Charles Hudson of Precursor Ventures joins Nick to discuss Lessons from 600+ Investments, Founder Profiles that Win, Reserve Strategies that Drive Returns, and the Hidden Potential in Consumer Standouts. In this episode we cover:
- Role of Precursor Ventures and Founder Support
- Investment Philosophy and Learning Cycles
- Reserves and Follow-On Investments
- Graduation Rates and Market Conditions
- Consumer Investments and Founder Evaluation
- Learning from Past Investments and Mistakes
- Choosing Customers and Market Segmentation
- Future of Venture Capital and Market Dynamics
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The host of The Full Ratchet is Nick Moran of New Stack Ventures, a venture capital firm committed to investing in founders outside of the Bay Area.
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0:02
Nick, welcome to the podcast about venture capital, where investors and founders alike can learn how VCs make decisions and reach conviction. Your host is Nick Moran, and this is the full ratchet.
0:17
Charles Hudson joins us today from San Francisco. He’s the founder and managing partner at precursor ventures, an early stage VC firm investing in the first institutional round. He’s invested in notable companies including the athletic Juniper square, carrot fertility and Bobby Bay. Before founding precursor, he was a partner at SoftTech uncork, and earlier in his career, he co founded bionic panda games and worked for in Q tel Charles, welcome back.
0:46
It’s so good to be back. Thanks for having me, Nick. It’s
0:50
been too long, Charles, we had you on the show. Geez. May of 2016 Oh, wow. And I think, yeah, can you believe that almost 10 years ago. That’s nuts. And you have launched precursor at the time. So I think that was fun one, and you can bring us up to speed to get a bit here. Can you give us an update on on precursor, kind of your big milestones, you know, for the farm and and how the strategy has evolved?
1:18
So I think in 16 we’d only closed our first fund. I think we were maybe a two person firm at that point. And if you fast forward to today, we just closed fund five in December of last year. So that felt great. That was a $66 million fund. We’ve got about $250 million under management at this point. The crazy thing is, we’ve made almost 500 investments in the last 11 years. So we’ve been, yeah, we make, like, 40 a year. We’ve been very, very busy. And it was once a team of one or two is now a team of 14. And so the team has grown quite a bit. Aum has grown. Portfolio has grown. The only thing that hasn’t really changed is we’re still just doing pre seed and seed investing, trying to find the best teams we can doing that zero to one work. And I’d like to think we’ve learned some things about the business since then that maybe weren’t obvious to me. In 16
2:10
amazing congratulations. Give us a breakdown of the team. So you have 14 folks, like, how did they specialize? And, you know, yeah, how do you kind of carve out different types of work for the team. We
2:21
have a very different structure than most funds, so I’m still the only GP 11 years later, but I have three really talented principals, one in LA, two in New York, and we just hired an associate earlier this year. So there’s five of us on the investing team. I’ve got a full time person on investor relations based in LA she does a ton to help me both with our existing LPs, but also in outreach and developing relationships with new LPs. I’ve got three people in finance, believe it or not, given our deal volume, I was telling someone we’ll do 40 ish new investments a year. We’ll probably have another 40 follow ons that happen where we need to track down the docs and make it happen, plus another 10 to 20 realizations, wine downs, M and A whatever it might be, it’s a lot of things to keep track of. So three people in finance. We keep them very busy. And then the second biggest team in the firm is I have a five person team led by my chief of staff that helps me stay on top of all of the demands on my time, and without that team, I wouldn’t be able to get my job done.
3:27
Amazing. Well, I’m glad you found some time for us, Charlie. I can’t imagine, you know, managing that a portfolio of that size. I mean, I imagine most of these founders reach out with requests like, how do you even begin to triage, and sounds like you’ve got some help, but
3:44
without the help, it wouldn’t work. So the couple things about the model that that I didn’t fully Intuit at the beginning, that I think are clear now, for most people, we’re like their zero to one buddy. We’re there to help them go from like idea to launch product and early traction, and if they start to get traction and can raise a bigger seed, rounder series, a oftentimes they come back to me and say, You are great. You are wonderful. And I’m like, but you don’t need what I did for you anymore. They’re like, No, I don’t. We’ve graduated to a place where we have different problems and we need different support system. So that helps also, as you can imagine, with almost 500 companies, almost every situation. You’ve seen it in multiple flavors. So we’ve also just gone through the process of documenting my points of view on a lot of things. And I have a ton of video content that I actually share with founders. So as you can imagine, Nick people will say, Oh, this. VC wants to get coffee, but I’m not raising like, how should I think about this. I’m like, here is a three minute video that distills my point of view on this very topic. We can definitely talk about your specific situation, but this is the primer. And half the time people are like, the primer is good enough. I don’t need to actually talk to you. And right now, we’re running an experiment where we’ve taken a million words that I’ve written, or. Spoken across podcasts, and put it into an AI from a tool called Delphi, and we’ve made it available to our portfolio company founders and people who don’t know me. And it’s been fascinating watching an AI digital clone version of me answer questions,
5:17
is there like a visual version of Charles? There’s also,
5:20
there’s the audio version that has this trained out of my voice. And there’s a video version. I’ve not the the uncanny valley part of the video one, I haven’t brought my also, you have to pay extra for the video. I haven’t brought myself to turning on the video one yet. I think that might be a little too much, but I might, I might, I might go there.
5:41
Who are we speaking with today? Charles. This is really me. This
5:47
is really neat. But no, the Delphi thing. It’s funny. Just as an aside, I have a founder who was going through a pretty tricky m a situation, and he and I had a a long chat. And separate from that, he went and asked the Delphi the same questions, and the Delphi gave him about 85% of what I told him. So it was, it was, it’s been pretty interesting to have a 24/7 version of my brain, or at least the things that I’ve spoken and written, available to people. It’s, it’s pretty neat.
6:19
Even using it yourself as a reference tool. You’ll make sure. Oh, yeah, I got a hit on this, you know, because it’s a million things going on. It’s like your own crib sheet of best advice you’ve given.
6:33
It’s great. It’s really great.
6:36
So 600 portfolio companies. Charles does indexing work.
6:42
You know, it’s really funny that you ask that yesterday, somebody told me, like, oh, like, you’re pretty good for a spray and pray guy, and I had to resist, like, the defensive bristle. I don’t think what we do is spray and pray. And like every founder that we invest in, we meet with them, we think they’re going to be successful, and we want to be a good partner to them. I don’t know that indexing works in venture unless you’re someone like YC, I tell our team. I tell our team all the time, if you’re like a talent black hole, I can’t seem to find this post online anymore. But a long time ago, naval wrote, In the early days of Angeles, wrote this post like you should like you should like, do all of the good ones. He’s like, if you can figure out, like the bar and like the the line of like, where the very best companies are, anything that’s like above that line, you should just do it. And I think about YC as an not as an index, but as this, like, gigantic talent black hole that sucks in all of these really talented people, and then they’re picking the 125 most interesting teams out of many, many, many, many talented teams that apply. And I would say, like for a YC model, it can totally work. So I think at the bottom of the pyramid, pre product market fit, I personally think more shots on goal is better. And I think the later you get in company building, the more concentrated your portfolio should get, and the easier it is to distinguish the winners. And so I don’t know, I think there’s also this element of like, who are you as an investor? We don’t take board seats at precursor they’re very rare. We take them. And so I find that, like, the load of supporting a company is you meet with them a couple times a quarter, and you make some intros, and you try to help them problem solve. I can provide that to a lot of companies. And we have winners in a wide variety of categories. We have winners in digital health, we have winners in FinTech. We have winners in CPG. We have winners in pure consumer. So I’m just sort of like, all right, I’d rather have a lot of interesting companies in a lot of different categories than be concentrated in one, either in a small number of companies or a small number of industries.
8:51
Love it. You know, as having an interesting conversation with a young investor recently, and it was kind of a derivative of this, this index indexing perspective that you just shared. And it was an old post from Fred Wilson, who said that in the first, like two to three years of his career, he did no investments, and he just watched and studied. And there was another post by Brad Feld, and he said, in your early career, you should do as many shots on goal as possible. And so they’re kind of like opposite, yeah, and I, I adopted the Fred Wilson approach. And for the first couple years I did no deals, um, as an angel. And I do wish I would have done the Brad Feld approach, but taking the check size down, right? Because you learn so much by doing it. And then, my God, see the behaviors. You see things play out. And then you know what you like. You know where you can help. You know how to work with founders. And it really informs the picking at the end of the day. And so it’s, it’s a little bit derivative, you know, it’s more about maybe time cycle of investing. And obviously the two of them grew into. Late seed and series A investors, not pre seed like us, but two different philosophies. You know, both, yeah, both with some merit,
10:09
we’ve implemented something like that at our firm, where our principals have the ability to graduate into a check writer program where they get discretionary capital to make five to 10 investments without my approval, like they don’t. I mean, they can ask me what I think, but it’s not required. And the same thing, you know, the big thing I’ve learned is you can’t simulate deal dynamics. You can’t simulate winning. And it’s one thing that intellectually big. Oh, I would have invested in Airbnb if I’d seen it. I’m like, but would they have taken your money like? The only way to find out is like, you guys have to give people money and say, Hey, go get into the stuff that you want to get into. And I have found that as someone who’s trying to help people advance in their careers and venture the caliber of conversations I have with people around companies where they made a commitment and something difficult has come up are 1000 times richer than any case study, or even them watching over my shoulder as I deal with something. Because in the end, I’m like, oh, that company is having a problem. You have to solve it like, like, you’re going to deliver whatever message we come up with jointly, you’re going to deliver it. They’re like, What do you mean? I’m like, I’m not, I’m not going to, I’m not going to undermine your authority by being on the call with you. You’re going to have to have that conversation with that founder. And if you can’t do that, you shouldn’t be investing. And we start them off with 250 but we scale, we scale the dollars over
11:32
time. How do you handle the duration of the learning cycles? Right? It takes years for some people to figure out, like, oh, I can do all these bets, but then graduating them up to the next round, Ooh, that was difficult. I’m not going to do stuff like that anymore. And the judgment piece, you know, it’s well documented. Some people think the judgment piece takes five plus years to develop. So, so how do you handle that when you’re building out a team? I give
11:59
them a two year cycle to make five to 10 investments, which feels to me about right? And I feel like every investment, I’m actually not judging them on markups. I mean, eventually you need, you need success. Because I think if you judge people on markups, the smart people will reverse engineer, well, what’s hot? I’m going to do the thing that’s hot like they’d be doing all AI agents right now and then, like, these are the highest probability. So instead, what I tell them is, like, we’re going to go over, what was your underwriting like, what did you think was going to happen? Who did you think these founders were as people? What do you think about the market? And like, what have we learned along the way? And because we get updates and we know something about the companies, it’s not a blind analysis. And honestly, after about a year, a year and a half, I kind of have a baseline level of somebody’s taste. And one of my LPS is like, Well, why do you do this? I’m like, Well, eventually I want to give people a lot more money to invest on the firm’s behalf. If they’re good, the only way to find that if they’re good is to give them a little bit of money. But after about 10 companies, I’m like, this is your baseline taste. And I think once you know someone’s baseline taste, I actually don’t think you can move it that much. I haven’t found that many people who have these like, huge epiphanies and suddenly become radically better at picking founders. I think people have taste. And my LP is like, Well, how do you teach these people? I’m like, I don’t really know that. I do that much teaching. I think they have natural ability, and my job is to put them in a place to showcase the ability. And if the ability turns out to be something I don’t want at the firm, I’ll tell people like, Hey, you’re good at this, but the style of investing you want to do isn’t what we do here, or the kind of companies you like. I don’t think we need more of those in the portfolio, which is different than being like, objective. Like objectively good or
13:44
bad at the job. Are you evaluating for taste and for judgment at the at the point of hire, or is it more sourcing focus?
13:51
I am and I what I tell people is, there’s no it’s funny that the harmony of the two things you mentioned is I tell of all of our principles. You can opt into the check writer program once you’ve sourced something that we close together. But you don’t have to ever opt into this until you’re ready. So if you decide, Hey, I just want to do deals with Charles. I don’t really want to do them on my own for a few years, you can do that. If you decide, hey, I got my one done and now I want to go do them all on my own. You can do that too. And for different people, different styles work better. But now I pretty much only hire people who I think have good investment judgment. Earlier in the firm’s life, I was like, I need people who have good investment judgment and who will help me out with ops tasks, and who can, like, put up with the craziness of being an underfunded like brand new emerging manager. And that’s like, a different profile. I’m like, so grateful for the crew of people that like joined us in those early days. It was very, very risky, and now we’re just in a different place.
14:48
And do you jump in and assist with late stage funnel activity, like closing the deal and negotiating, or do you kind of let them run on
14:57
that? What I tell them, Nick is, I said I’m. Here to do as much or as little as you like. And I was like, if you want me to be the puppet master behind the scenes, I’ll do that for you. But you know, the nice thing is, I tell them is like, if you source diligence and close this on your own, they took money from you. They didn’t take money from me. They didn’t take money from pictures. They took money from you. And so insert name here, principal at precursor, and that’s really your relationship to manage, and it’s a lot easier for you to be their point person. Now I do some things behind the scenes. I will help. Sometimes people will say, like I’m working on something right now, where one of my principals and I are trying to get a deal done, and the founder and we and the founder are a part on valuation, and the person’s like, what are you doing? Like, well, we’re just gonna sit tight, because I think our number is right and I think their number isn’t. And I think if we’re patient, they will get to our number, but they will feel better about it if we give them time. And here’s what I would write back to that founder if I were making the argument, do you want me to write it, since we’re working this together, or do you want it to come from you? So it’s those kinds of things, and sometimes they lose deals, and I just say, hey, like, what do you think you could have done differently to win that deal? Is there something should we have moved faster? Should we have given better terms? Was it always going to be this way? Talk
16:26
to us about reserves. First of all, do you reserve capital? And then do you think seed funds should have large pools of reserves? Oh, man,
16:36
every time I talk about our fund model, I’m like, boy, a lot of the things we think are different than the world. So a couple of months ago, I sent all of our founders a video which was like, how we think about reserves, because I felt like there was a narrative that wasn’t right. Historically, we reserved about 25% of the fund for follow ons, and I told our portfolio companies, we keep our follow ons for the top 20% of the portfolio, and that’s as judged at any moment in time. You can fall out of that top 20% you can graduate into it. But I don’t know. I’ve always felt like if you have dollars that are earmarked for reserves, you will find a way to put them to work. And I’ve always felt like it’s better to have the dollars in competition with each other, because it might turn out that it’s better to write a new check to a new company than it is to do your pro rata in some companies, just because they’re raising a new round and you have an allocation, and we did the math, and one of my then intern now principal, looked at every follow on check we’ve ever Written in the history of the firm. And we have this classification system where at the moment of writing a check, we say, is this offense or defense? Are we doing our pro rata, super pro rata, less than pro rata, insider only? And the results will not surprise you. In general, when we said we’re doing this for offense because we think it’s a good company and we want to own more, we were right about 75% of the time when we said, This is defense. We’re doing this for reasons other than we think it’s like the highest and best use. It might be because it’s a bridge or the company needs more time, but we’re low on the back foot. We were also right about 75 or 80% of the time. And I was like, Oh, well, there’s a very clear answer here. And the answer is, when we think we’re playing offense, we’re probably right, and we should be more aggressive and not feel limited by pro rata. And if we’re feel like this is defense, we should actually write the smallest check possible, including zero, if we have the conviction that this is really not a great use of capital, because we’re also generally right on defense. And so it changed the way I think about follow ons, which is for our companies that are doing really well, we should be as aggressive as possible in putting more money to work, and for the ones that aren’t, we should be as stingy as we can. But as you know, Nick like, we’ve had companies at the seed that look like rocket ships and then flames out at the A and I’ve had companies that like struggle to get an A done, and are now some of our top performers. So I’m always nervous that it as a seed stage manager, my ability to truly know which companies are the winners is, I think I have a more humble view of our ability to do that than maybe others.
19:24
Let’s talk about graduation. You know, rates have been cut in half from historical averages. You know, around 30% we’ve now seen about 15% graduation rates, and that’s persisted for six quarters. Not good, right? Is this the new reality for graduation, or, you know, are we just in the
19:45
trough? I believe, I believe it is the I don’t know if you read Tomas, to English, this stuff. I like his, I like his posts. And I was telling our team, if you just think about capital markets, since I. Supply and demand we have conspi have consistently increased the amount of capital that we are putting in to work at seed every year, which means we’re creating more and more seed stage companies every year, maybe with the exception of 22 and 23 those were slower years, but for the most part, but we’re not we’re not increasing the capital available at series A to the same degree, which to me, means, well, if you increase the supply of seed stage companies and you keep the the supply of series A capital more or less the same, you’re going to get a squeeze, because there’s just not enough money to fund the series A’s for all Of the companies that are being created at seed, and the Seed Company creation is dramatically out pacing Series A, and then when you layer on the fact that, let’s call it 50 cents on the dollar at series A is earmarked for AI companies only. But like, there’s a significant chunk of companies that were seeded that are not doing things in AI, so those companies are competing for an even smaller pool of capital. I just think we’re going to be back. I think we’re going to settle out somewhere in the low 20s. Let’s call it one in four, one in five.
21:15
Okay, well, that’s a little bit better than where we’re at, but it’s not not the historical average. What are you seeing when it comes to Central Casting versus non consensus, right? Like, Oh, yeah. Anecdotally, we’ve noticed just in the past year, year and a half, this massive flight to safety, or some may call it quality, right? But it’s perceived version to the central casting.
21:40
We said, there’s a massive flight to signal, and it feels like there’s a lot of people who are like, oh, this person worked at OpenAI. Oh, this person is a repeat founder. Oh, this person went to Stanford. Like, I think all of those historical signals that would get you coming out of central casting, those are back in a major way. And I can’t tell i My sense is the AI stuff is so uncertain. I think in a world where people are like, not sure what defensibility looks like, what terminal value looks like, I think people are finding safety in the signals that have been meaningful in the past. And I find our founders who are not from central casting, which is the vast majority of our portfolio, it is much harder. Also. A lot of the central casting folks are getting their seed rounds done by multi stage firms, so they’re already kind of in the family. And it’s not that getting one of those firms to lead your seed round means they’re going to do the A but it means they know you, and you’re on their radar, and you’re part of the portfolio. So I think it’s been much harder for us to get people excited about our non Central Casting founders than the ones who have like the pedigree and signal that people are are used to.
22:53
Did that affect you during the last fundraise as well? When it came to courting LPS with a majority non consensus portfolio.
23:02
It did well, I think I should say I think it did. Because I think a lot of people were like, Well, where are your like, big consensus? Because a couple things we noticed when we do the non consensus things that pre seed, oftentimes the seed lead is not one of the more brand name seed stage firms, but at the A it flips back. And so, you know, sometimes we talk to LPs, who just said, Gosh, like many of your co investors, that pre seed are firms we haven’t heard of them. Like, that’s because you haven’t heard of most pre seed firms. That’s like a it’s a function of where we get involved. But I do think when I told LPs, we’re we’re staying the course, we have a model to find mostly first time founders, pre product market fit, they were like, ooh, that seems very out of step with what the big firms are doing. I’m like, Well, the big firms have a different business model than I do. I don’t think we can make money playing their game. I really don’t.
24:00
So speaking of non consensus, consumer has not been a consensus category, and it is a huge category responsible for most of the biggest outcomes. Look no further than open AI, but you know, it’s maligned. It hasn’t attracted as much investment over the past. I’ll call it five years, but you’ve had successes in consumer. So what separates you know, your consumer successes from the rest, and how do you size those up versus the B to B investments that you do?
24:31
They’re really hard. And like part of my theory on why consumer has gotten harder is, I think most of the check, my guess is the median age of a check writing GP has gone up in the last five to seven years, and a lot of those people are not as in touch with consumer trends, and so I think their interest in funding those also B to B SAS was so predictable, it’s sort of like, Why do consumer it’s hard. The ones that have succeeded have a few things in common. Yeah, one, they’ve all found a marketing and distribution channel that was uniquely successful for them, and they usually found it like, if I think about Bobby baby, like Laura is just a fantastic brand ambassador for the company and has used press and PR in a really, I think, masterful way. Almost all of our most successful consumer companies understand some element of consumer psychology that has changed, and they’re, like, tapped into that. So we have a couple of companies that are in sort of like tarot, witchy astrology stuff and like, their audiences are all female, they’re all young, and they’re all doing great. And those that handful of founders all understand the psychology of those folks and like why those products matter. But I just think it’s really hard to build a Facebook scale company. It’s very hard to like sneak up on those people. But look, I think when discord finally goes public, people will get reminded you can, you can do it like it is possible. It’s just, it’s just really hard. I think a lot of it was like the distribution piece has been so hard, and so you just, you got to find people who really believe something interesting and unique about human behavior and give them the opportunity to show that it works.
26:27
What if we take consumer out of it and just talk about startup CEOs? You know, how do you evaluate founders who maybe don’t fit the traditional mold? And what are the patterns you’re seeing across the successes?
26:39
Um, the number one, it’s funny, these are all great questions, like we just did this big deep dive last summer, looking at all of the things that matter. And a couple things seem to matter for us. One is previous startup experience in a company that was small when you joined it has a disproportionate correlation with success in our portfolio, and I’m convinced it’s because in a zero to one startup, nobody tells you what to do. You have to figure it out. And that’s like led us away from the meta Fang universe of companies, because many of those people are very talented, but zero to one doesn’t play to their strengths. I’ll never forget this. We had two guys from Facebook that we funded, and they wound down their company and gave us back a good chunk of the money. And I asked the founder what was his conclusion. He goes, you know, many of the things that made me successful at Facebook are useless in this company. And I was like, You’re right. They are. Couldn’t have said it better myself. And so I think about that conversation a lot. So previous startup experience huge. Plus, surprisingly, only about half of our top companies were started by somebody who had expertise in the domain. Half of them are people who knew nothing about the category. And if you drill into that half who knew nothing about the category. In many cases, it was a new category, and there was no domain expertise. So they were as equally they were equally qualified to anyone else, pre product market fit for teams that have not worked together. I have a very challenging time investing in people who are not in the same place, to the point where I almost it’s not a blanket rule, but like, there have to be pretty extenuating circumstances if two people who haven’t worked together are building something from scratch, not in the same place. And it took me a while to get comfortable saying that, but like, now I just tell people it’s so hard to find product market fit and to find it over distance with the person you don’t already know. Well, you’re taking something that’s already very challenging and making it darn near impossible. Those are, those are the big ones. We’ve had success with solo founders. We’ve had success with teams that were not technical. We’ve had success with markets that were consensus bad. And then, you know, we rate all of the companies six months in, and at six months, we’re pretty good at predicting the ones that are going to work out. Not perfect, unfortunately, but pretty good at predicting
29:13
turns out for us. What about the time, the sins? What about the sins of omission, the ones that got away? Have you done a post mortem on that?
29:23
Yeah, usually it’s some combination of lack of a lack of belief, or, like, firm circumstances we were distracted working on, like, I just tell you, like, one, I think a lot is like we should have done whatnot. Like we really should have done that one. We knew grant, and he pitched me on it. I was, like, fun. I don’t under, like, I just, like, I don’t understand the thing that you’re trading and how you build something. It’s like, your classic eBay Pez dispenser type thing, except, like, it only works a handful of times. And I looked at other businesses in the live shopping space. And didn’t find them interesting, and I just, I should have done that one based on my feelings about the team. So I’m always asking myself, would I, would I make our best performing investments today? And anytime I’m sort of like, I think so, or maybe not, I go back and say, Well, what am I doing differently today? That would get in the way of me saying yes to those companies, and I tell our LPS all the time, a certain amount of learning is good, but like, you can become very jaded and like, very like, brittle in your thinking. Having done this job for a long time, like this is the only thing that works. Or like this, works. Or, like, this market stinks, and I’m always just like guys, I try to learn, but I also try to keep a beginner’s mind, because a disproportionate chunk of our best companies, we found them in the first four years of the firm’s life. Now we’re on another good swing now, but like, there was a period in time there where I think I was thinking too much.
31:03
It’s tough. The beginner’s mind is tough. The more you know about a category, the more you know about building, the harder it is to underwrite those risks. Yeah, so let’s, let’s talk more about zero to one. I had this great conversation just on Friday. So a few days ago, with a founding team working in trade compliance, they have nine customers. They’re currently serving shippers, receivers, ports, carriers and the government body responsible for enforcing the regulations. Wow. So this reminded me of a blog post that you and I had traded notes on called choosing your customer. What advice would you have for founders at the earliest stages, you know, as they prospect and bring on early customers?
31:51
I I’ve shared that blog post with a handful of people, because every time someone tells me who they think their ICP is and like, that’s not narrow enough, they’re like, What do you mean rates so narrow? It’s, it’s accounting managers. And like, Okay, well, an accounting manager at Ford Motor Company is different than an accounting manager at the bodega down the street. Like, it’s not specific enough. And usually I keep telling people, like, look at your best customers. Like, why do these people? And that usually ends up being, oh, it’s accounting managers and mid sized firms that use QuickBooks Online that want to solve this specific problem. Like, okay, now we’re in the zone of like, specificity. And I find when you get specificity around your ICP, you actually really understand why people are buying the thing that you’re building and what problem they’re actually solving. And when you don’t have specificity, it’s this kind of like wandering in the woods, like, oh, I talked to 10 accounting managers, five said they liked it and five didn’t. What does that mean? I’m like, what did the five who liked it have in common? And like, why did they like it? And I feel like in every case, people are like, I can’t get more narrow. It’s too small. It gets the internet, you’d be surprised. And once they really find that very specific ICP, they’re like, Oh, wow. It turns out marketing to these people isn’t so hard, because they’re super specific, and they all and they hang out and like, I have a company that sells software to employee, employee experience professionals at like, mid to large size software companies that’s like their core ICP, they dominate that ICP. They do super well with that buyer archetype. But like, if they were on this podcast, they would give you 10 more attributes of that ICP, that I won’t go into here, that they’ve learned from some of these people that are pretty good markers that that person’s gonna be a good customer. And I feel like there’s so many companies I meet who don’t know how to interpret signal that they’re getting from the market because they’re talking to too wide a set of people, and they don’t know how to decide. Well, this is the stuff we should just throw out. Like this person’s not our customer, their opinion of our product doesn’t
34:13
matter. Is that segmentation does it typically fall within demographics, I’ll call it, or identifiable attributes from afar, or some of them psychographic things you can only get to once you’ve met the person or done some investigation.
34:32
I’ll give you one example of this, like, why the psychographic this stuff is hard. We had a company that built an fpna tool that helped companies like modernize their fpna infrastructure. And I would talk to the CEO, and I’m like, you gotta remember, no finance team is gonna raise their hand and say, our infrastructure stinks. We’re bad at our job. So you’ve gotta find the customer who intuitively knows that, like they need a better product or service. But many of those people are not gonna raise their hand. Mm. Yeah, so you have to find, like, a safe way to allow those people to opt in and to, like, reveal to you that maybe they have a problem, but it’s not going to be one of those. We found the same thing with certain conditions in digital health. People don’t want to necessarily raise their hand and say, I’m suffering from X, Y and Z thing. But if you can produce content, or you can figure out, like, what are the triggers for those folks? You can, in fact, attract them.
35:26
Awesome. Talk to us about the future of venture capital, right? We’re seeing a lot of changes. We’re seeing multi stage and sector firms move into seed. I’d love to hear how that’s affecting precursor. And you know how you think these circumstances might play out for the seed specialists and, you know, other players,
35:46
I think, you know, we’re this barbelling continues, which is, you know, we’ve got a handful of really large firms that I expect to stay large, and then we’ve got a handful of smaller firms like mine, and I think increasingly, our business models are different. You know, if you’re a big multi billion dollar multi stage firm, you need 20 to $25 billion financial outcomes for your math to work, and anything less than that, it’s just, candidly, it’s just not that interesting. It’s not going to move the needle for your fund, whereas we need multi billion dollar outcomes to make our fund math work, which means increasingly, I think firms have a choice. Choice, a is invest in the companies that you think are interesting, be aware of, but not influenced by the needs of the multi stage firms and figure out, well, what do you do with the companies that you think are good, that they’re not interested in? Or I think option B is decide, hey, I’m just going to try to be downstream of what those big firms like, so that I can be a feeder to them and continue with what’s happened in the history adventure, which is small firms, basically teeing companies up for bigger firms. I think category A is a little bit scary for two reasons, like the like, we’re just going to continue to fund stuff that we find interesting for a lot of LPs. Follow ons and markups are important signals and inputs to evaluating your fund performance. In between, you know, before you’ve returned the fund. And if you go down the route of just doing what you want without thinking about the big firms, you run the risk of having a very interesting portfolio that nobody cares about, where, like no LP you don’t have Sequoia Andreessen and Lightspeed as follow on investors. So LPS can’t use that as a proxy, and you take on more financing risk for those companies. I think the risk in Category B is nothing says that those big firms have to continue to be interested in what they’re in, and if they change their mind and don’t tell you, or if the things you find are thematically interesting to them, but not the companies of choice. You’re running a firm where you, on some level, don’t really believe in the stuff that you’re funding. So we’ve decided that we’re going to do a we’re going to fund the companies that we think are interesting, and we’re just going to have to work harder with those companies to find ways to get them financed. And we’ve started talking to our LPS about the fact that, like, Hey, you might, you might not see the big multi stage firms as our CO investors, in the same way as you’ve seen them in the past.
38:27
It’s risky, but it feel. It feels riskier doing the other options, because then you’re you have to know your customer from a financing standpoint, your customer for equity. But if you design your whole system based on something that’s ever evolving and changing, and it’s not based on first principles, you know, the fundamentals of what winning really looks like. Long term for for business building, then you’re always going to be chasing
38:54
and and look, I think in the short term, our industry is going to get smaller. It’s already happening. Firms are shutting down. I just continue to think like, does this look like private equity at some point where you have a few really big platforms, then you have some, like industry specialists, like a toma Bravo or VISTA and their equivalents in healthcare. And then you have this, like, other set of companies that are doing lower middle market and doing different stuff, where each firm has its own business model, and whereas venture kind of had one monolithic business model. So our industry is maturing, and historically, when finance industries mature, they concentrate at the head, and then everybody else has to figure out what they do in response,
39:43
perfect. I’m gonna try and wrap up in four minutes. Do you have four more minutes? Charles, yeah, of course. Yeah. Charles, what book, article or video would you recommend to listeners?
39:53
God, there’s like so many. I mean, one, I’ve been on this seafaring kick lately. I. So I just finished this book called The wager, which I’ve been recommending to a bunch of my friends. It’s really good. It’s about a British, British captain who goes after a Spanish galleon, and as you can imagine, everything goes wrong. But a lot of the book is about human psychology and human behavior, and it’s really good tales of the sea. Anything that could go wrong for these people does, and it’s just a really good read.
40:28
Love it. Charles, do you have any habits, tactics or behaviors that are a force multiplier?
40:35
Um, really good audio dictation for me has been a huge game changer. I dictate a lot of not just, not just speech to text, but also speech to recorded audio. I have my team of five people. I have a lot of thoughts during the day that I will just fire off to them, and a lot of my good ideas start off as scraps. I was just reading. It’s like the anniversary of Steve Jobs’s commencement speech at Stanford, and I was reading articles that he wrote a lot of that speech by like, he’d get a little snippet here and he’d email to himself, he’d get a snippet here and email to himself. A lot of my ideas come from these little captured in the moment audio clips or things that I write down or record to myself, and then I’ll look at this pile of stuff and I’m like, oh, there’s a there, there. But if I’d sat down and tried to, like, do it all in one stretch, wouldn’t work.
41:27
Do you is there an app or something that you use for that? Um,
41:30
there’s a couple. I use, one called Audio memo, which has some good workflow in the back end. And then lately, I’ve been using, uh, whisper flow on my computer, which I quite like,
41:39
nice reminds me of my my morning runs, where I’m texting myself with these.
41:46
That’s where I get my best ideas. Best ideas,
41:49
all right, sir. And just to wrap up, what’s the best way for listeners to connect with you and follow along with precursor?
41:56
They can email me at Charles, at precursor vc.com, where they can just subscribe to venture reflections, which is my about once a month blog on substack. So
42:08
very good. Well, at this pace, we’ll have you back when it’s a fun 10 for precursor Charles,
42:12
let’s not wait so long next time.
42:16
Thanks for joining me. Sir. Appreciate it. See you. Thanks. Take care. You.
42:24
All right, that’ll wrap up today’s interview. If you enjoyed the episode or a previous one, let the guests know about it. Share your thoughts on social or shoot them an email. Let them know what particularly resonated with you. I can’t tell you how much I appreciate that some of the smartest folks in venture are willing to take the time and share their insights with us. If you feel the same, a compliment goes a long way. Okay, that’s a wrap for today. Until next time, remember to over, prepare, choose carefully and invest confidently. Thanks so much for listening.
