Latest / The Learning Corner by Precursor / Episode #57: Founder update signals, AI is a bubble and that's good and bad, YC's call to build "fundable" companies

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Episode #57: Founder update signals, AI is a bubble and that's good and bad, YC's call to build "fundable" companies · The Learning Corner by Precursor

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  It's possible that the stuff that's being built in this bubble will be less enduring than the
• 0:04
  stuff that was built previous bubbles.
• 0:05
  I think the good news about bubbles is you get this moment of enthusiasm where people try
• 0:10
  really crazy hard things, and some of those really crazy hard things work.
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  It's the week of November 17.
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  Welcome to the Learning Corner of 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 topic is a LinkedIn post from Ben Zisis, founder and GP of Super Angel Fund, who
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  recently shared his lived experience that, quote, consistent written updates from founders
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  are the single biggest leading indicator of future success.
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  He wrote the post in hopes that people would share their own opinions as well.
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  I know you had a different perspective on this one in that some of your most successful
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  founders in the portfolio stopped portfolio updates altogether.
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  What's been your experience at a high level?
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  I feel like this is one of those posts that gets written once a quarter.
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  Usually, just let it go by.
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  I don't say anything this time I had something to say.
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  I used to believe that this is true, and my theory is that this is something that VCs would
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  love to be true, that like, oh, the discipline of getting these things out.
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  And what I've come to realize is a couple things.
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  One, we've had some of our best companies tell me they stopped sending updates because they
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  got leaked.
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  Boundaries could never figure out who was doing the leaking.
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  And so they said, as a result, we're gonna punish everybody.
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  So no one gets any updates.
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  The irony is those companies will absolutely give you an update if you call them.
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  Yeah.
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  Get on the phone with them.
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  Go meet them in person, but nothing in writing.
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  Second, I think there's this temptation to conflate discipline, which I think getting a
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  founder update out on the first of every month, every month like clockwork, is discipline like
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  making your bed.
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  That's different than good execution.
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  And so I also would say, I have this unwritten, unpublished substack, which is I feel like the
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  quality of investor updates I receive has gone down over time, but the frequency with which I
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  get them has gone up.
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  And I think it's because more people have internalized the discipline piece, which is you
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  should sell these, but not the content piece.
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  Like, hey, you should have burn rate Yeah.
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  And metrics, and like the things that are keeping you up at night and perspective on the
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  business.
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  And setting up a that doesn't have those things isn't that valuable.
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  Yeah.
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  So I've seen a lot of our portfolio companies stop sending them, but I'm kind of with it's
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  really more like people who used to send them when they stopped.
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  That's usually not good news.
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  I generally found that true.
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  For both companies that are successful and not successful when they stop.
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  It's funny.
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  We've had a few companies that have stopped sending updates for us.
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  Like, hey, we're in the middle of a pivot.
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  We're working on something new.
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  We will report back when there's something to say.
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  And I'm like, yeah.
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  I don't wanna read an update that says we're mid idea.
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  Nothing nothing to see here.
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  But when companies have been kind of consistently reporting and you don't hear from
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  them and you're like, it doesn't feel like the product's doing that well.
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  I'm not seeing them online.
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  I'm not getting any sense that there's momentum.
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  It's usually not good news.
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  I feel like if you're a first time founder, creating a good update for investors is
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  something that you like go through an entire experience around.
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  From your perspective, what things do you feel like absolutely have to be in there?
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  And then how often do you send them?
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  Because it's a widely disputed thing.
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  Yeah.
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  Are these useful or are these not useful?
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  Is this a good use of your time?
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  Is it not?
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  There's one other reason that founders I've talked to have stopped writing them is that
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  some of them said I get nothing back from my investors.
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  I send them.
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  I don't even get an acknowledgment that they read it.
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  I'm yelling into a void.
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  I'd probably stop sending them too if no one was even acknowledging this.
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  So that's part of it.
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  I think, you know, we have our own template for people who want one.
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  I think at the end of day as an investor, I wanna know how much runway do you have?
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  How much cash are you burning?
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  Because everything else in the update, I tend to view through the lens of like, is this a
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  company that's default okay or a company that's like in trouble?
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  And if the company's in trouble, does the founder also think that the company's in
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  trouble?
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  We've had a few updates I've gotten where people have been like, well, everything's going
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  great as a company.
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  We only have two months of runway.
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  Then by definition, everything's not going great.
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  Two months of runway is actually a big deal.
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  And so I tend to look at them through that lens.
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  But usually, I wanna know what's top of mind for you as the founder?
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  How much money do you have?
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  How much cash are you burning?
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  What's the trend line in those things?
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  Any key additions or departures from the team?
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  And then generally, like, the founder sentiment.
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  I got one from one of our portfolio company founders who pivoted into a product that's,
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  like, personally meaningful for him.
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  And we got on Zoom last week, and I was like, I can feel the joy in your updates.
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  He's like, what do mean?
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  I'm like, I can tell how much more fun you're having with this new product, how much more
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  engaged you are with it just by like the way you write the updates.
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  One more widely disputed occurrence that happens in venture.
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  What are your thoughts on having a separate line of updates for investors and then separate
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  updates for non investors, supporters of the journey?
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  I think founders like to include people who didn't join the current round, but hopefully,
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  they think that if they see enough updates, will join the next.
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  Where do you fall in that?
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  I've sort of stopped sharing this take with people, but I'll share it here.
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  I think in general, investors have a hard time valuing information that they get from Citi.
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  I think in general, I get a piece of information for free.
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  I'm used to having to work to get information from companies.
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  I'm not already an investor.
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  And so I told someone this a few years ago, I can't think of very many if any companies I've
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  invested in because they kept me on their update list.
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  I can think of plenty of companies I've helped.
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  Yeah.
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  Where I read and been like, oh, you need an introduction to that person.
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  And so I think if your goal is to build your support system and like the ecosystem of people
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  who care about your company, it's great.
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  If you think it's a way to tee up investors, I'm more skeptical.
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  I've had some investors been like, oh, no.
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  I read these.
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  I've invested in companies.
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  We're looking for lines, not dots.
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  I think most investors, get one chance.
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  Once you've met them, it's very hard to regain that same level enthusiasm.
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  Unless the update is we made a dramatic unless you're like Replit.
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  Right.
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  Made a dramatic pivot into this new business that's working like crazy.
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  Yeah.
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  But you wouldn't need an update.
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  And there's like a balance of how much you want people seeing how the sausage is being made.
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  I think that's really what works against you.
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  It's like people see all of the ups and downs and then when you go see them, they're like,
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  not a neat package story.
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  Well, next piece is from the Spyglass blog written by MJ Seikler titled, hey, there's a
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  bubble, exploring how bubbles can be simultaneously good and bad.
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  He references the big short and draws parallels to today's ballooning AI funding, arguing we're
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  clearly back in bubble territory.
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  Unlike previous bubbles, he's written about internet, mobile, housing.
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  Siegler believes this one is so obviously a bubble that companies are both acknowledging
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  the reality and leveraging it as an opportunity.
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  By leveraging the opportunity, he means large tech companies are using this bubble to
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  accelerate core technological growth.
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  This is precisely what perplexes and frustrates people.
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  The world's seemingly smartest individuals are opting into the bubble either because they
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  believe it's real or because they're simply feeding the fire.
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  Ultimately, Segal argues that this both can be a bubble, one which will undoubtedly have
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  negative side effects as they always do.
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  And this bubble can still largely end up being a positive thing on a number of fronts.
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  There were a lot of parallels and comparisons made in the piece.
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  Any specific threads that you thought were especially noteworthy?
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  I do think this idea that like pretty much everybody in tech at the big tech companies and
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  open AI has been like, this is the bubble.
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  And every other bubble I've been in, everyone's like, it's not a bubble.
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  It's like, the future's bright.
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  Don't say that.
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  Here, everyone's kinda like, it's a bit of a bubble.
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  A lot of people
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  have been like, well, you know, we put all this fiber in the ground, and that fiber eventually
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  became useful.
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  I'm like, but I'm not sure data centers will be the same.
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  Semiconductor chips that have a shorter shelf life will be the same.
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  It's possible that the stuff that's being built in this bubble will be less enduring than the
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  stuff that was built previous bubbles.
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  I think the good news about bubbles is you get this moment of enthusiasm where people try
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  really crazy hard things.
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  And some of those really crazy hard things work.
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  Yeah.
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  And that to me is the value of bubbles.
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  I don't know.
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  I find it very interesting that even this week, Michael Burry took off all of his shorts on
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  Nvidia.
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  And then we've had four or five straight days of, like, public companies getting whacked.
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  And, you know, if I were in the management at Google, I'd probably be saying the same thing.
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  This is a bubble.
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  Alphabet slash Google will be here on the other side of the bubble.
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  So and we're benefiting Gemini.
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  You should go look over there and check on those startups.
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  Those are the ones you should really be worried about.
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  Yeah.
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  And if I were a startup company, I'd say, yes, it's a bubble, but this bubble is going to
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  upend the landscape.
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  But I I think it is very weird to be in a situation where everybody agrees that this is a
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  bubble, but everybody wants to continue to participate.
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  You know, we have our annual meeting tomorrow, this is a big theme.
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  I've I've really struggled with what MG wrote in that article, is what do you do when you're
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  in a bubble and everyone agrees that it's a bubble, and we all know how these things end.
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  And I think we always talk about this in the circle of being in venture and being maybe a
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  founder of a startup, but you kind have to pull yourself out and look at the broader landscape
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  of people who just have everyday jobs.
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  And I think MG does a really good job outlining why the good version of the bubble feels so
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  uncomfortable.
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  Yeah.
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  Everyday people are facing massive tech layoffs Yeah.
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  While those same companies receive enormous amounts of funding in simultaneous fashion.
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  We're hearing about this future of abundance while people are worrying about how to make
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  ends meet.
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  So do you feel like that captures the struggle for folks who just don't sit in this space day
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  to day and why it doesn't feel as bright and shiny and as positive of a bubble?
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  I mean, I told somebody about a month ago.
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  Was like, some of this is zero sum.
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  If you wanna build data centers and buy GPUs, the money has to come from somewhere.
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  Mhmm.
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  And for most tech companies, people are the biggest line item expense that you have.
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  So I think what you're seeing is a lot of companies are trading human labor or data
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  center and GPU capacity, which feels very dystopian or like Yeah.
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  In some way.
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  Yeah.
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  But I don't know how else you make the math work.
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  There's just not enough money to do both.
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  MG closes his reflections why it's difficult to short the AI market because, quote, it's
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  seemingly less financial engineering and more figuring out the correct financing for actual
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  engineering.
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  How much do you agree with that statement?
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  I think the only real ways to short it are to try to short Nvidia.
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  That's a scary trade.
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  Yep.
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  There's really no good way to short startups by design.
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  And a lot of the money that's going to data center and infrastructure is private credit.
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  There's not really a great way to bet against it.
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  So I think this is the challenge for all investors.
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  Your options are sit it out and do nothing.
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  And if you're right, maybe eventually you're proven right.
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  But you maybe miss out on the upside.
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  Or play the game and think, hey.
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  I'm smart enough to maybe get out before the bubble really busts, which market timing's
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  really hard.
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  But I don't think there's a way to say, wanna take the other side of the trade the way you
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  could with mortgage securities in a way.
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  Well, last topic is a piece by Kyle Harrison titled Build What's Fundable, reflecting on
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  YC's legacy and how the call for founders has shifted over time.
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  He recalled his early days as a founder back in 2014 when YC's request for startups was an
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  inspiring list of big ideas and open spaces like energy, robotics, government, and the
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  creator of 1,000,000 jobs.
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  Harrison reflected that today, the YC request list has moved from problem first questions to
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  consensus driven ideas that are venture backable.
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  He pointed to a specific request that felt especially different from the early YC days,
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  quote, the first 10 person, a $100,000,000,000 startup was a request.
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  Ultimately, Harrison closes with this comment, the most important takeaway here is that I
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  don't believe this is YC's fault.
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  He argues instead that they're adhering to logical economic incentives shaped by a much
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  bigger force, the consensus capital machine or the growing size of venture capital as an asset
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  class.
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  He also suggests that the way to solve the normative culture built around consensus
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  formation is to inspire participants to believe in something.
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  This was a very thick piece.
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  Yeah.
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  So anything specific that you wanted to highlight that stood out?
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  I have so much as when you are going back and forth on this point.
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  I've been going to YC demo today since just about the beginning.
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  And I think if you're new to Vetrick, it's hard to imagine a world in which the founding
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  premise of y c was controversial, which was that these more technically oriented founders
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  could become leaders and CEOs of companies.
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  Like at the time, that was, like, not a widely held belief.
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  That was that was not normal.
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  And I think if there's a lot that that's now a broadly consensus belief, not broadly consensus
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  belief, it is the consensus belief in venture.
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  That those are the people who should start and lead companies.
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  And I think that's partially why y c has been so successful.
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  In some ways, the analogy I use, it's like anybody who starts a venture fund with some
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  vertical thesis.
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  Maybe you're a forerunner and you had a thesis on consumer.
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  Maybe you're a bold start and you had a thesis on developer first stuff.
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  Maybe you pick your favorite term.
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  At some point, there's a window of time where you have an edge because there's something you
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  believe that other people don't believe and that that thing is true.
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  And then it becomes consensus.
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  Yep.
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  And everyone's like, well, of course, like technical founders are capable of running and
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  scaling big companies to see Stripe.
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  And once it becomes consensus, if you wanna continue to lead, you have to evolve.
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  And so I think, you know, YC lives in this ecosystem where it's important to remember what
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  the feedback loop looks like.
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  In the beginning, YC was finding founders that they thought were good.
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  VCs agreed.
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  And then becoming being a YC founder became a consultant because it gave you access to the YC
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  network.
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  It gave you access to the YC merit badge.
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  It puts you around smart people.
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  And I think it's hard for me to criticize YC for building an experience that more people
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  want.
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  Yep.
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  And so if you look at those charts, it's like, there are more second time founders in YC,
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  which wasn't the case before, partially because there are more YC alums.
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  Partially, there are more people who say, we have founders in our portfolio who are second
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  time founders but first time YC founders.
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  And I asked one of them, I said, why are you doing YC?
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  He goes, I just want that energy.
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  What do you mean?
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  He goes, I want that energy of being in the batch with those people who are all pushing
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  hard.
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  I think it's gonna make me a better founder even though I already had gone on this journey.
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  And then the other question is, like, what's the tail?
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  What's the dog?
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  I think what happened is YC became this really important channel for discovering new founders.
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  So VCs, like, became over indexed on YC Yep.
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  And they still are.
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  So is it YC's fault that they have curated a group of people that VCs are rabid?
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  Or you could say, well, VCs are irrationally enthusiastic about YC.
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  That's a VC problem.
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  That's actually not YC's fault.
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  And so I feel like there was maybe some people who commented on this article who didn't read
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  the whole thing, which is shocking on the Internet, know.
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  But I also would just say the hard thing for YC is, yes, you can have requests for starters,
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  but you also have to deal with the people who apply.
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  And if I think about, you know, there was a period of time where YC did, I think, amazing
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  for international especially during the pandemic, in allowing those people to be a part
• 14:21
  of YC and opening up investor aperture.
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  To think about founders in other countries, I think about YC Bio and some of the work they've
• 14:28
  done.
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  So, yes, there is probably an overrepresentation of agentic AI companies in
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  the last two YC batches.
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  There is also an overrepresentation of agentic AI companies in the entire startup ecosystem.
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  And while YC can attempt to shape who applies, the people who apply, why.
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  And if there's one thing I take away from the article, I think when YC said it's best, it is
• 14:50
  actually pulling in people that are working on ideas on the frontier, things that are not well
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  understood.
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  Portable nuclear reactor or aviation Yeah.
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  Or things that people broadly don't believe are technically possible or aren't paying attention
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  to.
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  I think right now, it's hard for me to criticize YC without criticizing the entire VC
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  industry for being too over rotated on AI.
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  And, I mean, we've all attended the demo days.
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  It's full.
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  They built something that the works that and by works means that there's an audience, VCs, who
• 15:19
  continue to show up every single cohort and support and write checks into.
• 15:23
  Yeah.
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  YC has hit the flywheel in the virtuous sense that they continue to attract great founders
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  because great founders think that great founders go to YC, which means they get more
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  great founders.
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  And so VCs come back and continue to pay exorbitantly high prices for privilege of
• 15:37
  investing in YC companies.
• 15:38
  And I don't know how you would deconsensus YC unless you just said, we don't believe in all
• 15:43
  this AI stuff.
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  We're only gonna take people that are doing synthetic bio or rockets or nuclear energy.
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  I think the beauty of YC is it is a good barometer for what people think is interesting
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  and hot.
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  And right now, AI is as noisy at YC as it is in the ecosystem.
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  Harrison showed several graphics and stats showing the archetype of a YC founder now, and
• 16:03
  I think you alluded to a little bit of it, of just repeat founders.
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  But it has kinda converged into something of a consensus, an attendee of a top college,
• 16:11
  previously involved in a YC startup, increasingly younger, and I think most people
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  focus on the positives of this.
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  Yep.
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  But what do the negatives maybe look like?
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  I think in, you know, if I were running YC and I'm not, I would wonder like, is there a risk
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  that we become too insular?
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  And that what we're really doing is taking people who are already in the YC ecosystem,
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  either previous YC founders, people who worked at our companies, and recycling those people.
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  And are we missing out on communities and people who would benefit from being a part of
• 16:39
  YC because they're gonna have a transformational learning experience.
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  Right now, that doesn't seem to be a huge problem.
• 16:44
  And look, they also have responded to some criticism.
• 16:47
  Some of the batches were getting a little bit too large and unmanageable.
• 16:50
  Batch sizes have come down.
• 16:51
  But also now it's year round.
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  And so I don't know.
• 16:53
  YC, the thing one one of the main things I admire about them is they never sit still.
• 16:57
  They're in some ways, I find their own worst critic at times.
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  And I think every time it feels like the brand has gotten diluted or maybe it's not as good,
• 17:05
  they address it.
• 17:05
  Well, we are all out of time today.
• 17:06
  Thank you, Charles, for meeting me in person the week of our AGM.
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  Yep.
• 17:10
  Thank you to our listeners popping in as well.
• 17:12
  Please like and subscribe, and we will talk to you all next week.
• 17:14
  Thank you.
• 17:15
  Bye.