course, like 1,100 people sent me this post.
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  They're like, did you see this post?
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  Of course, I saw this post.
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  And I think it's a very good articulation for something I believe deeply, is at the very
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  earliest stages, it's really, really important to have enough surface area to find good
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  companies.
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  And there are people like Manu Kumar, who I think are incredibly good at concentrated pre
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  seed.
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  They can pick one or two companies a year at a really early stage and be very successful.
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  I don't think most people can do that.
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  You know, I've I've told the people at SV Angel this before.
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  Like, SV Angel was a big inspiration for me at Precursor, and I remember once upon a time, a
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  friend of mine who worked at SV Angel said, okay.
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  We're investors in Airbnb and a bunch of Twitter and 999 companies you've never heard
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  of.
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  And I think the truth is you build your reputation and brand as a venture firm on being
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  in the best companies.
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  Nobody ever asks how much of OpenAI did you purchase in the seed round.
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  The answer is you're a seed investor in OpenAI.
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  And it's funny because this is the week where there was, like, a big piece on screen doors.
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  I've had a lot of people ask me, hey.
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  What do think about emerging vendors?
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  I've read this article a million times, and I've learned two things about LPs.
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  One, most of them have a very fixed mindset view of what works for portfolio construction.
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  And earlier in my venture career, me, I got really frustrated.
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  I was like, why don't these people see the light?
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  I can show them all of the data in the world.
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  And some of them don't wanna change their thinking.
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  But there's an important part in Stefano's piece where he talks about something that I
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  think fund managers often forget, which is LPs have a portfolio construction too.
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  And if you're an LP and you're like, hey, my goal is to build a you know, I'm gonna invest
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  in 10 funds, but my performance is a derivative of the performance of those 10 funds.
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  If each of those 10 funds owns a little bit in a 100 companies each, I'm gonna end up with
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  this unwieldy and very diluted ownership in my portfolio, even though the individual math for
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  each of those funds might work fine.
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  Versus if I invest in 10 concentrated funds, I'm gonna end up with 300 companies.
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  But each of those managers is gonna own enough of that company that when I roll that up
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  because remember, like, we're thinking at the fund level, like, oh, how do I make my fund
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  work?
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  You think of those funds as individual portfolio companies, they've gotta own enough
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  of the winners of their portfolio fund managers' winners for the math to work.
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  And I've had a few LPs that have been like, there's nothing wrong with what you're doing at
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  Precursor other than I'm trying to solve the problem you're solving in a very different way.
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  And you doing a 100 companies per fund doesn't actually help me construct a 300 company
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  portfolio, because in a sense, you're taking up three slots.
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  And you're taking up three slots with less ownership than I would get from three
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  concentrated managers.
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  And the other thing is every time I look at the spreadsheet for a concentrated fund, I'm always
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  like, this gives you the illusion that the person doesn't have to be that good at picking
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  because they're gonna own so much of these companies in theory.
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  Like, oh, as long as they get one good one.
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  I'm like, first of all, they probably won't get the ownership they're telling you.
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  And two, picking still matters.
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  And the thing I've learned from walking LPs through less concentrated portfolio
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  constructions is it forces you to confront your belief about that person's skill at selection.
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  Because you'll be like, if this person's only gonna buy three to 5% of these companies, not
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  10 to 15, They I have to really believe they're gonna find great companies.
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  Otherwise, there's no hope.
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  And I imagine it's a lot easier to go into an IC meeting at a fund of funds and just say,
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  hey.
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  This person's gonna buy ownership like everybody else.
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  It's a concentrated model like everybody else.
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  And so, structurally, this person has all the things they need to succeed versus, hey.
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  I'm bringing in this person who's gonna invest in a 100 companies, but don't worry.
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  Five of them are gonna be amazing.
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  Yeah.
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  The latter's a harder sell.
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  So I think people should continue to write these pieces.
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  People should continue to argue about this, but I I would encourage fund managers to also think
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  about these arguments from the perspective of the LP.
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  Do you think part of the problem is that concentrated funds are just far more common
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  within fund to fund managers?
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  And so maybe the mechanism is there needs to be more truly non concentrated funds that are
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  there.
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  But I guess the kicker is, like, they also all have to be they have to be good.
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  We can't have, like, a bunch of non concentrated funds running around there that
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  are all bad.
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  That doesn't help the issue either.
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  It doesn't.
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  I mean, part of the challenge is there's only a few LPs like Virtus being the most noteworthy
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  that truly deeply believe in power law expressed over these 80 to a 100 company funds.
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  Virtus might be the only LP who consistently shows up for funds with that shred.
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  There are other people who like it, but Virtus loves it and and believes it deeply.
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  So it's hard to raise money for these.
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  Yeah.
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  There's also a chicken and egg problem because there's a ton of LPs I've met who are like, I
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  don't believe that these funds work.
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  I'm like, well, how many of them have you funded?
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  They're like, none.
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  Right.
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  And I'm like, well, why not find out?
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  You know that concentrated doesn't always work.
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  And one LP told me something that and they told me, I was like, that makes sense.
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  He goes, but you know what?
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  When a concentrated fund doesn't work out, it's the manager, not the model.
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  Because we know that concentrated funds work and perform.
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  So if somebody runs a concentrated strategy and they execute it well, where we can basically
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  isolate the variable.
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  It's either the vintage year or the manager or both.
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  But you could have the same confidence about less concentrated strategies if you would
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  invest in them.
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  You would quickly realize.
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  And I tell RLPs all the time.
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  I like, we're gonna invest in 80 to a 100 companies per fund.
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  If we don't get a couple of good ones, I don't expect you to hire me again as a manager.
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  80 to a 100 is a lot of n.
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  There better be some good companies in it.
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  One of the biggest takeaways from the piece was that follow ons are incredibly difficult to get
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  right and increase the size of the outcome required to make a difference for the fund the
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  more you re up.
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  How possible is it for a fund to completely avoid follow ons altogether, though?
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  I think that's something that we always talk about.
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  We've had a year long conversation about this internally.
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  My view is if you do it, you'd have to agree to do it 100% of the time.
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  Because I think as soon as people realize that you're willing to do follow ons, then the
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  decision to not participate is a signal.
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  But if you're like, we literally never do them no matter how good the company, and if people
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  really believe that that was the case, I think you could pull it off.
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  The alternative is to do what we do, which is like you just keep a really high bar for follow
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  ons, and some people won't get money in the follow on.
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  And will that be a signal some people in the market?
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  Yes.
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  But I'd rather worry more about making the right decisions for our fund.
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  And the flip side is we sometimes do things that are risky.
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  We do bridges and extensions where it's not clear the company's gonna succeed, but I do
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  those because I think they're gonna work out.
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  And one thing I've seen is, you know, we get in at such low entry prices, and series As have
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  gotten so expensive.
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  Sometimes the the ratio of pre seed to series A can be 10 to one, and you don't know 10 x more
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  about that company than you do, but it's 10 x more expensive.
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  And so I've always felt like the best thing to do as a small early stage fund is truly to get
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  into as many great companies as you can as early as you can, buy as much upfront as
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  possible, and don't worry as much about follow ons.
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  Well, our final piece is a Tech Crunch article by Marina Temkin recapping an interview with
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  Cluely's CEO, Roy Lee.
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  Cluely went live in April with rage bait marketing to grab thousands of eyeballs on the
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  company and tool, claiming to be used to quote cheat on everything.
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  They made headlines when its ARR jumped from 3,000,000 to 7,000,000 in just one week with
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  Roy claiming every single person who has a meeting or interview is testing this out.
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  But in a more reflective tone, Roy recently acknowledged that brand virality alone isn't
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  enough to sustain long term growth.
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  Looking back, he admitted they may have launched too early and shared a key lesson,
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  quote, what I've learned is you never share revenue numbers.
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  If you're doing well, nobody talks about it.
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  But if you're doing poorly, that's all anyone will focus on.
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  They have now acknowledged to be pivoting to be the spaces.
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  Best AI notetaker, a crowded space to jump into to say the least.
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  I don't have much to say about Cluelie specifically because I'm not an investor.
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  But I remember when the 7,000,000 ARR number came out and so many founders, I know, were
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  thinking, I'm so behind.
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  What am I not doing correct?
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  And it is a good reminder that as a founder, you really can't let these kinds of headlines
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  cloud your focus too much, or you really do risk losing sight of what truly matters in the
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  early days, but wanting thoughts from your end too.
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  Mia, this is one of those moments where, like, I really started to appreciate how compressed
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  the information cycle is in venture these days.
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  Because I went to a board meeting that week, and the CEO was like, we gotta get some Cluelly
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  action going on in this company.
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  We've gotta, like, shake up our marketing.
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  Do you see what those guys were able to achieve?
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  And I told the CEO, I was like, why don't we take a beat?
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  Because we don't actually know what's on the other side.
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  What we know is they succeeded in all these think pieces.
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  Attention is the only thing that matters now.
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  The ability to capture people's attention is the only thing that matters.
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  It's the only everyone is so hungry for a moat.
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  Attention is the new and I'm like, guys, or maybe, just maybe, they did a fantastic job
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  with launch marketing, and now they have to back it up.
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  And I had a lot of companies who were just like, we were doing something similar to
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  Cooley.
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  Maybe we should have been more aggressive in our marketing and messaging or maybe and I was
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  just kinda like, guys, we still don't know if this is gonna work.
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  And I the thing I struggle with the most right now, mean, is I feel like nobody has patience.
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  And I think this connects with the, like, triple triple double double is not enough.
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  You have to go to 10,000,000 in ARR in two hours or your company sucks.
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  That's just not normal.
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  And we we we don't talk enough about what happens on the other side of these stories.
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  And I think it takes a lot of courage to say what Roy said and to admit the truth, which was
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  like, hey.
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  I made I made miscalculation.
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  We did a great job on launch marketing.
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  We shouldn't have talked about revenue.
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  And that the energy and attention we attracted at launch, the answer is like it didn't
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  persist.
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  And so I feel like lately I've been trying to spend more of my time encouraging startups to
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  not chase whatever thing it is that they read on X or heard about.
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  This company did this.
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  Should he be in that category?
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  I'm like, but don't you wanna at least wait a month and figure out if they're as excited
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  about the thing that you are excited about as they were yesterday?
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  And I think it's so hard, and I think it's a it's a reflection of the impact that AI is
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  having on pace.
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  And I think everybody is, like, so afraid of falling behind, so afraid of not taking
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  advantage of some new hack or viral growth loop or distribution opportunity.
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  And I think, honestly, investors are too.
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  It's like, throw money at something that's working.
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  If it stops working, you lose your money.
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  But if it keeps working, you're great.
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  And I think everything right now is operating at a speed that's faster than people can think
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  and process.
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  I don't think it's healthy.
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  I think part of the reason why patience is so difficult is because not only do people grow so
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  quickly, like quotation marks right now in this AI era, but also there are so many channels to
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  share that information publicly.
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  The moment you have a thought, can share and it's distributed immediately to millions of
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  people.
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  Before we had everyone pushing this in LinkedIn and through Instagram through X, did it feel
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  like people were able to be a little bit more laser focused, or do you feel like this
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  information would come through secret tunnels of venture and find its way to founders
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  eventually, but maybe just not as fast, but it still was impactful?
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  I think it's exactly what it is.
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  I think the rate of information diffusion was slower.
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  Also, I think we now have this narrative channel, for lack of a better word, which is x
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  company got to y amount of millions of dollars in z amount of time.
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  And I I'm sick of seeing these charts, which are like, we're the fastest company to get to
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  1,000,000 in ARR.
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  We did it in thirty two hours, and the last company did it in thirty six hours, and they
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  show you this you know what chart of this the steep Right.
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  Lines.
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  And I'm like, it's great to get out of the gates.
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  I don't wanna dampen people's enthusiasm for early momentum, but I also wanna remind them
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  it's early momentum.
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  Well, we are all out of time today.
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  Thank you, Charles, for shopping in.
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  Thank you for our listeners for popping in as well.
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  Please like and subscribe, and we will talk with you all next week.
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  Thank you.
• 16:57
  Bye.
• 16:58
  Bye.