Latest / The Learning Corner by Precursor / Episode #16: Pre-Seed/Seed M&A Activity, Solo Founders, Harvey $3B Raise, Fund Performance Recalibrations

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Episode #16: Pre-Seed/Seed M&A Activity, Solo Founders, Harvey $3B Raise, Fund Performance Recalibrations · The Learning Corner by Precursor

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  The lesson I learned in 23 24 is if you're conservative in a world where the people
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  evaluating you think everybody else is optimistic, you get treated like the optimistic
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  people.
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  And whatever you do that's conservative will still get discounted because it's too hard to
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  tell who's truly conservative and who's an optimist masquerading as a conservative person.
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  It's the week of January 20th.
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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 two pieces are great snapshots from Peter Walker and the Carta team.
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  The first is around m and a activity in venture where Walker's data showed that half of startup
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  m and a in 2024 was at the pre seed and seed stages.
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  The post emphasizes how changing market conditions are pushing companies to seek growth
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  through acquisitions, particularly as organic growth becomes harder to achieve in a cautious
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  funding environment.
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  What's interesting is the blend of motivations.
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  Some startups are looking for exits as fundraising gets harder, while larger companies
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  are leveraging cash reserves to secure talent or possibly fill gaps in their product
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  offerings.
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  So while the increase in m and a deal activity is exciting, it's impossible to not acknowledge
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  the reality that valuations were largely bubbled over the last handful of years.
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  So it's not clear if these acquisitions resulted in tremendous earnings for founders
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  and their investors across the board.
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  So Charles, pre seed and seed is our investment stage here at Precursor, and we're constantly
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  tracking m and a activity across our portfolio of 400 plus companies across every industry
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  every week.
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  I was curious if you felt, in comparison to years prior, has there been this uptick in m
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  and a interest and movement over the year, and what does that tell you about the current state
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  of venture?
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  If I look at our m and a tracker, you know, we go over it every week as a team.
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  There's certainly more companies on that list.
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  And I think what's happening is we've gone back to something that feels like an earlier era.
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  I think from 2018 maybe to 2022, there was just a lot of insider support for companies that had
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  made good progress but not great progress and maybe got pretty far down the line on the seed
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  round, but it didn't happen.
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  And I think a lot of insiders just felt like, well, we'll bridge these companies.
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  We'll extend them.
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  We'll keep them going because they're 1 or 2 quarters away from being ready for whatever
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  arbitrary name of round they're trying to close, whether that's a series a or a c 2.
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  And I think when we had the big valuation reset in 2022, I think a lot of VCs looked up and
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  said, maybe we shouldn't continue to do these bridges and extensions.
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  Maybe the series a bar has gotten so high or so hard to predict that the right answer actually
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  is to cut our losses.
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  And for the companies that aren't working, instead of extending them and giving them more
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  time, we should more aggressively encourage them to sell.
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  And I certainly have noticed on the group chats and investor only threads I'm on with Compass
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  where I'm an investor, there are many people who are pulling that lever much sooner.
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  You know, 6, 9 months of runway, companies starting to talk about a bridge, a lot more,
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  hey.
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  Let's run a parallel process.
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  Let's look at selling the company.
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  Let's also think about a bridge.
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  And I think founders have gotten that message, which is that there's gonna be some resistance
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  if you ask for a bridge or an extension or you wanna keep going and you're relying only on
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  your insiders.
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  And so a lot of companies are selling.
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  And what I'm typically seeing is these deals are okay for everybody.
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  Usually, the founders get jobs.
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  I also think part of this is just the labor market.
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  I think previously, the funding markets were so good that if your company didn't work out, a
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  lot of people were like, well, I'll go start another company, or I'll go get a job at a big
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  FAANG company, or the list of options felt pretty robust.
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  And now it doesn't feel like FAANG is safe.
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  It doesn't feel like it's easy to just walk across the street and start a new company.
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  And I think more people are saying, hey.
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  If I land this plane and we get acquihires as a small deal, is there a job on the other side of
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  this for me, at least for the next year?
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  And so I think some of this is happening because founders, I think, are getting the
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  sense that investors are less likely to support them.
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  And I think some of this is happening because investors are pushing companies that aren't
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  clearly working to sell, shut down, return capital, or pursue exits, even if those exits
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  don't generate a lot of money for everybody.
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  Pre seed and seed is also very early in the journey.
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  So I was not surprised because I've seen the data across precursor of when we start engaging
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  on m and a activity across the board.
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  But for people who invest in other stages, I think maybe that would be a new insight that so
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  much of this activity happens so early on when maybe product market fit hasn't quite been
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  reached and it's not really a conversation around let's try another angle, but maybe it's
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  time to think about other routes entirely.
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  A lot of these things end up being relationship driven too.
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  Like, I tell our founders, like, nobody buys a stranger.
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  And at this stage, a lot of times, the founder of the acquiring company knows the founder or
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  team of the company they're acquiring and wants to add them.
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  And so so I will say, like, very few of these acquisitions, the ones at least I'm seeing are
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  like, wow.
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  Pre seed company has built some amazing piece of technology, and there are people fighting to
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  acquire the company.
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  It is much more like, hey.
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  We tried something.
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  We learned something.
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  It's working pretty well.
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  Maybe not well enough to keep going, but there's some value here.
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  And in most cases, what you're getting is either your money back as an investor and or
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  some stock in the company that acquires it, and you hope that that company does well.
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  The second piece from the Carta team was a graphic indicating that solo founder startups
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  are less likely to receive funding.
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  Solo founder startups are 35% of all startups, but 12% of unicorns from the past year.
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  This all being said, this was actually an increase from 29% in 2023, indicating that more
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  founders are opting for a solo journey.
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  The founder journey is obviously extremely difficult, and there is an argument that
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  bringing along a partner for that journey offers a strong sounding board, a partner in
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  the trenches, etcetera, etcetera.
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  However, the flip side of that is that the wrong combination of founders can lead to a
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  company's demise.
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  Within our own portfolio, roughly 23.5 percent of our companies, both inactive and active were
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  and are led by solo founders.
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  So I was curious to ask, how do you evaluate that when we think about team dynamics?
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  I would rather have a committed, focused solo founder who's passionate about what they're
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  building than 2 people where one is only half in.
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  I always think about, well, what are the ideal configurations?
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  I think the ideal configuration is 2 deeply committed founders just because being a solo
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  founder is really hard on your down days because there there isn't a person there to
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  counterbalance.
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  There isn't a person to hand things off to.
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  And also, Mia, like, I don't know.
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  When I started Inventor 20 years ago, a founder was somebody who was there the day the company
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  started.
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  And now a founder is a title.
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  We have people who have these late joining cofounders who join companies a year or 2, 3
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  years in and are given the founder title as an honorific to recognize their contributions and
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  to make them feel empowered, but not because they were there from the beginning.
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  And I used to be very resistant to this because I was like, it dilutes the meaning of what it
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  means to be a founder.
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  And I've totally come around and said, like, this is, like, head of this is, like, all of
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  the other titular innovations we have in startup land to recognize people's
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  contributions and make them feel seen and recognized in their role.
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  So now to me, a solo founder is a company where one founder owns 85 or 90% or more of the
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  equity.
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  And the number of times in the last 5 years I've met a founding team where I'm like, this
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  is a founding team.
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  There is a founder and 2 people who join this person very early.
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  And whether they have the founder title or not, the equity is held in the hands of a single
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  person.
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  So now when I meet teams and as you know, as part of our intake process, I'm like, show me
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  the cap table and show me who owns what.
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  Because that will give me a sense of, like, who's really central in the journey and maybe
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  who was given a cofounder title because they wanted the recognition.
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  So my biggest fear with solo founders is not that the person is in is, you know, is a bad
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  leader.
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  It's just, like, maybe you're on your own because you can't work well with others.
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  And so I'm always trying to test, is this someone who just, hey, had an idea, nobody in
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  their ecosystem or orbit was ready to go on the journey with them, and rather than wait for
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  that person, they got started?
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  Or is this someone who can't share their Legos, who can't, like, play nice with others, who
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  can't recruit, who has some defect that will make it hard for them to build and scale the
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  company?
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  And if I think it's the latter, I usually won't invest.
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  But in most cases, I I think it would be weird to sit around if you had a good idea and just
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  look for or wait for somebody else to start unless you're a person who's really committed
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  to this, says the guy who started a solo GP fund and is still the only GP 10 years later.
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  So, you know, I I may be guilty of motivated reasoning, but some of our top companies have
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  either wildly imbalanced cap tables or essentially solo founders.
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  And I think when it works, it works.
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  When you're kind of discerning between those last two scenarios, one of which being the
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  founder who maybe can't play nice with others, how do you figure out the signs here and there?
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  I'll usually just ask them, did you think about having a cofounder?
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  Like, did you explore this process with anybody?
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  I'll try to look at other places or organizations they've been a part of.
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  Were there signs in those companies that the person couldn't grow?
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  And, you know, sometimes I'll meet people who've had 3 or 4, 1 and 2 person companies.
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  And I'm just like, maybe maybe this is a sign that nothing you've done has ever scaled beyond
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  1 or 2.
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  Maybe that's, like, your comfort zone and preference.
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  Maybe that's the limitations of your ability, or maybe it's just circumstance, but it's
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  probably worth having a conversation or 2 to figure that out.
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  What are the specific learnings that we've had about cofounders that break up throughout the
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  journey, and what does it take to be successful for founders who started
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  as a duo and then continue
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  on solo and choose to successful for founders who started as a duo and then continue on solo
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  and choose to kind of go on that journey on their own?
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  I know we track a lot of that information over time.
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  My big learnings are for the 1st 5 years of the fund, I kind of only looked at what I call the
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  principal founder, the person who's the CEO and had most of the equity.
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  And if I liked that person and didn't love their cofounder, I would probably invest
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  because I was like, as long as this person's here, I feel pretty good about our investment.
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  And that really worked.
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  Then we went through a period of time where we had a bunch of breakups, and I was like, oh, in
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  many cases, like, I if I'm honest, I wasn't as enthusiastic about the second person.
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  And usually, there's a couple of archetypes.
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  1 is if the founder's technical but not that sophisticated and not a people manager, I'm
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  like, well, at some point, we're gonna need a stronger technologist leading the company.
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  And that puts that technical cofounder in an awkward place if they're not technical enough
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  to be the system architect and they're not people oriented enough to do the VP of
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  engineering, there's really no place for them.
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  It's hard to make the cofounder an individual contributor in the NGO org.
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  It's just awkward.
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  Sometimes, you know, we do a lot of forecasting with the hope that people are going to grow
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  into what the company needs.
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  And sometimes people just can't scale with their own companies, and the company needs a
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  different leader.
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  Sometimes it's health or life circumstances, divorce, death, kid issue.
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  And the ones that are the hardest is sometimes people just run out of energy.
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  It's been 5, 6, 7 years, and they're just tired.
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  And they've given it all they have, and they need a new challenge, and they leave.
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  So my assumption is that it's highly unlikely in a world where it takes 10 or 15 years for
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  companies to fully mature, that everybody who's there at the start will be there at the finish.
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  I was talking to someone about this over the weekend who has a cofounder who left, and I
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  asked the person, like, what did what did we lose with this person out of the building?
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  What what did we lose?
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  Our next article is from Bloomberg titled legal AI startup Harvey set to double valuation to
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  3,000,000,000 It's about the company Harvey, a platform that uses AI to streamline legal
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  workflows, raising another large round, perhaps signaling the growing appetite for vertical
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  specific AI solutions, even in industries that have been relatively slow to hop on the the AI
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  bandwagon.
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  As background, the platform leverages generative AI to help law firms draft
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  documents, analyze contracts, and manage compliance, all areas that are notoriously time
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  consuming and expensive.
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  The legal industry itself has traditionally been slow to adopt new technology even amidst,
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  you know, the growing interest in generative AI.
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  What do you think made the timing right for a company like Harvey to break through at least
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  with investors, especially with other companies building simultaneously in the space?
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  It feels like AI is really coming for some of these professional services businesses.
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  We're historically, you know, selling to lawyers and accounting firms.
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  It's been hard, which isn't to say we don't have good companies in legal tech.
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  You've got Clio.
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  There there are, like, meaningful scale, but it's all I think it's been one of those
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  categories where VCs have been like, selling those people is hard.
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  They don't pay a lot.
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  They're difficult to deal with.
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  And I think AI has created this opportunity to go after professional services businesses by
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  using technology to automate the work that fairly expensive junior and mid level people
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  do.
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  And I think law makes sense.
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  I think we've seen a pretty wide flavor of approaches.
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  Some are like, hey.
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  AI is gonna replace humans.
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  Some are like, AI is gonna augment humans and everything in between.
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  It's fine.
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  There were 2 articles in The Information this week.
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  1 about kind of PE style roll ups of kind of traditional services based businesses, and then
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  one today about just a meteoric revenue rise of some of these companies and whether it's
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  sustainable.
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  And I think there's a lot of VC enthusiasm that AI might be the kind of crowbar that cracks
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  some of these industries that have been very resistant to adopting technology.
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  And I don't know whether that's changing buyer behavior.
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  I think AI has put a level of urgency on a lot of people to figure out what does this mean for
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  the future of our business.
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  So I think there's more room for experimentation.
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  And by all accounts, the Harvey team is very strong.
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  So I don't know.
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  I think in the end, we're still many years away from knowing what long term lasting impact will
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  AI have on most of these services businesses.
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  I think in the beginning, a lot of people said it's going to transform them and like, they're
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  going to become amazing.
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  I'm like, we just don't know.
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  And I think there's just a lot of momentum, venture capital dollars going into AI.
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  And I hope these things all work out.
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  But I don't think we know what the long term impact of AI will be on law.
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  Also this week, it's kinda funny.
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  I know David Solomon said a nice quote that, you know, AI can now draft, you know, maybe 95%
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  of an s one.
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  And so that means that the remaining 5%, that's what actually matters.
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  If the first 95 is basically a commodity, which I think there's there's truth to that.
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  But I don't know.
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  If AI gets that document wrong and there isn't enough power to double check, how quickly will
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  people fall off the wagon again?
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  It's almost 2 things happening at once.
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  1 is drumming up excitement about AI in legal.
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  And then the second is actually applying it to real world cases.
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  And I'm wondering who are gonna be the 1st folks to opt to do that?
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  Who's gonna be the 1st company to say, I'll raise my hand.
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  I'll use AI to draft our s one in the first run.
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  My hunch is there is a lot of boilerplate and a lot of business writing.
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  My question is there's a lot of legal documents we use that are fairly boilerplate and no not
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  to take any away from the law firms we work with.
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  Safes.
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  They look the safe.
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  They look the same.
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  There's some find and replace.
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  The value though is when you see something novel, being able to have eyes on it, or when
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  you see something that looks normal but is often being able to catch that.
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  I think AI can maybe help people with that.
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  And is there a lot of value in having a, you know, 1st year associate or senior associate
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  draft to say for a startup?
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  Probably not.
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  But also people have to get part of training as reps.
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  And per this is one of my big questions.
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  Since certainly in professional services, the way you got better and learned was you started
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  with very mundane tasks, and you repeated those kind of like making rice at a sushi restaurant.
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  And so you got really good at, like, hey.
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  This person can do safes and convertible notes, red lines and everything, no errors.
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  Now let's move them on to long form financing docs.
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  And you went up this ladder of complexity by repeatedly doing basic things.
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  And what happens when you skip the basic repetition sushi rice making part of the
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  journey?
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  I'm just very curious what that means for people's professional development in these
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  fields.
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  And maybe we'll learn that those reps were empty calories, and they were really useless,
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  and you didn't need them.
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  And it was, like, a form of either hazing or it was necessary for making the business of law or
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  investment banking work.
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  Or maybe we'll learn that, like, the attention to detail and a lot of the skills that you
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  learn from doing those things over and over are a good reinforcement mechanism for what it
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  means to be successful.
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  Like, my friends who worked at consulting would never have a typo in a deck.
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  Like, I've it's never like, it literally, like, never happened.
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  And I think it's because of the repetition, and you know how it is.
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  Having that, like, beaten into you over and over, I don't know what happens for people who
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  skip that step in their professional journey, but I'm quite confident we're gonna find out.
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  Our final topic is a LinkedIn post by Jackie DeMonte from Grid Capital exploring how q one
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  2025 will be one to watch as fund managers from the previous 2 years have been making proactive
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  valuation resets and continued corrections to mitigate against the valuation highs of 2019
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  through 2022.
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  I really liked her staging of what has occurred over the past 3 years, basically calling out
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  the reality that if you as a fund manager did not recalibrate in 2023 across your portfolio,
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  in 2024, you had the year of reckoning and probably incurred some hard hitting markdowns
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  across your portfolio.
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  The hope is that this year is the year we see restabilization and growth across fund
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  portfolios with full swing corrections hopefully being made.
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  Proactively marking down your positions across the fund is extremely painful for any fund
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  manager, but especially if you were an emerging fund manager or fundraising yourself.
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  So I was curious to hear your perspective living through this past cycle and your
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  approach to making corrections across the portfolio proactively where it makes sense.
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  I think this is really hard because I just talked to a group yesterday, and they were
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  like, how does valuations work?
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  And I'm like, well, every firm has a valuation policy.
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  And they're like, well, what does that mean?
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  I'm like, well, every firm has a different view.
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  Like, for example, I know some firms that programmatically always hold things at the last
• 16:43
  round's valuation.
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  And their argument is that is the most consistent policy we could apply with minimal
• 16:49
  discretion, and it means that sometimes we will be too low on a company because the company's
• 16:54
  outperformed.
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  But sometimes we will be too high because the company raised in a moment of enthusiasm.
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  And I think for me, the TLDRs, LPs are very smart people.
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  And whenever I ask them about this, they're like, once we get to know a firm's personality,
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  we know how to interpret their marks.
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  And what's challenging as an emerging manager is your firm has no personality for LPs to know
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  yet.
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  And I have had situations where I've talked to LPs.
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  And remember, LPs can be in multiple funds that hold the same position.
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  So you might have something that you're holding at cost, and your peers have all marked it down
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  to 0.
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  And I'm an LP in a handful of emerging manager funds where we've co invested with people.
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  I'm holding the company at a very different price than they are.
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  And when I talk to them about it, the price they're holding at it is genuinely motivated by
• 17:37
  their belief in the company's prospects.
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  So what I always tell people is you gotta have a valuation policy, and ours is simple.
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  We don't mark up above last round valuation unless our auditors force us to.
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  And I will liberally mark things down if I think they're underperforming.
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  And I have other people who use runway as a gate and they go, well, any company with less
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  than 6 months of runway, we mark it down 50%.
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  I'm like, well, that seems kind of arbitrary, but consistent.
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  If you apply it to all companies, an LP could look at your valuations.
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  But at the end of the day, Mia, this stuff is all like fog of war.
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  Like, I was telling LPs, what do you want with this TVPI number?
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  And, truthfully, there are some LPs whose financial compensation is tied to our interim
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  performance, not like the distributed DPI cashback.
• 18:18
  But our marks impact the IRR of the portfolio that they're in and that the performance of
• 18:24
  that portfolio might dictate their bonus for the year.
• 18:26
  So you have all these competing pressures.
• 18:28
  My view is I would rather just always be honest with our LPs and give them an accurate but
• 18:33
  conservative view of what our portfolio is worth.
• 18:35
  The downside is there are other firms that I know that are far more aggressive than we are.
• 18:38
  And I've had LPs tell us, like, hey.
• 18:40
  I put your performance up against these other peoples, and theirs looks better.
• 18:43
  I'm like, well, it's all unrealized, and it's all speculative assessments of what private
• 18:47
  companies are worth.
• 18:48
  So, yes, they might have a different point of view on the value of their portfolio than I
• 18:52
  have on mine right now.
• 18:53
  But in the end, it will all show up as DPI, and here's why we're conservative.
• 18:57
  And I think the lesson I learned in 23 and 24 is if you're conservative in a world where the
• 19:03
  people evaluating you think everybody else is optimistic, you get treated like the optimistic
• 19:08
  people.
• 19:08
  And whatever you do that's conservative will still get discounted because it's too hard to
• 19:12
  tell who's truly conservative and who's an optimist masquerading as a conservative person.
• 19:17
  And so I think you just have to decide, like, what can I live with?
• 19:19
  And I told their LPs, I can live with you guys applying a discount to what I think are already
• 19:23
  deeply discounted numbers because we got well ahead of this starting in 21.
• 19:27
  And it's gonna all work out in the end, and it means it's gonna be a little harder to
• 19:30
  fundraise.
• 19:31
  I'm gonna have to work harder to explain and show you where the value lies in the portfolio.
• 19:35
  But I think anybody who hasn't done it yet, I don't know how you get through 25.
• 19:39
  Either those companies are gonna fail.
• 19:40
  They're gonna raise down rounds, or it's gonna be really hard to convince your auditors that a
• 19:45
  3 or 4 year old mark on a company is still accurate.
• 19:47
  Well, we are all out of time for this week.
• 19:50
  Thank you, Charles, for jumping into the learning corner.
• 19:52
  Thank you to our listeners for joining us.
• 19:54
  Please like and subscribe, and we will talk with you all next week.
• 19:57
  Thank you.
• 19:58
  Bye.