Latest / The Learning Corner by Precursor / Episode #62: Firm Over Fund, Relevance Decays, The Privilege of Belief

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Episode #62: Firm Over Fund, Relevance Decays, The Privilege of Belief · The Learning Corner by Precursor

• 0:00
  For me, it's really motivating to remember, you know, there's a bunch of people who are
• 0:02
  starting companies for the first time.
• 0:04
  Where do they go to get information about who they should talk to?
• 0:07
  I wake up every day saying, my biggest fear is there's an amazing founder who's building an
• 0:11
  incredible company that's in our thesis who simply doesn't know me and doesn't know anybody
• 0:14
  anybody in our network.
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  And what if we don't see that person purely because they don't know to ask?
• 0:20
  It's the week of January 12.
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  Welcome to the Learning Corner, a Precursor Ventures podcast.
• 0:30
  Welcome to the Learning Corner by Precursor.
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  I'm Mia Farnam, and I am 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
• 0:41
  week.
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  Our first topic is an ex post written by David Haber titled firm is greater than fund.
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  Haber argues that most investors are running funds, but very few are running firms, and
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  there's a critical difference.
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  His core thesis is that funds become more fragile as they scale, getting caught up in
• 0:58
  deal chasing rather than building sustainable competitive advantages.
• 1:01
  Haber believes firms are run like entrepreneurial ventures.
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  They're constantly asking what's our defensible moat rather than just what's our next deal.
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  The firms invest heavily in technology and data infrastructure to create an edge.
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  He calls them product companies.
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  They build something that wins the market in ways that aren't obvious or easily replicated.
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  Firms also benefit from decentralized decision making, which lets them move quickly, explore
• 1:26
  multiple directions simultaneously, and tap into diverse perspectives across the team.
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  His closing point was if you wanna build an institution that lasts a hundred years, you
• 1:36
  need to be building a firm, not just a fund.
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  This echoes a lot of things we've talked about over the last year, especially as venture is
• 1:44
  growing up and the bar continues to raise in order to become a more lasting firm franchise.
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  So wanted to pause here for your
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  I think it's a good framing.
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  I would also say there's a counterpoint, which is I know some people who have no interest in
• 1:58
  building firms who are fantastic investors and are happy to build institutions that will not
• 2:03
  last a hundred years and that will not outlive the person who built them, and I think that's
• 2:08
  fine too.
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  But I do think firms don't happen on accident.
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  They only happen on purpose.
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  And I think the part about the post that that really resonated with me is if you're gonna
• 2:18
  build a firm and to me, a firm is something that will outlast its creator.
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  I don't know if it has to be a hundred years, but passed on, handed up.
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  There's a lot of things.
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  Yes.
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  Technology is important, but so are people.
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  We have to also have, like, a human capital people strategy.
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  We're finding and depending on your point of view on this, finding and or developing not
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  just investment talent, but all of the other talent that you need around a talented team of
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  investors to build an institution that can function.
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  It could be investor relations.
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  It could be platform.
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  It could be operations.
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  There's just a lot of things that you need to build, and I think a great firm ends up like a
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  great company having a culture and a philosophy and a set of business practices.
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  For example, I would say Andreessen Horowitz and Sequoia are both firms that have been very
• 2:59
  successful, but they're not the same firm.
• 3:02
  The culture, the beliefs, the day to day practices for those firms are different.
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  I could throw index in there.
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  And so I do think this is something I didn't fully appreciate when I started Pre Grocer.
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  There's also a lot of LPs who wanna hear a story that you have plans to build a firm, not
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  just raise a couple of funds then ride off into the sunset.
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  And I think part of it is that they like to underwrite things that are gonna stick around
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  for a while.
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  Part of it, I think, is it just sounds better to say I'm building something that will be
• 3:26
  around forever.
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  The the unfortunate truth is a lot of firms fail for a different reason than companies do.
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  Yes.
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  Companies go out of business because the product that they built is no longer needed or
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  they get out competed, but a lot of venture firms fail due to leadership transitions.
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  They just can't get the people running the firm who are successful in one generation to
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  replicate that success, both in investing and in operating with other people.
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  Lots of public companies are able to make this work, I'd say, better on average than venture
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  firms.
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  Are there specific roles that you look at precursor right now that you didn't realize
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  were gonna be such critical cogs in the wheel if you went backwards in 2015 when you
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  launched?
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  Finance.
• 4:06
  Yeah.
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  Five I mean, we 20% of Precursor works in finance.
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  I would have never appreciated how valuable in retrospect, it's obvious.
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  Because of our deal pacing, finance was always gonna be important, but not in the way that I
• 4:20
  appreciate now, which is it's not just, oh, they get the wires out.
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  It's a strategic role done right, and I I fully didn't appreciate that.
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  Also, would say, like, having a really good team that can do operational support, whatever
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  that means at your firm.
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  It's not so much platform.
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  Back to this firm versus fun thing.
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  Getting your firm to operate at its highest capacity takes people who understand how the
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  machine works on the inside and can operate and tune that machine while you're off investing.
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  Well, that's a good lean to my last question here.
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  I mean, they talk about platform a lot in the post and thinking about how these platform
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  services are are the product offerings and the resources that firms offer founders for hiring
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  and marketing and scaling, and we've seen them grow across firms and funds over the last five
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  years, specifically.
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  While many funds have platforms now, Haber argues that when done well, these become great
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  products that can create the moats.
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  But I wanted to ask you if there's been any evolution of thought here on your side on
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  platforms since you've been in venture.
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  So, like, let's think the beginning to now.
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  I think there's two things I've observed.
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  One is it doesn't this is maybe cynical.
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  Other platforms actually deliver on value to founders after the investment.
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  They tend to be a very effective marketing tool when you are trying to win a deal or convince
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  you you tell them, hey.
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  We've got all these talent people over here who are gonna run all of your searches or help you
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  do all this stuff.
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  You don't actually know if that's gonna happen as a founder.
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  The existence of those people cannot be denied.
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  Their talent is usually unquestioned, but your ability as a founder to access them, if you're
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  part of someone's portfolio, can vary.
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  And I think the other thing, and I've just heard this from founders, not all platform
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  teams are created the same.
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  There are some firms whose platform teams have a really strong history of delivering value to
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  founders.
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  There are others where people say, hey.
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  You know, their talent team is great, but their corp dev team needs work.
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  Or their corp dev and, like, introductions team is great, but the talent.
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  And so I think it's a lot of your mileage may vary.
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  You also can't raise, like, billions of dollars and have two people.
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  There's maybe a few people on the planet, Elon, a few people who could do that.
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  But for the most part, if you're gonna raise large sums of money to the tune of billions of
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  dollars, I think LPs wanna know, well, what are you gonna do with all those fees?
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  What are you building what are you building that requires tens of millions of dollars of
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  investment in people?
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  I think if you don't have an answer for that, I think it's harder to make the argument that you
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  can raise these gigantic funds.
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  It just doesn't make sense.
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  Yeah.
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  And plus, your competition is gonna go to market and say, we have this and they don't.
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  Why would you take their money?
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  They don't even have a talent partner.
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  We've got 10.
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  Any questions, I guess, that founders could ask investors when they are given this menu of
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  options and things that are available to them post investment that can really suss out what's
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  gonna be actually a tangible resource they can actually access versus more of like a marketing
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  tool.
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  And I say this also knowing that when you're on the founder side, a lot of those questions you
• 7:00
  don't really think about because you're like, I'm just really more concerned about closing in
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  the rest of this round.
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  The rest of it, like, I don't really care.
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  But if you were to ask those questions, what would they be if you were in the founder's
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  shoes?
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  I would go ask other founders in their portfolio.
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  And it's interesting.
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  I wouldn't ask the top founders because those founders may or may not even need those
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  services.
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  And I wouldn't ask the bottom performers because it's possible that those services are
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  rationed in such a way that that I'd try to find people who are kind of in the middle.
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  And the two questions I'd ask are, how available was this team to you?
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  Like, were you able to actually, like, get time with them?
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  And then when you had time with them, how useful was it relative to something you could
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  have hired on your own in the market?
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  And depending on the founder, they may or may not have a good perspective on that, the last
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  part of my last question.
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  But those are the two things I'm wise because if if you could have hired an equivalent
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  marketer or talent person on your own in the market, you don't then you don't need the
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  platform team for the fun.
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  Doesn't mean it's not you, but, like, you do need it.
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  If they're delivering at a level that's hard to replicate in the market arm's length, that's
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  really bad.
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  I think it's a good segue into our next topic.
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  It's a piece written by Sarah Guo titled relevance decays.
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  In the piece, she argues that venture investing is uniquely time dependent.
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  Staying relevant requires constant active market engagement, and being in market, so
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  meeting founders and debating incomplete ideas, isn't just a sourcing technique.
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  It's truly the fundamental nature of the job in venture.
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  This matters more than ever with AI companies that operate on radically compressed timelines.
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  What used to take years to validate in SaaS can now shift dramatically in a month.
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  You could be off and running in one day and then up in flames the next.
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  The best investors look for invariances, so things that persist across technological
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  shifts, but you can't outsource a lot of this learning through apprenticeship alone, which is
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  something people say venture is really built upon.
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  You really have to be in the driver's seat experiencing it yourself, and this is why less
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  experienced investors can still be exceptional.
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  They reason from first principles rather than inherited pattern matching.
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  Meanwhile, established investors can be complacent even as their track record stays
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  really strong.
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  And her warning to founders and LPs was don't just stick with the established names, and the
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  closing line was relevance must be earned continuously.
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  And the more success you've had, the easier it is to believe you no longer have to.
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  I know this article resonates because it echoes a lot of the belief systems that we have at the
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  Fund.
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  But why do you think investors forget about the importance of relevance over time?
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  It's interesting.
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  I don't know why people forget it, but I understand how it happens.
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  I think when you get in the business, you're hungry, you're aggressive, you wanna win.
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  And for some people, like, a little bit of winning dulls the edge.
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  Because to stay on top and venture, you have to be really competitive.
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  You have to be willing to do the same thing.
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  You have to be willing to take that phone call at 10PM from that founder because you think it
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  matters.
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  You have to be willing to, like, jump on a plane to go meet some there's all these things
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  you have to do that are inconvenient.
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  And I think once some people get successful, they're like, well, I wanna be as successful as
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  I am now, but I no longer wanna continue doing the things that got me here.
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  And the truth is you can do that for some period of time in venture.
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  You can you can ride off your network.
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  You can ride off your previous wins, but it decays really quickly.
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  And I was talking to somebody yesterday.
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  He goes, oh, I wanna introduce you to this founder.
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  They're in San Francisco, but they've never heard of you.
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  And the person's like, couldn't believe they've never heard of you.
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  I'm like, I can.
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  There's tons of people out there who don't know who Precursor is, who don't know who I am.
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  And I wake up every day saying, my biggest fear is there's an amazing founder who's building an
• 10:24
  incredible company that's in our thesis who simply doesn't know me and doesn't know anybody
• 10:28
  anybody in our network.
• 10:29
  And what if we don't see that person purely because they don't know to ask?
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  And for me, it's really motivating to remember that, like, you know, there's a bunch of people
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  who are starting companies for the first time.
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  Where do they go to get information about who they should talk to?
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  They go to the Internet.
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  They go to their friends.
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  They go to chat GBT.
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  So I think for me that I find that a fun intellectual challenge to figure out how to
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  stay relevant and how to stay top of mind for people, and it does take work.
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  And I do have some friends who've opted for the, hey.
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  I'm going to just cash in on what I've gotten, and I'm just gonna work my own network.
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  And the people that I find who find me.
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  But that's that's not how you win in a lot.
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  You know, I look at somebody like Josh Koppelman, who I think still works extremely
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  hard and has been really successful, and I think does a lot to keep first round top of
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  mind for founders.
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  Based on his success, he doesn't need to work this hard unless keeping first round capital
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  top of mind in the ecosystem was important.
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  And, obviously, it's important to him, is why he worked so hard.
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  And I think we always think about this relevancy piece in terms of just winning deals,
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  but I think it it has to extend for the rest of the job, which is stuff that we talked about in
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  the last article, so supporting your founders.
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  After the investment, if you take yourself out of the market and don't talk to other founders
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  or hear from other investors on what is working and what is not, it's difficult to provide that
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  advice for founders who are building even after you wired the checks.
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  You could win the deal, but can you continue to uphold, like, a strong reputation?
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  And I'm sure there's a whole host of other people who are like, I only care about winning
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  the deal.
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  That's what an investor is, and so the other stuff is slough, which I I partially agree with
• 12:00
  as well.
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  I guess from your perspective, are there any distractions or other things that you see
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  investors, maybe the ones who you mentioned more senior in their career, sometimes are
• 12:08
  confusing with relevance or deeming to be more important at that time?
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  I think relevance is this, like, perspective question.
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  And I think if someone said how relevant are you, I'd say I'm completely unqualified to
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  answer that question.
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  The only people who can answer that question are founders.
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  And sometimes people are like, oh, I was on the Midas list, or, oh, I was, like, written up in
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  this investor focused blog or magazine, or, oh, I was on, like, this VC focused pot.
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  Like, I think you have to have some level of humility and say, like, relevance is in the eye
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  of the beholder.
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  And you have to think, like, if I'm relevant, how would that show up?
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  That would show up with people sending me deals.
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  That would show up with founders in our portfolio thinking of us when they when they or
• 12:50
  someone they know is starting a new company.
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  There are signals of relevance that you can detect, but, again, these things all take work.
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  And so I don't know.
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  And I think there's some things in this business we really overthink too.
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  And I think Sarah's point about young investors is the other one I think we overthink, and I
• 13:07
  think we've gotten.
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  The point you had about the list is just like a funny feature of Venture.
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  Tell a lot of people that if there was a list of, like, top investors with brown hair, like,
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  I would be on it.
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  I'm sure.
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  And so would, like, 65 other people for no reason at all.
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  All these lists are dumb unless they're on them.
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  Our last piece is a Substack by Michael Dempsey titled The Privilege of Exploring How Belief
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  Operates in Investing, particularly around the long silence between making a decision and
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  knowing if you're right.
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  In early stage venture, you're not just working with incomplete data.
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  You're often having no data at all.
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  So he asks the question, where does real belief show up?
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  So first, steadfast belief in a thesis.
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  That's his first point.
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  So having a clear articulated conviction so strong that you'll happily lose money on x
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  until we eventually make money on x.
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  Second, belief in asymmetry, investing in areas of potential change when success creates
• 13:59
  outsized impact.
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  While this leads to those classic venture return outcomes, this will obviously also lead
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  to those things that fell apart, and this is actually where you can learn the most.
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  Third, belief in people, not just because they will always get it right, but because their
• 14:12
  judgment and intentions point in the right direction over the long term.
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  He closes on the cost of disbelief, noting that lacking belief shows quietly in all kinds of
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  damaging ways.
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  And the through line of the piece is that you need to remain steadfast in your convictions,
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  knowing that there will be ups and downs, but trusting the direction and the people you're
• 14:30
  backing is the most important thing.
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  So we hear all the time that belief is everything in pre seed investing.
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  But Charles, like, what does that real belief look like, and how do you know when to have it?
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  I get this question a lot, especially from some of my growth stage friends.
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  Yeah.
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  I always ask myself, like, what what's changed?
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  And sometimes, well, nothing's changed.
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  Then I'm like, well, then why has my opinion changed?
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  Then usually, you're like, okay.
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  Something has changed.
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  I just haven't put my finger on it.
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  I think about this a lot in the context of our team.
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  The truth is with the founders we back, once you've made the investment, there's generally
• 15:00
  no take backs.
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  They've got the money.
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  They're gonna do what they wanna do.
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  There have been some times where I've been like, wow.
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  I was wrong in my assessment of this founder.
• 15:07
  I made a mistake, but there's really nothing I can do about it.
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  They've got the money, and now my job is to try to make this person as successful as I possibly
• 15:14
  can.
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  And that's hard.
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  That's hard sometimes when the person doesn't have it in them.
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  In other cases, I'm like, this person's exactly who I thought they are.
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  And the market just doesn't understand either their product or doesn't understand them or the
• 15:25
  timing's not right.
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  And then you have to ask yourself, like, in the context of this company, are all of the things
• 15:30
  that are necessary for success going to come together?
• 15:33
  And, you know, we had a company in our portfolio that was, like, pioneering a bunch of
• 15:37
  ideas in remote work, and they shut down, like, right before COVID, not knowing that COVID was
• 15:42
  coming.
• 15:42
  And there are many, many things that that company intuited about where work was headed
• 15:47
  that are, like, totally how people work now.
• 15:50
  But at the time, the idea that people wouldn't be in the office five days a week, it was hard
• 15:54
  for people to grasp.
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  And that's a company where I was just like, I believe in those founders.
• 15:58
  They were directionally correct, but the circumstances didn't all come together.
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  I think investing talent is a different kind of belief.
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  It's, you know, we give all the principles here independent investment authority.
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  And part of why I do that is, you know, in the beginning, our LPs were like, this is nuts.
• 16:14
  You need to get in there and put your thumb on the scale and, like, tell these people whether
• 16:19
  the deals that they wanna do are good or not.
• 16:20
  And I'm like, wow.
• 16:21
  Well, you're you're presupposing that I have way more insight and predictive power than I
• 16:25
  believe I have.
• 16:26
  But second, I trust the people on our team, that they have good taste and good judgment.
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  And that belief is why I'm comfortable giving people on our team capital to invest without my
• 16:36
  say so.
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  And I've told the LLPs, if I ever felt like I didn't have that belief in somebody, I wouldn't
• 16:41
  give them a nickel.
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  I would take the whole budget back because that's a fool's errand.
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  It's also the reason why most of what I evaluate our team on is the quality of the
• 16:50
  thinking that went into the decision, not did you get a markup from a tier one VC fund.
• 16:55
  Because I really do think in this is part of why I think our industry gets itself in
• 16:59
  trouble.
• 17:00
  If all you're gonna do is measure people on how quickly did you get a markup and by whom, the
• 17:04
  simple answer is just reverse engineer the test.
• 17:07
  Let me go try to figure out what it is that the people that my firm respects are gonna wanna do
• 17:12
  in twelve to twenty four months, And let me, like, pick those companies.
• 17:15
  And if you're a good guesser or picker, you'll get a good grade on the test, but you maybe
• 17:18
  won't invest in anything if the fact that turned out to be personally interesting or
• 17:22
  successful.
• 17:23
  I agree.
• 17:24
  And then I will also say if I were to kind of carry that over to an investor founder
• 17:28
  relationship as well, like the belief in the founder, I've seen what it looks like when
• 17:32
  investors, I think, over involve themselves a little bit too much early on.
• 17:35
  And I think it's just because they believe that they have a stronger sense of what's going on
• 17:41
  and need to really be involved.
• 17:43
  And like I had a conversation with one of our founders yesterday, they're prelaunch, and this
• 17:47
  past week, a competitor launched out of nowhere in a really nice flashy way, and we'd had a
• 17:52
  good conversation about it.
• 17:54
  And in no way did I feel like I had to be like, you thinking about this with as much depth?
• 17:59
  Do you know what this means?
• 18:00
  And I know that there are lots of investors who would jump down the throat and and really wanna
• 18:05
  make sure, like, are you really thinking about this seriously?
• 18:07
  I think it just stems from, I've known this person for now, like, over half a year about
• 18:10
  how passionate he feels about this industry.
• 18:12
  I'm not worried that he isn't thinking about this very thoughtfully, and I really liked his
• 18:16
  response of, like, I'm excited that we have competition in this space.
• 18:19
  It's actually perfect.
• 18:20
  It makes me really fueled for what we're gonna be offering.
• 18:23
  And, again, it that stems from a belief person.
• 18:25
  So there's all these other immaterial things that you can always think as an investor that
• 18:29
  are important to bring up to a founder, but ultimately, it has to stem from do you believe
• 18:32
  in them or not?
• 18:33
  I've always thought though, like, did you see this email that VC sent?
• 18:36
  I'm like, there's nothing good that can come from that email.
• 18:39
  This is totally orthogonal what you're talking about.
• 18:41
  Either the person has already seen it, and they're like, of course, I've seen this.
• 18:44
  And I want that thirty five seconds of my life back.
• 18:47
  Or if they haven't seen it, then you as an investor are like, how do you not know this?
• 18:51
  What are you doing?
• 18:51
  So I I tell people, part of belief is also recognizing your own anxiety and not projecting
• 18:58
  it.
• 18:58
  And I find most times investors send the, do you see this email?
• 19:01
  It's because they're nervous.
• 19:03
  Yes.
• 19:03
  Of course.
• 19:04
  Finals already have enough problems to deal with.
• 19:06
  Why project your anxiety onto that person?
• 19:09
  Just let them be.
• 19:10
  Well, I wish everyone else thought that way on every cap table.
• 19:13
  We are all out of time.
• 19:14
  Thank you, Charles, for stopping through.
• 19:15
  Thank you to our listeners and subscribers for popping in.
• 19:18
  We will talk with you all next week.
• 19:19
  Thank you.
• 19:20
  Bye.