Latest / The Learning Corner by Precursor / Episode #41: Investor to Fund Manager, Picking the RIGHT Capital, Seed Is Experiencing A Crisis

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Episode #41: Investor to Fund Manager, Picking the RIGHT Capital, Seed Is Experiencing A Crisis · The Learning Corner by Precursor

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Fundamentally, don't believe that all of the alpha in this business is gonna come from
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people who are well positioned because they did something previously or because they happen to
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have a drink of water at OpenAI or a cup of coffee at Anthropic.
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In my venture career, many of the best companies I've met have been started by people
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who are talented but not obvious.
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It's the week of July 21.
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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 feature is a recent episode from the emerging LP podcast called Super Clusters,
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where the host, David Zoe, featured previous guests he had hosted in earlier episodes for an
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interactive q and a with GPs calling in.
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The LP guests for this episode were all three investors from the fund of funds firm
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Screendor, Lisa Colley, Lane Johnson, and Jamie Road.
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In fact, it was the first time they've been on a podcast together.
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And the episode was filled with great insights for certainly emerging managers, but I would
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say for all fund managers more broadly.
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One of the discussions on the episode was around the fact that certainly for emerging
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funds, LPs need to spot investors who can grow into that fund manager role, which requires
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different skill sets and strategies altogether.
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A lot of that fund manager growth has to do more with understanding the back of office and
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operational complexities that exist with running a firm, complexities that don't weigh
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nearly as much when you're not running the fund yourself.
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So Charles, as you've gone from fund one to fund five, how much of the job has evolved from
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the original venture capital role that you loved and once had?
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And how have you been able to communicate the ability to be a fund manager to LPs in your
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earlier funds when you raised them?
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No.
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It's pretty funny.
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So, you know, I've been on the investment committee for Screen Doors for quite some time.
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Obviously, I'm a big fan of the work that that team's doing.
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One of the things someone told me in the beginning that I've really adopted, and I try
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to tell every emerging manager I meet, is a lot of people say I wanna start a venture fund
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because I love investing.
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And I'm like, great.
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If you really, really love investing, you should actually not start a venture fund.
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You should go invest on somebody else's platform so you can spend 100% of your time
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writing checks and finding founders.
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Running a venture fund is a three part job.
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It is obviously an investing job.
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It's also a fundraising job and managing relationships with LPs.
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It's also running a small professional services firm.
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You know, we have 14 full time people at Precursor, and we have payroll in multiple
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states.
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We have taxes.
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We have benefits.
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We have one on ones.
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We have reviews.
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It's like running a small law firm or consultancy or something like that.
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And time is not free or fungible.
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And what I tell people is if you really wanna build a firm, that is gonna pull you away from
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the job of just finding portfolio companies and writing checks.
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And the more architecture you put into your firm, the more of your time you will spend on
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firm and fund management, and the less time you will spend purely investing.
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And for many of my peers, there comes a point in time where the firm is so large that you can
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no longer both invest and manage the firm.
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You have to sort of choose one.
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And I don't know.
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I like investing, so I'm glad I have a team that gives me plenty of space to still do that.
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And a lot of times when I'm interviewing people on behalf of Screamdoor, what I'm trying to
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figure out is have they intuitively realized and accepted, like, part of their time will be
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spent on things other than the thing that probably got them super excited.
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And it's kind of in some ways, Mia, like, we meet first time founders, and I'm like, well,
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this person's never been a CEO.
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I know they wanna be a CEO because they wanna be in charge, but do they realize that being a
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CEO has all of these other duties that come along with it?
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And this person's never done these things.
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In many ways, I evaluate fund managers in the same way I evaluate first time founders.
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Does this person have a general awareness of what they have to do?
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And has this person built a support system of people who are more experienced or who have
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some know how who can help them when they get stuck?
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Yeah.
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And I don't know.
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I think Screentor does a good job of doing that for first time or emerging fund managers.
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I'd like to think at least we do a good job helping first time founders build the
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scaffolding they need to be successful.
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But I've also met a lot of people coming out of 2020 and 2021 who are like, you know what I
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really liked doing investing.
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I started a fund because I thought it would be a better way to invest, and it turns out that
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you the amount of time I spent fundraising and fund managing and k oneing and auditing was not
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that great.
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And I wanna go back to a job where I mostly get to invest even if it means I'm not in charge.
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Like owning your own angel check portfolio and running your own fund are completely different
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concept.
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Totally different.
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One thing that's interesting, I feel like within my peer network, is when folks jump into
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venture for the first time, I think people are surprised with the lack of people management
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skills fund managers have from fund to fund.
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How often do those questions come in from a diligence perspective as a GP?
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And I'll also ask you, how important is that to actually consider if you're going out to raise
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a fund?
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Do you wanna manage people?
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Because that's that's actually a lot of I feel like you're dying now.
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I used to joke about this, but I believe it's true.
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There's, I think, a lot of people who get into venture because they're burned out or tired of
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people management.
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And, you know, a venture firm can scale AUM much faster than an operating company can
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without scaling headcount.
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And so I've met a lot of people who are like, my goal is to be not just a solo GP, but a solo
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capitalist.
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I don't want anybody at the firm other than me.
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And some people have been able to scale to great heights with that model over the very
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lean teams.
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I think about Orin.
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I think about Elad.
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I think about Josh Buckley.
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Those are people who've been able to scale with very lean teams.
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And whereas the things that we do here require people.
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So I was like, well, the only way I can build the version of precursors that I want is with
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people, and that means I have to be interested in and at least decent at managing people.
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And I often ask fund managers when they're pitching Screamdoor, what's your vision for the
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team?
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What who's around the table in fund in fund three?
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Now the funny thing is for most of Precursor, it was me and one or two other people.
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It was in fact very small.
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And then one day I woke up and I was like, well, if we're gonna do all of these things
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right, if we wanna be a good partner to our LPs, if we wanna be a good to the founders,
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back.
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And if I wanna have, like, sanity, I actually need lot more leverage at the firm.
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And so I've met a few people who've outlined strategies that I'm just sort of like, well,
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that's a strategy that requires you to hire people.
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How interested are you in managing people?
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And if it's a multi partner partnership, not everybody in the partnership has to be
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interested in people management.
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And I think that's why a lot of venture funds have gone to this, like, CEO model, where there
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is somebody who's kind of responsible for running the place, who says, will take on the
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responsibility of people management, performance management, coordinating all of
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the, like, unsexy stuff, like tax and audit and closing out the quarter and getting the LP
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letter out.
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These are all things you have to do, and somebody has to own them.
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Yeah.
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Lisa said, as an LP, it's really important to be constantly questioning and refining their
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specific sourcing mechanisms in order to really surface the top quality fund managers.
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I know that this is easier said than done.
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What are ways from your perspective that have enabled you to discover new top talent as an
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LP?
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Because I know you're an LP in a handful of funds and obviously have helped out with
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Screendor.
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I always ask myself the same question every time is, given this person's strategy, why are
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the very best people that are in that strategy gonna choose this person?
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In most cases, it is not some technical thing.
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It's not like, oh, this person has this secret network of operators.
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In most cases, I'm like, oh, this person is gonna match the founder's hustle.
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This person comes across as being aggressive and very interested in winning.
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Or sometimes I'm like, this person is just very likable.
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And I think the founders who meet this person are really gonna wanna work with this person
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because they're a joy to be around.
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I'll give you one specific example.
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One of my screen door mentees has a very specific operating background where she has a
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very unique knowledge set around a very I don't wanna say who it is, so I'm being a little
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obtuse.
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Has a very specific operating background that is quite rare, especially in the technical
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domain.
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And people seek her out because she has this really unique skill set when it comes to go to
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market for technical teams.
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Now the funny thing about operating experience is there's a half life to that stuff.
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And what I always tell fund managers is, like, the story that you use to get your fund off the
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ground and differentiate yourself will probably not be the way you talk about the firm two
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funds from now.
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So you should just know if whatever it is, like, oh, we're an AI.
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We're an AI focused fund.
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Maybe five years ago, seven years ago, that was unique.
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From now, every fund is an AI fund, so that can't be your story.
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But you do need a launch hook because there's so many venture funds out there.
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If you don't have a way to stand out from the beginning, you never get the right to get to
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fund three and fund four.
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Yeah.
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The person that you're thinking of, would they be someone that every type of LP would look at
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her background and be like, wonderful.
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Let me write a check into that, or is she from a pocket that you feel like you'd have to
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unearth?
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She comes from more of an operator pocket.
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What I've noticed is I think most sophisticated LPs know how to evaluate spinout managers, if
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you're leaving Graycroft or Greylock or some gray name for really one of those.
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Like, I think LPs know how to diligence people who've been VCs on a platform that they know.
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Yeah.
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And by the way, they don't diligence these firms the same way.
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They know how to diligence people who've been very successful angels and who wanna become
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institutional.
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I think most LPs know how to diligence operators who have a high profile.
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I think where they struggle is if you're not in one of those buckets, it gets way harder.
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And I think a lot of it the playbook for a spinout manager is you look at what they did at
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their firm and you call all the people who were at that firm and try to figure out if that
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person's any good.
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The angel, you look at the angel track record and you figure out, okay.
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Well, how much of this angel track record will translate to institutional that they scale up
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the check and and all those things?
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And the famous operator, you're basically trying to figure out how famous is this person,
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and and does this person have enough gravity to attract really great founders in whatever
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domain they're starting their friend.
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And if you're not one of those, if you're, hey, was a consultant or if I was a podcaster like
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Harry Stebbins or a blogger, in many cases, LPs don't have the same playbooks for underwriting
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those people, so it's harder.
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I was recently talking to a founder who asked what the largest differences in relationship
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are between the venture capitalist to founder relationship and then the LP to GP
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relationship.
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I have some in my mind, but I was gonna ask first.
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I think one of the big things is the time cycle.
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I talked to one of our largest LPs last week.
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By the time Precursor's all said and done, I'll probably have worked with this person for
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twenty five years.
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Twenty five years.
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I joke with him.
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I was like, I met you before I had a kid and my kid might be married by the time we stop
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working together.
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Yeah.
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It's a really long term relationship and it's different because even the best founders I work
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with, if I'm lucky, I work with them for ten or twelve years on a single company.
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And because we're so early, it's really more like I work closely with them for two or three
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years and then Yeah.
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In a less intense way over eight or nine years.
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And the other thing I'll say is a lot of the performance that happens in venture happens
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late.
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Where I think for startups, yeah, you can hear these things about stigma, five years, nothing
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happened then.
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But for the most part, most startups, if it doesn't work for you in the first two or three
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years, that you don't really get the right to keep going with that specific company.
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And that's also where I find this LP thing is different.
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Our returns are backloaded.
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The majority of the money we're gonna give to our LPs is gonna be after we've been working
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together for at least a decade because the firm's already been ten years old and things
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are still compounding.
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And so I think it creates a different type of relationship when I know I'm gonna be in
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conversation with these people for ten to twenty years.
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Yeah.
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But a lot of it's also the same.
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They're evaluating my performance.
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They have feedback for me about how I can do a better job for them.
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And in the same way that sometimes you have an investor who doesn't do every single round that
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you raise, I have LPs who I'm like, hey.
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We have to sit this fund out for various reasons.
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And I think it's a good practice to just learn how do you stay in relationship with somebody
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for ten or fifteen years.
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You'll have your ups and downs with your LPs, depending what happens with the market,
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depending what happens with their firm.
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But you're kinda stuck together.
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It's kinda nice.
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It's sort of like you actually it's very hard to divorce in this world.
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So in some ways, you're just like, we're in this together for the next fifteen to twenty
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years.
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We should figure out how to make this feel productive.
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Equally as important to make sure that you're really thinking hard about the people that you
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bring in.
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It's a really good segue into the next topic.
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It's a recent piece written by Ariana, the founder of Half Days, a women's ski and outdoor
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apparel brand we've been lucky to support since their earliest days at Precursor.
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In the blog post, Ariana discusses the importance of choosing the right investors for
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your company, not just the first ones who show interest.
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While the founder journey can often feel like treading water in search of lifeboats, there
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are real consequences that we mentioned to jumping into a boat without understanding what
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comes with it.
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Yeah.
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Sometimes it's an anchor that stalls your growth entirely.
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She walks through a handful of specific questions founders should ask themselves before
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accepting capital, questions that might seem unnecessary when you're searching for a
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lifeline but can make all the difference in the long run.
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Her post was really digestible and to the point, one of the questions Ariana poses to
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founders that I like the most was, do they actually understand what I'm building?
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I think for founders, this feels obvious, but you'd be very surprised what competitions are
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happening behind closed doors during investment committee meetings to get folks around the
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table to vote yes on the deal.
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How much of this can actually be controlled by founders from your perspective?
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Oh my gosh, Mia.
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Like, first of all, I'm so glad that we are investors in half days, and I'm so glad that
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Ari picked us.
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There are so many times where I get these calls from investors who are looking at a company
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where we're an investor, like, I really wish the company were doing x.
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I'm like, but they're not.
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I know, but I really wish that they would do x thing.
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I'm like, they're they're not doing that.
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Like, hey, you should remember, they're the CEO.
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They've made a decision about what they wanna work on.
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And if you really want them to do thing x, you should find a company that's doing thing x.
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And the number of times I've had people, particularly in follow on investments, tell
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themselves a story that a company is going to do something that the investor thinks is
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interesting that the founder has maybe a passing interest in exploring but not committed
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to has created no shortage of problems.
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Yeah.
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So that's one.
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Second, I would say at least once or twice a year, I find myself in a situation where
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there's a very disruptive person on the cap table.
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And in some cases, it was knowable or the person revealed themselves to be difficult
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during the negotiation.
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And the founder's like, how do I get rid of this person?
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I'm like, you can't.
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Because if your company's doing well, they're not gonna wanna sell.
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If your company's doing poorly, there's no one to sell their shares to.
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So what I tell founders is you will have an easier time parting ways with your cofounder
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than you will with somebody on your cap table.
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And so make sure that you pick people whose behavior in general like, I have somebody who
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put in a 25 check-in, essentially demands a weekly check-in with the founder, and I'm like,
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this is bad.
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That is too little money for too much access, and it's driving the founder nuts trying to
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communicate to this person that, hey, this weekly thirty minute check-in isn't gonna
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happen for the tune of 25 k.
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Yeah.
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It's not what we're doing here.
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And so I do think it's really important also when it comes down to strategy.
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You know, we have a post six month analysis thing we do here, but one of the most important
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questions I ask myself is am I aligned with what the founder wants to build?
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Do we have the same vision for what the company should be working on and what success looks
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like?
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I have found it very difficult to work with and support founders when we are at odds about what
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should be built.
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And that doesn't mean that I'm right, but when I'm at odds with folks, it's super hard.
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Going back to that example that you had for the investor who wrote a check that's too little
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and and gained too much access, I've seen that many times at different scales.
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And I think for founders, they assume that everyone sees it, everyone by all the other
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investors, and assume that those other people will come to their rescue and knock sense into
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that investor.
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But usually actually doesn't happen as much as you would think.
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Can you walk through the logic on why probably from your end?
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Usually, somebody has to sit down and have a conversation with somebody about what's
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happening.
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And the tricky thing is for a founder, this is go one off thing for you.
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If you're Ariana, like, I have this investor.
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They're on my cap table.
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I'm probably never gonna see this person again on another company.
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Whereas as a VC, we deal with repeat Yep.
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Relationships.
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And so sometimes you're like, well, this person's behavior or this person doesn't get
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it.
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Somebody has to take some of their relationship capital with that person and use it to maybe
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have a corrective conversation.
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And those aren't fun.
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I had to have one of those with somebody earlier this year where I had to, no uncertain
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terms, tell them they were driving the CEO insane.
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And I hypothesized that it had to do with something that was actually unrelated to the
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company and completely related to an internal dynamic at their fund.
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And that was in fact the case, and it was an awkward conversation for the first twenty
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minutes.
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And then once we kind of broke through and got to the real issue, the person, like, was
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unaware that they were showing up in this way.
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He's like, this is not you.
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You are better than this, but this is the impact you're having on the founder, and we
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need to solve this.
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This is, like, not okay.
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I was like, you're creating a gigantic detractor in this founder, and I don't think
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you want that either.
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The person was on the one hand, like, it sucks that we're having this conversation.
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I'm glad that you had the courage to have it with me.
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I'm annoyed that the other people didn't have the courage to bring it up and that they sent
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you as the ambassador.
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And, like, now we're fine.
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So it's just hard.
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And sometimes you're just like, I don't wanna I don't wanna have that conversation with that
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person.
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More people management skills if you needed more examples.
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Last question here.
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Anything that you feel like founders should know about you or precursor that might not be
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as clear in those early meetings when you're evaluating the company?
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Oh, that's a really good question.
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The one thing I will say is, generally speaking, I rarely go into a pitch meeting with
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a strong point of view about whether I'm gonna say yes or no.
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And a lot of times, even in our team meetings, people are like, we never thought you'd be
17:40
excited about that company.
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I'm like, well, me neither.
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I got excited in the meeting.
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And I the thing I like about being a generalist is that my job is to get up to speed on new
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topics very quickly.
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And a lot of what I'm looking for is a spark Yeah.
17:54
In a meeting.
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It's like the most of a recent investment you and I worked on together.
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That founder, I think, has a unique spark for the problem that she's trying to solve.
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And I think if I see it, other potential employees will see it.
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Customers will see it.
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Other investors, hopefully, will see it.
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I don't I don't go into most of these meetings with a strong point of view.
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I go into most of them with a genuine desire to learn from the founder about what they know
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about the problem that I don't know.
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Which is different.
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I think at most funds, there are complete categories that everyone knows not to touch,
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but they will still take the meeting.
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Our last topic is another great piece by Rob Goh from Next.
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You who published the recent post titled A Crisis Moment for Seed VC.
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Rob argues seed investing isn't just experiencing a down cycle, but a structural
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shift driven by four forces, industry maturation that's squeezed profits for small
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funds, dominance of YC and mega funds that scoop up some of the best early founders, power
18:45
law thinking becoming consensus, so capital floods into only the biggest bets, and the AI
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wave, which is capital intensive, crowded, and and favors platforms, leaving most seed funds
18:54
sidelined.
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He ends the piece with a quote, hope is not a strategy.
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Seed VCs are staring extinction in the eye, and we will all have to evolve or die.
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We've talked at length about these different scenarios, but Rob wrote probably one of the
19:06
most direct pieces on the future of seed that I've seen in a bit.
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Wanted to first see if you had any initial reactions to the post.
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Other than violent agreement I mean, I told some people on our team this.
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I think a lot of times when I talk to people about the future of seed, the presumption is
19:20
that, well, seed will continue to exist.
19:22
I'm like, well, no.
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The venture ecosystem survived without seed firms for a very long time, and there is no
19:29
guarantee that any asset class or sub asset class will exist forever just because the
19:34
people who are in it want it to do so.
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Seed emerged to solve this gap between starting a company and series a at a time where not a
19:44
lot of people had friends and family and there were good ideas being left on the cutting room
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floor.
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That was almost twenty years ago.
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Those conditions don't exist in the same way.
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So I always say, like, what problem are you trying to solve?
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If as a seed fund, if you're like, hey, I'm trying to solve the problem of getting money to
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repeat founders or people who left really high profile companies who wanna start from scratch,
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I'm like, I'm sorry.
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Multi stage funds are also trying to solve that problem.
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And they are more likely to solve it than you are on average is my guess, for a bunch of
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reasons.
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Their business model allows them to be way more flexible.
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So if that was your whole reason for being as a seed firm was to kinda arbitrage, obviously,
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good people who needed somebody.
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Like, I don't think that arbitrage exists anymore.
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So I think the only reason for any venture firm to exist is that you're actually solving a
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problem for entrepreneurs.
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Now, cynically, some people would say some VC firms exist to solve a capital allocation
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problems for limited partners, but I am not gonna be cynical today.
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I would say what you really need do is you you need to solve a problem.
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And I would say, Eira Moradi doesn't have a capital access problem.
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She raised $2,000,000,000 for a prelaunch company.
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So if your whole theory is there are these people from OpenAI who need help and money,
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they don't.
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They're awash in capital.
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So I think for a long time, what started off as, like, a necessary arbitrage became a good
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business and nobody noticed.
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And seed stage entrepreneurs were raising capital from seed funds, and series a, mega
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funds were happy to let seed funds do their thing.
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I think one day those folks woke up and said, well, we need to be in the seed business too.
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But not explicitly just to make money, but to see the best companies and to see them early
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enough to have a point of view about them.
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And I've always told people you should be very nervous when somebody decides to make your job
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their hobby.
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And I tell our LPs all the time, I truly believe we deserve to exist because we are
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helping a pool of entrepreneurs who consistently struggle to raise capital.
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And if it ever becomes easy for the folks that we work with to raise money, I will question
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our right to exist.
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And I think there's not a lot of seed managers out there I meet who've really questioned
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again, going back to the beginning of our conversation with Screamedore, always ask
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myself, the other question is, like, well, what would happen to the ecosystem if this fund
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didn't exist?
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What ideas wouldn't get funded?
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Who wouldn't get capital?
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And sometimes I'm just like, well, somebody else would pick it up.
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They're like other firms with a similar strategy.
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The irony, though, is the more unique and difficult the thing you're doing, the harder it
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is to get LPs excited about it.
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And I think that's part of one thing Rob and I think have both talked about and written about
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is this sort of, like, samification of venture where everybody has the same portfolio
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construction, the same strategy focused on the same type of entrepreneur in the same
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geographies.
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And anytime you try to deviate from that, you can find alpha, but you are making the process
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of raising money for your fund and storytelling much, much harder.
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And the question is, is that trade worth it?
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Because the difficulty in fundraising shows up today.
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The benefits of the strategy show up at some indeterminate point in the future.
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To give everyone a a closer look as to how, to your earlier point, Charles, like, there's a
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sector of founders and companies that do not have a fundraising issue.
22:42
Rob shared the CO2 chart showing that so far in 2025, 52% of venture capital dollars have
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concentrated into just 10 companies.
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Rob shared this to underscore his point on how consensus investments are absorbing most of the
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industry's attention in the face of a sluggish exit landscape, which leads to widespread price
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insensitivity.
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He had a good quote that was investors may as well swing only for grand slams because it's
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not like the hit rate of home run outcomes is significantly higher.
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One counterpoint to that may be, isn't it still possible for winners to emerge from the
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remaining 48% of deployed capital into those other companies?
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And if so, what caveats come into that?
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I mean, is my little argument to the LPs that I talked to, which is there's a slider.
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Some percentage of big outcomes in venture are going to come from consensus obvious people.
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And in some cases, those outcomes might be disconnected from capital from company success.
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It could just be that, like, hey, there's this pod of AI researchers who are really great, and
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they never build anything, and Meta comes and buys them for a gazillion gazillion dollars
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because they want the talent, and that's a good investment even though it wasn't a good company
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per se.
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We'll put those to the side.
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I think there is no world in which 100% of the good companies come from outside of the realm
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of, like, the known attributes.
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That to me, it's impossible that none of the the alpha adventure.
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I think it's equally unlikely that 100% of the alpha comes from the known obvious stuff.
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And the question is, well, what's the ratio?
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If the ratio is fifty fifty, then seed is a great business because you're equally likely to
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find good companies outside of that core concentration anointed few.
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If it's eighty twenty towards the anointed, then seed's a terrible business because you're
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working really, really hard to pick up a small amount of alpha relative to the category, and
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we should all quit and go home and just let the multistage firms.
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I just actually fundamentally don't believe that all of the alpha in this business is gonna
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come from people who are well positioned because they did something previously or
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because they happen to have a drink of water at OpenAI or a cup of coffee at Anthropic.
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Like, I I don't think that that's I don't think that's where all and maybe that's maybe that's
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motivated reasoning.
24:49
Maybe it's self serving.
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I just in my venture career, many of the best companies I've met have been started by people
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who are talented, but not obvious.
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Well, we are all out of time today.
24:58
Thank you, Charles, for stopping by.
24:59
Thank you to our listeners for listening.
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Please like and subscribe, and we will talk to you all next week.
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Thank you.
25:05
Bye.