Latest / The Learning Corner by Precursor / Episode #94: The Middle Ground Is Gone, Funded Teams With No Plan, Being Legible to Capital

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Episode #94: The Middle Ground Is Gone, Funded Teams With No Plan, Being Legible to Capital · The Learning Corner by Precursor

• 0:00
  I think if you're a founder who's been out of the market for two years, I don't have a good
• 0:04
  analogy, but it's like you've been living in a cave.
• 0:06
  I told my friend it's kind of like the first episode of season two in silo.
• 0:10
  She, like, gets out of the silo and she gets past the VR field and then she sees this, like,
• 0:15
  wasteland.
• 0:15
  You're like, oh, it actually was as bad out here as they said it was.
• 0:19
  And I really do think that that's the experience I see is happening for a lot of
• 0:23
  founders whose priors on the market aren't current.
• 0:26
  It's the week of September 7.
• 0:28
  Welcome to the Learning Corner, a Precursor Ventures podcast.
• 0:32
  Welcome to the Learning Corner by Precursor.
• 0:34
  I'm Mia Fornham, and I'm joined by our GP and managing partner, Charles Hudson, where we will
• 0:39
  be talking through the articles and Goodreads that caught our team's attention over the past
• 0:43
  week.
• 0:44
  Our first piece this week comes from Ethan Kurzweil, co founder and managing partner at
• 0:48
  chemistry titled Go Big or The Middle Ground is Gone.
• 0:54
  He opens with the pink elephant thought experiment, the idea that once you're told not
• 0:59
  to picture something, you can't help but see it, and argues that the venture industry is
• 1:03
  stuck on its own version, the trillion dollar startup that no one can unsee.
• 1:08
  Now that we know a trillicorn is buildable on a venture timeline, capital at every stage is
• 1:14
  concentrating into the biggest possible swings, and the most ambitious founders have learned
• 1:19
  that the more aspirational they sound, the more funding they attract.
• 1:23
  The catch is that the biggest winners of every era rarely started out looking that big.
• 1:28
  Ethan's worry is that the pedestrian double or triple has become a relic and that progress in
• 1:34
  out of favor sectors like SaaS, consumer, and commerce turns linear, gated on a stubborn few
• 1:41
  tinkering outside the spotlight.
• 1:43
  His advice to founders is to pick a poll.
• 1:45
  If you are out of favor, make sure your business and your psyche can survive there
• 1:49
  longer than you think.
• 1:50
  And if you're a consensus needle mover, that is not a train.
• 1:54
  You can get off to rest.
• 1:55
  Wanted to pause here for your thoughts on the piece first, Charles, since it was a it was a
• 1:59
  good one.
• 1:59
  I feel like I've given various versions of this feedback to our portfolio companies.
• 2:04
  It's varied from sort of nobody cares.
• 2:06
  That's the only problem with your business to it's binary.
• 2:09
  There's I told some of the day there are haves and have nots.
• 2:11
  And if you're not sure which one you are, you're a have not.
• 2:14
  And I think it is true.
• 2:16
  I think people are holding two things in their brain at the same time.
• 2:19
  One, the cursor SpaceX, and soon probably to be on top of an open AI, are outcomes that are so
• 2:25
  extraordinary that they, like, reset your brain.
• 2:27
  Well, if that's possible, why play for anything less?
• 2:30
  And I'm like, okay.
• 2:31
  We've seen this three times now.
• 2:34
  Does three times mean that it's the new goal?
• 2:37
  Or does three times mean you've really seen through three once in a career, once in a
• 2:41
  lifetime companies in a very short time frame.
• 2:44
  What I do know is most people are just like, can't unsee it.
• 2:47
  And so I've told a handful of companies that's yeah. You
• 2:49
  You have like a very high probability of being a billion dollar company, but a 0% chance of
• 2:55
  being a $10,000,000,000 company, and nobody's gonna fund that.
• 2:57
  They're like, what do you mean?
• 2:58
  I'm like, a billion dollars is a big outcome for you, for a fund of our size, for just about
• 3:03
  everybody, except for people who are managing gigantic pools of capital.
• 3:06
  For them, it's just not a needle moving outcome, and they are in the needle moving
• 3:10
  outcome business.
• 3:11
  And so I think as those funds remain large or even potentially get larger, the scale of
• 3:16
  interesting outcomes is only gonna get bigger.
• 3:18
  And I think we have a lot of very, very large private companies, whether that's a Base Ten or
• 3:23
  a Harvey or all these companies that are worth well more than $10,000,000,000 as private
• 3:28
  companies, still with, in my opinion, probably a fair amount of work to do and no immediate
• 3:32
  plans to go public.
• 3:33
  I think if you're a founder who's been out of the market for two years, I don't have a good
• 3:37
  analogy, but it's like you've been living in a cave.
• 3:39
  You go out of the cave.
• 3:40
  I told my friend it's kind of like the first episode of season two in silo.
• 3:44
  She, like, gets out of the silo, and she gets past the VR field, and then she sees this,
• 3:49
  like, wasteland.
• 3:50
  And you're like, oh, it actually was as bad out here as they said it was.
• 3:53
  And I really do think that that's the experience I see is happening for a lot of
• 3:57
  founders whose priors on the market aren't current.
• 4:00
  I had a whole strategy meeting with one of our founders heading into fundraising in the next
• 4:06
  couple of weeks.
• 4:07
  And you, of course, go down the list of different funds you wanna reach out to, what
• 4:10
  tier they fit in, and conversation has changed so much since the last time they went out.
• 4:16
  Yeah.
• 4:16
  So maybe two years ago, I could totally see that person being interested.
• 4:20
  Let's just put out the soft connect and we'll see where they fall.
• 4:23
  Now I could firmly say there's a large portion of that list that I would say, I wouldn't waste
• 4:29
  your time or your energy there.
• 4:31
  I think our time is best spent elsewhere.
• 4:34
  And I think that's created a whole new dynamic of like, there used to be a lot more
• 4:37
  conversation for seed, and there still is, of who's leading your seed or the next round and
• 4:42
  what that means to the audience.
• 4:44
  Now, if a large portion of those more buzzy firms are only corralling around specific
• 4:49
  thing, who kind of gets to signal something positive for the things that are a little bit
• 4:53
  out of favor, or do people just not care?
• 4:55
  Is the question mark.
• 4:56
  And if that's the case, then I'm sort of like, okay, let's talk about fundraising from a
• 4:59
  perspective of like, who can we get around the table to just supply the capital and make this
• 5:03
  journey less painful for you, and then we have to talk about things in the long run.
• 5:06
  It's such a new and different journey.
• 5:08
  I think the other thing that's hard is I have friends who used to be specialists, and those
• 5:13
  specialist firms have strategies that will not get them into SpaceX, OpenAI, or Anthropic.
• 5:18
  And most of them have concluded a strategy that doesn't get me into a Trillicorn is not a
• 5:22
  venture strategy I wanna execute.
• 5:24
  So the other thing, founders have been like, what about this person?
• 5:26
  They invest in my category.
• 5:27
  I'm like, they used to.
• 5:29
  Now they don't.
• 5:30
  Now they are an AI infrastructure and physical AI investor, and they're like, but how?
• 5:34
  And I'm like, because that's where the money is, and they'd like to remain employed as
• 5:37
  venture capitalists.
• 5:39
  And I I I think there's one other wrinkle, which is we have some really great high
• 5:44
  performing companies that are in sectors that are not in favor, and those companies just
• 5:48
  continue to execute.
• 5:49
  And their job and our job is to stay alive and stay in business long enough for people to
• 5:53
  eventually care.
• 5:54
  And I think the one good thing is there are lots of industries where AI infrastructure is
• 5:59
  not the most important business problem.
• 6:01
  And then those categories, m and a markets are good.
• 6:04
  Those cut those companies still feel pressure to acquire things to grow, and it's very
• 6:09
  possible.
• 6:09
  I told someone for the first time ever, kinda changed my tune on when we should get strategic
• 6:14
  investors involved in companies.
• 6:16
  I'm like, it's not so bad to get them involved earlier if financial investors are really not a
• 6:21
  realistic option.
• 6:22
  As is the theme of our pod for the last year, every week, I feel like things are different
• 6:26
  than the week before.
• 6:26
  Some of the biggest names that we know in tech today just weren't the original ideas that they
• 6:31
  came to market as.
• 6:32
  And that was part of Venture.
• 6:34
  That was like a beautiful aspect of what people were drawn to the space on.
• 6:39
  Now, I think it's very clear that you have to come to the market with a massive idea.
• 6:44
  That's what people are calling for.
• 6:45
  And you have to stick to it, which is very different.
• 6:49
  My question is, do you think this is the new era of venture?
• 6:53
  If we give you tons of money, you have to commit to this idea and make it come to life,
• 6:58
  and you have to present it as such.
• 7:00
  We don't need you to start so niche.
• 7:02
  Or are we just in the bubble?
• 7:04
  Because we always have talked about on the pawn how venture capital as an asset class is
• 7:08
  maturing.
• 7:09
  And so, therefore, are the ways that we think about what we seed for first institutional
• 7:14
  rounds, does that look completely different because there's so much capital on the market?
• 7:18
  And if that's the case, how does that negatively impact the industry and sway
• 7:22
  founders into building specific archetypes of companies because that's what they know will
• 7:27
  create the most signal and support?
• 7:29
  I think in a previous episode, we talked about Yoni's post what capital wants.
• 7:33
  I think these two things are related ideas.
• 7:35
  One is I think most founders are smart to and they'll say, like, what is the market rewarding
• 7:39
  and funding?
• 7:40
  Oh, it's a very specific type of company.
• 7:42
  If I wanna fundraise, I should build one of those because raising money there will be much
• 7:46
  easier.
• 7:47
  I think it creates a lot of distortion.
• 7:49
  I also think something we don't talk about enough is, in many cases, if a VC firm gives
• 7:54
  you or invest, we won't say give, invest a $100,000,000 in your company, they don't want
• 7:59
  you six months later to be like, oh, here's $99,500,000 back.
• 8:04
  We couldn't figure it out.
• 8:06
  You're now, in my mind, stuck with the responsibility of finding a business that is
• 8:12
  worthy of the scale of capital that you've raised, even if it's not the original idea.
• 8:16
  So you've raised that a billion.
• 8:18
  Great.
• 8:18
  Oh, the thing we were doing didn't work.
• 8:20
  Wonderful.
• 8:20
  You have $99,500,000 to find something Yeah.
• 8:23
  That is a multibillion dollar outcome.
• 8:25
  Have at it.
• 8:26
  And the the sad thing is the VC will move on.
• 8:30
  They'll be like, oh, that company lost their way.
• 8:32
  They've got a lot of money.
• 8:34
  They better figure it out.
• 8:36
  I'm gonna go find the next company where I'm as enthusiastic about their prospects as I was
• 8:40
  when I made that investment.
• 8:41
  And the founder is left there to work it out.
• 8:44
  So And it takes a long time to burn a $100,000 too.
• 8:47
  So and I would assume the investors who exceeded that, they'll be long promoted to
• 8:52
  partner years
• 8:53
  Or
• 8:53
  gone.
• 8:53
  Or gone gone and on to the next.
• 8:56
  Our next piece is a nice bridge from Ethan's.
• 8:59
  If the market is only funding the biggest possible swings, the next piece is what happens
• 9:03
  after the money lands.
• 9:04
  It's from David Kahn on his Substack titled, they built the team, they raised the money, now
• 9:09
  what?
• 9:10
  David's observation is that the market's rational response to an uncertain era has been
• 9:14
  to invest in teams rather than ideas.
• 9:17
  Ideas change and teams stay the same, but every zig brings a zag, and the zag is a generation
• 9:23
  of well funded startups, wonderful team, visions, who don't actually know the steps to
• 9:29
  get there.
• 9:29
  And as one founder put it, I know what the destination is, but I'm trying to figure out
• 9:33
  the steps along the way.
• 9:34
  He traces how we got here.
• 9:36
  Talent that's attracted to big problems and repelled by details, a venture ecosystem that
• 9:40
  has shifted to a call option mentality.
• 9:43
  The uncomfortable part is that these founders often have nobody to turn to because admitting
• 9:47
  that there's no plan would demoralize the team, investors they've already brought on board.
• 9:53
  He also points out that most of the valuable AI companies of this era were not amorphous at
• 9:58
  all.
• 9:58
  Klay, Harvey, Kerser, and even Anthropic all started with very concrete problems.
• 10:03
  And OpenAI is really the only one that succeeded with the open ended search formula.
• 10:07
  His closing distinction is the one that stuck up most.
• 10:09
  There's a big difference between big vision for the sake of big vision and big vision because I
• 10:15
  cannot live with myself if I don't solve it.
• 10:18
  How often are you seeing this exact shape right now?
• 10:22
  I think this is the archetype for a lot of these, particularly if it's a very strong
• 10:26
  technical team, and they're working on a technical area of AI.
• 10:29
  One, it might be the fact that only the people working at that company truly understand Yeah.
• 10:34
  The nature of the technology and solution that needs to be built.
• 10:38
  And two, I think right now, we're in this era where I think a lot of people, investors say
• 10:43
  this.
• 10:43
  They don't mean it, but I think they say it which is like, oh, this is a really smart team.
• 10:47
  They're working on some esoteric problem.
• 10:49
  If this doesn't work, we can probably voice this team upon a model provider or some other
• 10:55
  large acquirer who will value the AI research talent and can put it to better use than that
• 11:00
  team could independently.
• 11:01
  And in every news cycle, there's always been this, oh, well, we have a talented team.
• 11:05
  The worst case scenario is that we will get team acquired and get our money back.
• 11:10
  And that remains the floor until it isn't.
• 11:12
  And then when it isn't, suddenly you're like, oh, there's no market for these companies that
• 11:16
  aren't working.
• 11:17
  Oops.
• 11:17
  That changes the calculus for us in terms of how we have to think about this.
• 11:21
  And that is hard.
• 11:22
  That's a hard that's a that's a hard thing to deal with.
• 11:25
  So I guess the one thing I come back to is a long time ago, good friend of mine, founder and
• 11:30
  collective, would always remind me, you know, capital has no insights.
• 11:33
  And we have founders in our portfolio who have a lot of money, and they're like, what should I
• 11:36
  do?
• 11:37
  And I'm like, I don't know.
• 11:38
  But spending more money and hiring more people is probably not gonna get you closer.
• 11:42
  The answer is probably to find the thing worth building or they'll solve the question that's
• 11:47
  that you're stuck on, and that's where the answer lies is, like, in doing the work and
• 11:51
  figuring it out.
• 11:52
  I've met some people who've raised a lot of money, and I talked to them privately.
• 11:54
  They're like, oh, I don't know what we're doing.
• 11:56
  We've been giving a lot of money to go after this problem.
• 11:58
  Step one is we have to sort of define what does it mean to, like, quote unquote, go after this
• 12:03
  problem.
• 12:03
  We raised a bunch of money to work on the intersection of AI and molecular science.
• 12:07
  I'm like, what are you building?
• 12:08
  They're like, we don't know.
• 12:09
  But it's gonna be No.
• 12:10
  At the intersection of those two things.
• 12:12
  And I'm like, well, that's that's pretty crazy.
• 12:14
  To play devil's advocate though, I agree with you.
• 12:17
  Like, capital doesn't equal insights for a good company.
• 12:21
  But if you're a founder and then you look over to the right and you just watch one of your
• 12:25
  competitors launch out of Stealth, $100,000,000.
• 12:27
  Again, these are like unprecedented times.
• 12:29
  Yeah.
• 12:29
  Yeah.
• 12:30
  This is new.
• 12:31
  How do you react to that?
• 12:32
  Because previously, I'd be like, yeah, capital doesn't equal insight.
• 12:35
  A certain amount doesn't equal insight but buys you time, buys you distribution.
• 12:39
  In this in this stage, it depends on what you're building, buys you compute.
• 12:43
  These are all things that I think you have to weigh differently.
• 12:46
  And I I think, like, the other thing is it used to be fine.
• 12:50
  Our competitor raised a little bit of money.
• 12:52
  For the next twelve months, there's gonna be this fog of war where nobody knows who's
• 12:56
  winning, but they raised last.
• 12:58
  When companies are raising like $103,105 $100,000,000, it changes the calculus because
• 13:03
  those companies it could take a long time for the fog of war to clear.
• 13:06
  And I think that's one of the things that's changed with the king making.
• 13:09
  It used to be like, oh, that company got a $10,000,000 seed round.
• 13:12
  Everybody else had two.
• 13:13
  That company has a head start and a resource lead, but they too will have to fundraise in
• 13:18
  two years.
• 13:19
  Now it's like, that company got a $100,000,000.
• 13:21
  They're not gonna have to they're not gonna have to fundraise anytime soon.
• 13:24
  They might choose to because things are going well, but they want have to, which means the
• 13:28
  fog of war around their fundraise can persist far longer.
• 13:31
  And that's just a different world.
• 13:32
  One of the points of the piece was that for a lot of these teams that are super talented, but
• 13:37
  have no clear idea of where to chart down first, they have no comfortable place to go
• 13:42
  from a cap table perspective to share those feelings.
• 13:45
  Is that an investor's responsibility to create that environment, especially in a deal that
• 13:50
  looks like that?
• 13:51
  And if so, what's the line?
• 13:53
  Where is your stance on that?
• 13:54
  And I'm talking, I guess, specifically for big rounds that look like the ones that we've been
• 13:59
  talking about, not the first time founder of the traditional pre c looking round.
• 14:03
  I think that's a conversation where as a founder, you gotta go find founder friends.
• 14:06
  And that's something I think you wanna talk about peer to peer.
• 14:09
  Well, I would love it if someone came to me and said, I'm terrified that I raised too much
• 14:12
  money.
• 14:13
  And I don't know what to do with it.
• 14:14
  Be like, well, you've already raised it.
• 14:15
  So I appreciate you being open and honest.
• 14:17
  But this is a problem you bought so we can work on it together.
• 14:20
  But like, the problem you bought, you signed up for it when you made the decision to raise this
• 14:24
  money.
• 14:24
  Our last piece this week is from Nakunj Khathari, partner at FPV Ventures titled Being
• 14:30
  Legible to Capital, and it's essentially a brain dump for founders raising this fall as we
• 14:34
  somehow are officially post Labor Day.
• 14:37
  His starting point is that this is the most competitive market he's seen in a while, so
• 14:41
  most VCs aren't doing independent work.
• 14:44
  They're reading off signals off of you and comparing notes, and the founders who are
• 14:47
  winning are the ones who are the most legible.
• 14:50
  From there, he gets really tactical.
• 14:52
  You wanna figure out who at the firm actually has leverage.
• 14:54
  Get a warm intro to the decision makers.
• 14:57
  Ideally, through a founder, they've already backed.
• 14:59
  That's something we've talked about on the pod.
• 15:01
  And be careful with the number who say out loud for round sizes and valuation.
• 15:04
  Because if you announce a larger raise that you need to backtrack, it sees a lot of doubt, and
• 15:09
  you really can't take it back.
• 15:10
  Some of the counterintuitive bets are some of my favorites.
• 15:13
  He said, VCs don't want a quote unquote deal, a price that's too good.
• 15:16
  Just raise questions.
• 15:18
  No established lead will take under 10%, and never compare your terms to what a competitor
• 15:23
  got because it's the single best way to take a round.
• 15:26
  He also flagged how much hiring great people helps, and that your infraction slide should
• 15:30
  always show the current month old numbers smell like still goods.
• 15:34
  His closure is a good reminder that even this market gets it wrong, and all it takes is one.
• 15:38
  Yes.
• 15:38
  There's a lot of really specific tactical advice here, the two week timeline, 10% lore.
• 15:43
  Are there anything specific in here or things that he has listed that you believe could
• 15:48
  sabotage a fundraiser or things that matter far more than others?
• 15:51
  I think you have to know this sounds really mean, but I don't mean to I think you have to
• 15:56
  know how much money the market thinks you can handle.
• 15:59
  And I've met some founders where I'm just like, this is a repeat founder who's been successful
• 16:05
  before.
• 16:05
  People will trust this person with money, or this is a hot y c company.
• 16:09
  Maybe you have questions about the founder, but because it's a hot y c company, you know
• 16:12
  they're gonna raise a lot of money.
• 16:14
  And I think you have to just understand the dynamics of your own fundraise.
• 16:17
  How much momentum do you really have?
• 16:18
  How much leverage do you have?
• 16:19
  And like, if you have it and you wanna max on it, go for it.
• 16:23
  Extract as much as you can just knowing that, like, the people you're extracting from, they
• 16:27
  feel it too.
• 16:28
  And if things go sideways, that that conversation will be hard.
• 16:31
  And if you don't have a ton of momentum or leverage, you shouldn't act out of weakness,
• 16:35
  but you should also acknowledge that like, hey, not having that experience.
• 16:39
  And while there is room to negotiate, we still need to get a deal done.
• 16:42
  And I do agree.
• 16:43
  Like, most people don't wanna get a deal.
• 16:45
  Like, venture is not like bargain basement investing.
• 16:47
  And I think sometimes people say, well, this YC company raised at these terms.
• 16:51
  I'm like, well, it's because it's YC.
• 16:52
  And they're like, what do mean?
• 16:53
  It's like, well, YC companies operate with different rules than non y c companies.
• 16:57
  And that's just the thing.
• 16:58
  We could argue whether it should be a thing.
• 16:59
  It doesn't matter.
• 17:00
  The thing.
• 17:01
  You know, pegging your hopes and expectations on someone whose circumstances are different
• 17:05
  than yours is a good recipe for disappointment.
• 17:07
  I also think right now in this environment, there's a gigantic premium on storytelling and
• 17:12
  narrative.
• 17:13
  Everyone's like, oh, have this traction.
• 17:14
  I was like, most companies don't have so much traction that the traction will be the lead
• 17:18
  story.
• 17:18
  And I was like, and candidly, most investors are still feeling their way through AI.
• 17:22
  So to the extent that they invest, it's usually not because of like the ARR data or something
• 17:27
  like that.
• 17:28
  It's usually like, oh, this person told me a story about the future that feels like the most
• 17:32
  likely version of the future that will exist, and so I'm gonna invest in this company because
• 17:36
  I believe this person.
• 17:37
  And I think there's some people I I I spent thirty minutes today with somebody where I was
• 17:41
  just like, the narrative doesn't work.
• 17:43
  Like, the things you're telling me about this this category and your product, it doesn't hang
• 17:46
  together in an interesting and exciting way, we have to fix that.
• 17:49
  And if we can't fix that, I think you're gonna have a hard time raising money.
• 17:52
  It goes into my last question here, but to weave the three pieces together that we talked
• 17:56
  about this week, they're all circling the same idea from different angles.
• 17:59
  If you had to give one piece of advice to a founder who is not in a hot, favorable sector
• 18:04
  and is raising this fall, what would it be?
• 18:07
  I think most people right now seem to have a pretty firm vision of who they wanna fund from
• 18:16
  a profile and background standpoint.
• 18:18
  And if you look like that person, regardless of the firm, it's great.
• 18:21
  You could be a repeat founder who had success in consumer before and is now doing something
• 18:25
  in consumer AI and people go, oh, this person knows consumer.
• 18:28
  You could be someone that that VC's known for a long time and they're giving you money out of,
• 18:32
  like, the depth of the relationship.
• 18:33
  You could be coming out of a big model provider.
• 18:35
  I think most people have a pretty narrow set of archetypes that now feel fundable.
• 18:40
  And part of this is just not what do I like, but what do I think other people like me will
• 18:44
  like.
• 18:44
  And so I think there's a lot of that happening right now.
• 18:47
  And if you don't fit that pattern, it's pretty tough.
• 18:49
  Pretty tough fundraise.
• 18:50
  Well, we are all out of time today.
• 18:52
  Thank you, Charles, for stopping in.
• 18:53
  Thank you to all of our listeners for helping as well.
• 18:56
  Please like and subscribe, and we'll talk with you all next week.
• 18:58
  Thank you.
• 18:59
  Bye.