Latest / The Learning Corner by Precursor / Episode #18: Founders Quitting vs Stopping, The Rise of Spinout VC Funds, AngelList State of Venture Report

Transcript

Episode #18: Founders Quitting vs Stopping, The Rise of Spinout VC Funds, AngelList State of Venture Report · The Learning Corner by Precursor

• 0:00
  I've learned is as an investor, sometimes the best thing you can do is to open the door to a
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  conversation about what the future might look like and create space for the founder to know
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  that you're open to that idea.
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  It's the week of February 3.
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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 Farnham, 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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  The first essay is by our good friend, Hunter Wach, titled, I never want founders to quit,
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  but sometimes they should stop.
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  Here, Hunter raises a nuanced take on founder perseverance.
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  One of the prevailing blanket beliefs in venture and Silicon Valley could be that
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  resilience is everything.
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  Never give up.
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  Push through the downturns.
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  Pivot when necessary.
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  But Hunter poses the question of what happens when that mentality leads founders to chase an
• 1:01
  impossible outcome.
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  He argues that the best founders recognize when to pivot, but also when to step away entirely.
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  Hunter makes a distinction between quitting and stopping.
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  One being reactive, the other being a more strategic decision.
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  Oftentimes, it's probably investors who have to have these really difficult conversations with
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  founders.
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  So, Charles, how can you frame that conversation in a way that's constructive
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  rather than shocking and demoralizing?
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  I will say, Mia, this is one of those things I think you get better at with practice.
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  This is an awkward conversation.
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  I can tell you the way I think about these.
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  The most important thing that I believe is I don't think I can tell a founder to quit or to
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  stop.
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  It's their decision.
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  If they wanna keep working on the business, it's really up to them.
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  But what I've learned is as an investor, sometimes the best thing you can do is to open
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  the door to a conversation about what the future might look like and create space for the
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  founder to know that you're open to that idea.
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  I've handled some of these poorly in the past where I've told someone, I think you should
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  shut this thing down and quit, and they were just, like, crushed.
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  Like, you don't believe in me?
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  I'm like, no.
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  That's not what I I can see how you would draw that conclusion from the poor way I handled
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  this, but that wasn't my intention.
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  My intention was to let you know.
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  So now oftentimes, what I tell founders, you don't owe me anything more in this business at
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  this point.
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  You've given it your all.
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  You've tried really hard.
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  You sacrificed for years.
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  If this is something that you wanna continue to pursue because you find it personally
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  interesting and satisfying, you should continue to do so.
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  If this is something you're pursuing because you have a dogged determination to return
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  investor capital or because you just don't know how to quit, that is not a good reason, in my
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  opinion, to quit, to keep going, and I'm not gonna ask you to do that.
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  And it's very rare that when you open that door that a founder runs through it at that moment.
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  What I often find is if you crack that door open sometime over the next couple of months,
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  they might ask you, so what would it look like if I shut down the company?
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  Or what would it look like?
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  And I think we focus this conversation so much on shutting down the company.
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  And I think that's because at the early stage, oftentimes, bringing in management isn't an
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  option.
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  But I think as companies mature, sometimes the answer is just because you as the founder are
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  tired or have hit your ceiling or capped out energy wise.
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  The answer might not be to force a sale or to sell the business or shut it down.
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  The answer might be find somebody internal or external who has the energy to keep going with
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  the business.
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  I always tell people all I expect from you is effort and focus.
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  If you worked hard and you made the company a a priority, you don't owe me anything beyond
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  that.
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  If you haven't done those things, then I'm probably gonna have a different view on you as
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  a founder and what you do next.
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  But my biggest thing to me is I hate to see people waste their best working years on things
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  that aren't gonna work or aren't gonna be meaningful unless they choose to do so.
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  What has been a more difficult conversation when you have to ask them, maybe it's time to
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  stop entirely or maybe it's time to bring in someone new.
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  I think because I normally have these conversations with the original founder, not
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  like a hired CEO.
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  For a lot of people, we can argue whether this has gone to the extreme, I'd argue it has.
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  For a lot of people, being the founder of their startup is a huge part of their And you're
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  basically asking them to rip out a big part of their identity without always a very clear
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  sense of what's on the other side.
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  And I think that's psychologically scary for a lot of people.
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  Who am I if I'm not the founder of this company and I'm not now the founder of a new company?
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  I'm like, well, you're a human being.
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  This company and I'm not now the founder of a new company?
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  I'm like, well, you're a human being with friends and family and interests.
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  You are a person beyond your startup.
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  But I think oftentimes at the moment I have this conversation, it's a time where someone's
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  like working really hard to keep the thing alive.
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  And I think sometimes people were just like, Hey, like I need a job.
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  Or, Hey, I left a good job to start this company.
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  How am I going to explain to my friends and family that it failed?
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  And so I think in many ways to me, like shutting down a company or leaving, it's a
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  grieving process.
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  That's why that's why I'm so anti rebound startups.
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  And the notion that you just shut something down and you wanna get back in the game and
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  please don't do it.
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  Give yourself time and space.
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  That's a great segue into my next question because a part of the piece that stood out was
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  stopping at the right time can sometimes set founders up for future success.
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  So we've probably all seen cases where founders jump down a company and come back a few years
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  with a better one.
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  But how have you actually seen this play out?
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  I I think 2022 and 2023 were very instructive years on this for me.
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  Not all VCs or investors have the same perspective when a founder decides to shut a
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  company down.
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  We've had a couple of companies where I've been like, look, this founder doesn't believe this
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  is working.
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  I don't know how you make somebody work on something they don't believe in.
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  They're going to shut it down.
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  And I've had other investors say, I can't believe this person's quitting.
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  I totally think they should keep going.
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  They're like giving up too soon.
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  And my reaction to that has been like, that's what you would do if you were in their
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  position, but you're not.
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  None of us are in their position.
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  I'm a big fan of the old saying, never quit on a bad day.
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  Sometimes I talk to people, I'm like, you're just having a really bad run.
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  I'm not sure that quitting in this moment is the right decision.
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  Not because you don't have the right to quit, but you might be quitting on a bad day.
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  I've been surprised.
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  We've had some investors who are like, I need this company to keep going because I don't want
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  the write down on my books.
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  We've had other people saying, I think this founder should be tougher and should keep
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  going.
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  And I'm like, at the end of the day, they run the company.
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  We we can judge the decisions that they make, but we can't make the decisions for them.
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  And same of what you said before, if you can't force a founder to quit, you probably also
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  can't force them to continue working day in, day out on the company that they set out to
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  build when they're like half in.
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  But I do think to the point of that piece, the way people exit really does stick with you as
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  an investor.
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  Whether they wound the company down properly and were able to get you all the documentation
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  you need for audit.
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  We've I've had situations where people just emailed me, and we're like, I'm quitting.
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  I'm done.
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  I'm walking away.
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  And they just bounced.
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  And you're like, wow.
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  And I get it.
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  You've reached your limit.
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  And so there's a better way to do it than this.
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  Great post from Hunter.
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  Always love reading all of the essays that come from him.
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  Moving on to the second topic, it's an article by Forbes about Seroquel's latest fundraise.
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  Seroquo, formerly of Greylock, just closed a $230,000,000 second fund for her firm,
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  Conviction.
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  It's doubling the size of her first AI focused fund.
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  Her ability to carve out a reputation as a top tier AI investor highlights a broader trend.
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  More prominent VCs are leaving established firms to start their own.
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  The article describes this as a VC reshuffling with top talent seeking to build their own
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  platforms instead of staying locked into legacy firms with slower decision making processes and
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  perhaps diluted economics.
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  There's been a steady drumbeat of partners leaving top firms to start their own funds.
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  So, Charles, what do you feel like this means about the current state of venture today and
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  where opportunity lies?
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  I think we've talked before about the concentration in BC and how the big firms are
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  getting bigger.
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  I'd be curious to see someone also cut the data and say, of the 25% of capital that wasn't
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  raised by big established funds, what chunk of that went to people who used to work at big
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  established funds?
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  My sense is that is a significant chunk of it.
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  It's funny when you leave to start your own fund, lots of people will call you and ask you
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  about your experience.
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  It is kinda interesting.
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  And when I talk to people, a lot of it, I think, is people are leaving for good reasons.
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  There's something that they wanna see in the world that they feel like doesn't exist, and
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  they feel like they can't will that thing into existence at their current firm.
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  And if you think about a lot of these big firms, a lot of them have a very visible prime
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  working age leadership in charge of those firms.
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  So if you're an up and comer, and I don't know the specifics of everybody's carry split and
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  pay and manage.
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  I there's a lot of things that are unknowable as an outsider.
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  What I do know is that in most venture firms, the people at the very top have a
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  disproportionate amount of both economic control and simply operational control over how
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  the firm operates.
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  And if you're someone who believes in your own ability and thinks you are a good investor, the
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  natural tendency is at some point to say, am I better off staying here and trying to become
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  the person who's leading this firm, or am I better off striking out on my own?
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  And I think some of this is economic.
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  It is people saying, look, I have a teeny amount of carry here, and I don't have any
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  management company participation, and I don't have any control over how this firm is working.
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  If I could raise enough money, I could have much more say in control over how the firm is
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  run.
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  And I think a lot of the people I've talked to, that's their motivation.
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  It's a desire to build something that better reflects who they are and their values.
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  And they wanna really control essentially the UI of the firm, Mia, more.
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  And it's it's as much about the money as it is about control.
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  And I think part of the reason we're gonna continue to see an acceleration in this trend,
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  in my opinion, is we did sort of emerging manager one point o, which was mostly people
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  who were new to venture, people like me who were spinning out of, like, smaller firms.
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  And I think right now, we're in a climate where when I talked to a lot of LPs, backing a GP
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  who's spinning out of a well known platform, maybe even a platform where you are already an
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  investor, feels much safer than one of a hundred random from your point of view as an
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  LP.
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  Emerging manager people who were maybe a successful angel or an operator or spinning out
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  of a family office, like, the person who was at x name brand name firm feels like a safe bet
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  you could get through committee.
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  Sarah even acknowledged when she started, she got a lot of questions around is success that
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  you're going to have based on the platform that you had at your prior fund.
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  She said second fund, that question came up a lot less.
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  I know you're involved in Screen Door and LP of multiple funds.
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  Also, what are the things that LP should consider when they look at types of emerging
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  manager and putting quotations around my fingers there who've left larger platforms and
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  wanna start their own?
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  We meet a lot of these folks through Screen Door, and I always I just ask them directly.
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  How much of your success do you think was a function of the platform you were on?
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  There is an answer.
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  I won't say there's a right answer.
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  There's an answer that I think is intellectually honest and works for me.
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  But I think it's actually unknowable for you as a as a person.
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  Look, I think it's a lot easier to get people to reply to you if your email address ends in
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  at a 16 z or at, you know, pick your favorite brand name firm.
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  I think founders pay attention.
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  But I think also most people in this business realize that founders are choosing a firm and
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  an individual.
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  And I think as the individual, it's nice and satisfying to believe that who I am as an
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  individual is more important than the name on the front of the jersey versus name on the back
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  of the jersey, to use a sports analogy.
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  But I think most of the people I found who've done the best can simultaneously hold two
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  things to be true.
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  One is that I absolutely got a tailwind in terms of access from the brand name firm, but
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  who I am and how I relate to founders is also important.
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  But also I found out peace will ask the founder, hey.
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  Would you have taken this money if they're on their own?
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  You don't have the founder can't really answer that question because it was a bundle.
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  It was like Sarah plus Greylock.
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  I think maybe a more relevant question is would you have taken Greylock's money without Sarah
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  as opposed to would you have taken Sarah's money without Greylock?
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  And so I think a lot of LPs try to assess this.
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  And and, truthfully, I think the other reason this trend persists is if you look at the size
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  of the debut funds that spin out managers raise, they're usually somewhere around a
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  hundred million dollars per GP if you want to use, like, a crude metric.
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  Most emerging managers who are not of that ilk are raising funds that are between 1025% of
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  that total.
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  And knowing that you could raise a hundred million dollars out of the gate, I think
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  changes the calculus of leaving, both in terms of short term cash comp, but also in terms of
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  the the type of team and resources you can hire when you get started.
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  And it's just a different ballgame.
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  And is that just based on LPs making the assumption that you don't need to have the
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  $10,000,000 pilot fund?
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  Like, we're happy to give you the 100 to just skip all of that.
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  I also think when you've been operating at the scale of billions, operating at a hundred
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  million feels small.
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  When I talk to my friends who are spinning out, the idea of leaving and starting a $50,000,000
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  fund, like, you just wouldn't do it.
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  You just stay.
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  You'd stay and figure out how to be happy.
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  So there's some, like, minimum threshold amount of money.
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  But also, when you're at these platforms, depending on your relationship to leadership,
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  you might have access to LPs for whom writing a $10,000,000 check into a hundred million dollar
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  fund for someone you've gotten to know on a platform, you've observed their work, the GPs
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  have given you some sense to their contribution, can be an easier experience.
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  If you just think about as an LP, what we really wanna do is I wanna underwrite someone
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  I've really gotten to know where I have some insight into their performance.
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  Someone who's been a GP at a platform where you're an LP, you kinda have unfair access on
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  the diligence side.
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  You can ask the leadership, hey.
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  Why is this person leading?
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  Here's what they told me.
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  Are you all investing?
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  These are the deals they tell me they worked on.
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  Is that true?
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  And you might have met that person at AGMs for the last five or six years.
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  You do sometimes have the ability to build a relationship and have more familiarity there.
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  Moving on to topic three.
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  It's AngelList latest state of venture report, which provides a data driven look at early
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  stage investing across 2024.
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  After a more turbulent 2023, the market found some stability, but a handful of lingering
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  challenges remain.
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  There's a couple of key takeaways, most of which we've discussed at different times
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  throughout the podcast.
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  Seed valuations have remained surprisingly resilient.
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  They're standing around a median seed round valuation at 20,000,000 pre, which is actually
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  back to nearly the 2022 highs.
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  VC performance still continues to be stagnant.
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  So funds from 2021 to 2023 vintages are relatively underperforming.
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  Again, things we've talked about, but squeezed by higher entry evaluations and a lower rate of
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  markups over time.
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  And then a new one, AI dominates deal flow.
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  So through AngelList specifically, a third of deals at the seed stage now fall into the AI
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  category, far outpacing previous tech cycles like fintech and crypto.
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  So the fact that seed valuations are still climbing despite weaker overall venture
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  returns, I thought was pretty interesting.
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  I assume a lot of this has to do with AI or StackSafe, but how sustainable do you kind of
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  think this model is?
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  I think we're in this very weird place in seed stage investing.
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  You know, some things feel kind of like boil the the frog, and I feel like this elongated
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  seed process is we're we're very close to actually boiling the frog.
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  I think it was one thing when seed was a two year journey and then seed was a three year
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  journey.
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  And now I would say it's becoming more like a four to five year journey.
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  At least from what I've seen in our portfolio, it can be a four to five year journey where
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  there are three financings, all of which you will hold on your books at cost for five years.
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  You'll do the first one at cost, and then you'll do two more safes at cost, and you will
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  end up with and if it's a good company, you might end up concentrating dollars into a
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  company and getting essentially no credit for whatever bump in valuation you're seeing from
• 15:09
  those safes, which means your reported performance as a seed fund will be muted.
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  And I think this is becoming one of the hardest things, particularly for emerging managers, is
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  how do you talk about performance in a world with very few markups?
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  Because in most cases, a new safe, unless you have more liberal valuation policy, a safe at a
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  higher cap isn't a markup.
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  It isn't something that's gonna show up in your performance until it converts.
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  And also remember, the losses, though, will show up sooner.
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  We've talked about this a ton internally.
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  You end up in this dynamic where the old lemons ripen early, bad news shows up early.
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  The good news doesn't show up until much later.
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  But in some cases, the good news can be quite true.
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  Like, we've had 10 x step ups on conversion, and it's not because the new round was a 10 x.
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  It's because it's been five years.
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  And if you go all the way back to the original safes, the new valuations are such that, like,
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  it's a it's a meaningful step up.
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  We have one of those that's gonna close in three weeks, and we're gonna get a six x markup
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  on a position, but it's only a two x markup on the last safe.
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  And so I think it's different also when you have later stage companies that go long time in
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  between evaluation because usually those companies are mature.
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  You can be like, oh, they grew ARR from 10,000,000 to 20,000,000.
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  They doubled revenue.
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  They're at $20,000,000 in revenue.
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  We think a company doing $20,000,000 in revenue with these margins is worth x.
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  When you're like, this is a company at 500 k in ARR, I don't know what to tell you.
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  And I think it puts a premium on two things.
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  When I talk to RLPs, I think it's a lot easier to trust a GP when you've seen how they handle
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  evaluations and markups over a long period of time.
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  And a handful of our LPs have been like, we give you a hard time about performance
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  sometimes, but we understand how you mark the book.
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  And we know that you're conservative.
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  So we need the language from you, not so that we are comfortable, so that we can explain to
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  people internal to our organizations why they shouldn't be concerned.
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  But I think if you're a 2021 brand new vintage manager who doesn't have the trust of long term
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  LP relationships, I think it's hard to talk about performance.
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  Particularly if LPs might be like, well, have you been doing this job long enough to know
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  which of those companies are doing well and which ones are actually in trouble?
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  Are you trying to fool me or are you fooling yourself?
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  These are hard conversations.
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  It's funny.
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  I thought by now, we would have dealt with all of the 2021 overhang.
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  I now think it's gonna take until 2027.
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  Wow.
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  What do you think in 2025 is in when you think about seed and venture and the dynamics there,
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  and what do you feel like is out?
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  If you cynically said, I just wanna optimize for markups, then you should do buzzy AI stuff
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  because, like, that's where the energy and the action is.
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  And if your goal is to, like, generate markups, I think that's a good strategy.
• 17:40
  I don't think chasing markups is what most people get in venture to do.
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  But the practical reality is that like, they help.
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  They help with narrative.
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  They help with fundraising.
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  They help.
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  The question I always ask myself is what's going to look like a good idea two years from
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  now?
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  Like, what are people going to look back and say, God, I wish I had had the foresight to do
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  that two years ago.
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  And those things always feel slightly scary and uncomfortable.
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  And so I'm always like, alright.
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  Well, if this feels slightly scary and uncomfortable, we might be in the right zone.
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  Looking for things that are slightly scary, uncomfortable, and then I would add, maybe in
• 18:11
  comparison, feel a little bit more more boring or less flashy is typically what I feel like
• 18:15
  the cycles you wanna look for.
• 18:17
  To me, the risk of being all in an AI right now is that we can't maintain this level of
• 18:22
  enthusiasm for a single investment theme for that much longer.
• 18:25
  Could it be another year?
• 18:26
  Sure.
• 18:26
  Could it be two years?
• 18:27
  Maybe.
• 18:27
  Is this gonna be three years?
• 18:28
  I doubt it.
• 18:29
  Because at some point, you you get more feedback about what happens as things get
• 18:32
  closer to terminal or at scale.
• 18:34
  For example, we still don't know if spending hundreds of billions of dollars a year on data
• 18:38
  centers and expensive models is really the right approach, but we are going to run that
• 18:42
  experiment.
• 18:42
  But at 2027, people might say, you know, we spent $200,000,000,000 on this stuff.
• 18:46
  Was that a good idea?
• 18:47
  We are all out of time for today.
• 18:48
  Thank you, Charles, for stopping by, and thank you to all our listeners for listening.
• 18:52
  Please like and subscribe, and we will all talk with you next week.
• 18:55
  Thank you.
• 18:56
  Bye.