🎧🍌 Why Pre-Seed Investing Has Never Been Harder | Charles Hudson, Precursor Ventures

How sitting out of bubbles can be more dangerous than joining, why the system rewards an addiction to consensus, how to fundraise as a non-consensus founder, and "the last $250k effect"

Charles Hudson started Precursor Ventures in 2015 to help create Pre-Seed as a category.

Ten years and hundreds of Day 0 checks later, few investors have backed as many first-time founders, making him the perfect person to talk through the state of Pre-Seed investing today.

We talk about why this is the hardest moment for pre-seed/seed investing he can remember, why sitting out of bubbles can be more dangerous than joining, how he hands his junior team real money to make their own bets, raising as a non-consensus founder, instilling urgency, and “the last $250k effect”.

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Timestamps to jump in:

• 0:00 Is Pre-Seed dead?

• 4:15 Do round names matter anymore?

• 12:27 Multi-stage signaling risk doesn’t exist

• 16:42 Smart LP’s love multi-stage funds

• 22:03 Is the traditional Seed model broken?

• 26:31 Velocity of capital deployment drives all incentives

• 30:30 How to compete with megafunds at early stage

• 34:24 Megafunds have Seed funds in a vice-grip

• 38:34 “The best Series A’s are all expensive"

• 39:33 Are we doing 2021 all over again?

• 41:53 It’s safer to participate in bubbles than sit out

• 47:35 Price you pay is everything

• 50:22 The system incentivizes an addiction to consensus

• 55:22 High valuation + high CapEx grows AUM

• 59:56 How Precursor actually invests today

• 1:01:32 Precursor’s Principal investor program

• 1:05:56 Deciding when to selling your winners

• 1:10:53 Raising as a pre-consensus founder

• 1:12:39 What Charles looks for in founders

• 1:17:20 What it’s actually like to start a fund

• 1:20:56 Misconceptions of first-time fund managers

• 1:26:22 300+ LP meetings to raise Precursor Fund 1

• 1:29:24 The single tweak to his pitch that raised the fund

• 1:31:54 Precursor’s evolution over time

• 1:34:57 The second desert of venture capital

• 1:37:34 The last $250k effect

Referenced:

• Precursor Ventures

• a16z’s State of Markets Report

Find Charles on X / Twitter, LinkedIn, and Substack

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Transcript

Find transcripts of all prior episodes here.

Turner Novak:

Charles, welcome to the show.

Charles Hudson:

Thank you for having me.

Turner Novak:

Thanks for being here. I think this’ll be fun. So you started Precursor in 2015, and kind of helped create this category called pre-seed. A lot of people argue that pre-seed is now dead. How do you reflect on that?

Charles Hudson:

I don’t think anyone’s ever had a consistent definition of what a pre-seed round is since I started our fund. So I started working on Precursor in 2014 and really got it off the ground in 2015, and back then the only people I really knew who were talking about pre-seed were Manu Kumar at K9 and Tim Connors at PivotNorth. And even they were like, “Oh, these pre-seed rounds are small. They’re like 500K.” For most of the time from when I started the firm, like 2015 to 2017, we had this very strict definition: pre-seed is a million dollars or less. Anything greater than that is seed.

And that kind of worked. There was this bifurcation of people who were raising a little bit of money and people who were raising more money. Then we had to update the firmware, so to speak, about three years ago, to say, “Hey, pre-seed rounds are now maybe more like anything under one and a half million dollars, and anything above that is a seed.”

The reason I’ve always tried to maintain this distinction, which maybe doesn’t matter anymore, is I always felt like pre-seed rounds were about product market fit finding. They’re not about scaling out the management team. They’re not about generating a ton of ARR. They’re basically figuring out, is the thing I’m working on interesting to anybody else?

Turner Novak:

Yeah, you have a hypothesis. This is a problem. We can probably make a product to solve the problem. Some customers might want it. There could be a company, but honestly, that’s a whole different equation. It’s just, can we even do this thing in the first place?

Charles Hudson:

And if we do it, does anybody even care? So I’ve always felt like that’s what pre-seed’s about. It’s this hypothesis validation phase. It’s about proving that people care about the thing that you’re building, and I still don’t think for most software companies you actually need much more than one or two million dollars to execute on that vision.

The problem is if you do it too skinny, then you have financing risk. I was mentioning to my friend earlier today, we have two companies that have done $9 million pre-seed rounds, and my friend said, “I didn’t know pre-seed rounds could be that big.” I said, “Well, they called it a pre-seed round.” By my terminology it would probably be closer to a Series A.

But they called it a pre-seed because they want to maintain the ability to call the next round a seed. And so I don’t even know what round names mean anymore. But I will say, I think we’re in a world where for some companies there’s a negative stigma around raising a small round, because somehow the perception is, well, if you’re only raising a million or a million and a half, it’s not your choice. It’s all that the market would give you.

So your company must not be that interesting if you didn’t raise $3 million or $5 million in your pre-seed. I’m like, some people are just better with small amounts of money.

Turner Novak:

Yeah. To that point though, sometimes some of these AI companies, you could say you need... there’s some CapEx related to this. You need $20 million to even get things rolling. That’s another argument that can be made.

Charles Hudson:

You couldn’t do an inference company for, like, 500K. You wouldn’t even be able to do anything. And I think I told someone the other day, First Round Capital is probably, in my opinion, one of the greatest names of a venture capital firm, ‘cause it leaves very little room.

Turner Novak:

Yeah, the first round.

Charles Hudson:

That’s right. Which means no matter what you call it, it’s the first round. And I think pre-seed, when it started, was needed because seed rounds were becoming more of these post-product market fit, early expansion rounds. And now I think pre-seed is firmly the thing you do before you’re ready to do that. For some companies you can do that on 500K to a million and a half, and for some companies it’s $5 to $10 million to do that exploratory work.

Turner Novak:

Yeah, so maybe... I’ve always had this opinion that we kind of need to figure out this naming thing. I don’t know if it’s ever gonna happen, but adjust how we generally think about this. One of my favorite ways of thinking about this is adventure capital versus venture capital. My friend Dan Feder at the University of Michigan kind of brought me onto this, and I do like that thinking. It’s like we’re going on an adventure. We have this hypothesis. There’s a problem. We’re gonna try to solve it.

It’s kind of like when you think about the origins of venture capital, going back to the whaling industry. We’re going in the ocean. It’s the 1600s, there’s whales out there. We might sink. We just don’t really know. We’re like, “We might die in this boat in the middle of the Atlantic Ocean.”

Charles Hudson:

But I think what you highlight, Turner, is a real problem that my team and I have been trying to solve, which is, we’re a pre-seed firm, and people will come to me and say, “I’m raising 250K for my pre-seed.” I’m like, “Well, that’s too small.”

Turner Novak:

Yeah, I’ve had before, like, 50K. And I’m like, “You probably want, like, 750 grand. You probably want 10 times more.”

Charles Hudson:

That’s right. And I’m just like, I don’t want to do 250 where I’m the whole 250, unless I know the person and we’re both like, “Hey, this is just pure experimentation.” We have other people who come and say, “Well, I’m raising a $10 million pre-seed.” And the last company we did that for is a company that has a significant hardware component in the energy space. For you to do what pre-seed is supposed to do, which is hypothesis proving, you probably do need $10 million to get there.

So how do I communicate to the market? We do pre-seed rounds anywhere from 750 to $10 million in size, because most of the things I get that are 7 to $10 million in size are uninteresting to me. Or they’re companies that have already raised what I would consider a pre-seed round, and that’s really more of a seed. So I find that the messaging for us as a firm has gotten much harder as the definition of what constitutes a pre-seed round has expanded.

Turner Novak:

What I found myself doing is just saying I invest in the first or the second round. A classic pre-seed or seed, whether you’re raising a million bucks or maybe it’s 4 million, more traditional seed. It’s just first or second round. It’s again the First Round Capital branding of, you’re raising your first round, whatever. I don’t care what you want to call it.

Charles Hudson:

I know. So we’ve gotten away from nomenclature and we’ve gotten less strict. We used to be very strict about tracking pre-seed and seed, because in the early days a lot of LPs were like, “Well, if pre-seed’s a good thing, your companies will graduate from pre-seed to seed.” And pre-seed to seed graduation was a proof metric.

Now everyone’s like, “Well, pre-seed’s a thing. I don’t actually care about your pre-seed to seed graduation. Now I really care about your cumulative pre-seed and seed graduation to Series A, because Series A is now the real thing.”

Turner Novak:

And one way I think about Series A is just, you have a board member. It’s a real company, versus we’re kind of hacking this thing together, we’re trying to convince people to pay, and it’s like, okay, this is a thing. It still might not work, but we’re doing the legal stuff and we’re creating the board. In my mind, that’s kind of when I think of a Series A, even if it’s technically a pre-seed round or technically a Series C. Whatever it is, that’s kind of when it flips. The letter naming is when I would think, okay, the board was created. This is a real company now.

Charles Hudson:

Well, we have a company that raised a $10 million Series A on a SAFE, and all of the board stuff got handled in the side letter.

Turner Novak:

Oh, interesting.

Charles Hudson:

So I was like, “Oh, even the Series A’s not always the priced round anymore.” That used to be our other thing. The Series A is like your first significant priced round. I’ve had companies that have raised a Series A and wanted to go back and rename that round a seed round, so that they can have a big Series A as opposed to a small Series B. And I just find the nomenclature gymnastics to be exhausting.

Turner Novak:

Yeah. And it’s not always one person’s fault. I have one company in New York where he doesn’t really need to raise a Series B, another round. But he’s been thinking about it purely from a recruiting perspective, just the external signals, all that goes into making it a little bit easier to hire more people. So it’s kind of interesting where maybe the market boxes you into having to do something, whether you name a round, whether you make a certain decision with the company, whether it’s fundraising, recruiting, product. The market has so many external factors that influence what you have to do.

Charles Hudson:

And I’ll admit, when I see, wow, $12 million seed round, even though I know in my head, okay, that was probably a $2 million pre-seed, a $4 million seed, and then a $6 million seed extension... that number impacts me, even though I know it was probably gamed or structured in a way that, if you said that’s a $12 million Series A, I’d be like, “Oh, pretty good Series A. Not exceptional, but pretty good.”

Turner Novak:

Yeah, and then there’s also this other element of not everyone else sees it and thinks that. They just think $12 million that you raised, and they don’t realize that it was a three-year process, and it’s an oversubscribed $20 million Series A. And you’re like, “Oh, wow, that’s awesome.” I mean, it’s not oversubscribed until the end.

My favorite thing is, someone will say for a fund, “We raised an oversubscribed $40 million fund,” and the reality is that it was an absolute grind for 18 months, and then at the very end everybody wanted in when it was already raised. It was super hard to put that together. But a lot of people are like, “Oh, congrats, amazing, oversubscribed.” And it just means a completely different thing to different people.

Charles Hudson:

Also, I’m like, well, you set the target. If you thought you could raise 50, and the target was 50, and you raised 40, you’d feel like you failed. If you set the target at 30 and you raised 40, you’re like, “Wow, I’m oversubscribed.” I’m like, well, in either case you still have the same amount, $40 million. It’s just how you feel about it.

Turner Novak:

Yeah, it’s like an optics thing. So then what other ways do you feel like first round investing has changed over the past 10 years?

Charles Hudson:

It’s a good question. When I first started Precursor, we were in the “founders should beware of multi-stage funds” signaling era.

Turner Novak:

That benefited you, right?

Charles Hudson:

I think it benefited... there were two things. Most seed funds had enough experience with deals that had been backed by multi-stage funds at seed failing to clear the Series A bar, oftentimes with the firm that had done the seed declining to lead the A. And people are like, “Oh, you’re gonna get signaling if you take the money.” I’m like, “Well, it’s only a signal if you don’t raise money, and you’re probably only gonna not raise money if you’re bad relative to what else is in that company’s funnel.”

So it’s not as if taking a seed check from a multi-stage fund gives you the fast pass on the next round. It just means they know a little something about you.

Turner Novak:

It might actually speed you up, ‘cause then they want in. So it could go either way.

Charles Hudson:

And this was the argument that carried the day from, we’ll say, 2010 through maybe 2017, ‘18. Most founders were like, “I’m open to the idea that taking a seed round check from these multi-stage funds is not great for my business.” And then it flipped, and founders were just like, “You know what?” I think it was really driven by repeat founders who were just like, “I know the bar at those funds. If I can’t clear it, whether I have their money or not, I don’t care. Their lack of willingness to fund me is a signal of quality, and I can deal with it.”

And I think it eroded this argument that multi-stage funds shouldn’t play. ‘Cause we’d gone through this cycle where multi-stage funds would dabble in seed. They’d create a lot of ill will from founders who they didn’t follow on.

Turner Novak:

And then they’d kind of pull back, right?

Charles Hudson:

And they’d pull back, and they’d be like, “You know, we should just leave this to the seed people.” But my whole theory is that in a world where AUM is the name of the game... and I’d like to point out the firm with the most AUM in our industry. How old is Andreessen? Fifteen, seventeen years old? A less than twenty-year-old firm is the largest by reported AUM firm in our industry.

So in less than two decades, they’ve gone from nonexistent to the largest AUM firm. And at some point, if you’re gonna grow AUM, the only way you can do it, if you believe that each of your individual strategies has a different elasticity... you can put a lot of money in growth. You have to be in every asset class.

So at some point, the multi-stage folks said, “You know, if we’re really gonna be a tip-to-tail multi-stage VC fund, we actually cannot allow someone else to just do seed for us. We have to have our own product in the market that competes with what they have.” There’s an AUM opportunity here, but there’s also a full lifecycle pipeline opportunity here. And their decision to come in in a permanent way, I do think changed seed.

Turner Novak:

Hmm.

Charles Hudson:

‘Cause then a lot of repeat founders are like, “Wow, I can get a large chunk of money on terms that are very friendly to me from a firm that I held in high regard, that I hope does my next round, and if they don’t do it, I’m probably out of business. And I think I’m okay with that.” That to me is the biggest shift, because suddenly those repeat founders... I think that was honestly an arbitrage opportunity for seed.

There were people who probably could have gotten money from the big funds, but every two years, the big funds were out of the seed business. So if you were a person starting, you’re like, “Well, I have to go to these seed specialists,” and seed specialists were paying 15 or $20 million post-money for companies that the big funds are paying 50 or 60 post-money for, if they can even get into those companies.

Turner Novak:

When you say, “If they can even get in,” that’s an interesting line, because for most seed managers today, the biggest question that you face for your business is, can you compete with these mega funds? And you tweeted something, it’s probably a couple months ago, where you’re like, there’s this pretty big difference between how the venture managers are describing the current state of the seed market versus the current state of the seed market from the LPs who are actually investing in all these funds. So what are these two things that you’re hearing, and how are they different or the same?

Charles Hudson:

There’s a lot of early-stage managers who I think, as capital really started to concentrate in this business, have felt like, “I have to defend seed investing.” And I’m like, “Well, you should always understand, am I in a good business?”

I think a lot of them said, “Well, these mega funds don’t make any sense. You can’t generate the kind of returns that we can generate. The LPs who are opting for these funds are dumb, or they don’t get it.” I’m like, “Uh”...

Turner Novak:

Small funds outperform. Therefore you should just only invest in smaller funds.

Charles Hudson:

Yeah. I’m like, “Well, that’s a very circular, self-serving argument.” Doesn’t mean it’s true or untrue. And I was like, “Guys, it just isn’t true.” The people who are making these allocation decisions are very sophisticated and smart people. And I’d argue piling a bunch of money into a company that’s compounding rapidly, that’s working really well, can generate dramatically outsized returns.

Turner Novak:

Yeah. If you just think about your seed fund, you’re investing in all these companies that are probably gonna fail, versus just put a bunch of money into Anthropic, the fastest-growing company ever. Those two pitches coming to an LP look different.

Charles Hudson:

Totally different reasons. And if you’re an LP who has a cost of capital hurdle that’s quite low, even if those firms do underperform relative to small firms, they still might perform well in excess of the cost of capital hurdle that you need to clear for it to be a good investment.

And if you told someone, “You have two choices. You’ve got $100 million to put to work. You could give $50 million to two firms, or you could give $10 million to 10 people,” a lot of people are like, “Oh, to get to those 10, how many managers do I have to meet? It’s a lot of work. I gotta meet 200 managers to get to 10. Then I gotta make sure I get $10 million into each. Then I have to go to 10 AGMs. Then I’m gonna be at 10 LPACs. And I have 10 re-up decisions. That’s a lot of work. Or I could give these two people $50 million each. They’re gonna cover everything from pre-seed, in theory, to growth. And if they have good brands, they should see and get into all of the stuff that I care about. Why shouldn’t I do that?”

And I’m like, think about this. If you were at a family office and you’re like, “I’m responsible for all privates,” private credit, venture, all forms of PE and buyout. You don’t have time to meet 200 early-stage VC managers in addition to the rest of your work. So giving a large chunk of money to one person who can cover the whole swath of venture, if they have good access and they run a good firm, is actually a completely rational strategy.

Also, it just sounds lame to be like, “Well, you shouldn’t give those people money ‘cause they’re bad at their job.” I’m like, the people who are giving them money have a peek into the returns, know what’s in the books, and they’re not throwing their money away. They might be wrong, but they’re not throwing their money away, and it’s hard to raise money from people by telling them that they’re idiots.

Turner Novak:

It’s like, “You’re dumb, but give me money.” It’s kind of like... I feel like you see a lot of times where founders maybe get frustrated at investors. And that’s another thing that can be tricky to navigate. There’s an investor that’s telling you that you’re gonna fail and your idea’s bad, and you’re grinning while they say it. To me, it’s a skill that you need as somebody who’s starting a company, just constantly people telling you you’re not gonna make it.

So do you think that the seed model is broken when you think of... well, I don’t know what the most average seed strategy is, but 30 to 40 companies, 2 to 4 million dollar checks each. Maybe there’s some follow-on reserves, but you have a 150, 200, $250 million fund. Does that work anymore?

Charles Hudson:

I don’t know. And I say I don’t know because I don’t run a firm of that strategy. I have good friends, my old friends at Uncork, they’ve dramatically increased their fund size. I have other friends who run anywhere from $100 to $250 million funds. If you think about what the old premise was of those firms, it’s like, we’re gonna buy 10 to 15% ownership, we’re gonna take a board seat, and these are gonna be billion-dollar outcomes. And the math works that by the time you figure out dilution and everything, a winning company should return the whole fund.

I’m not sure you can win 10 or 15% of the companies you want to be in as a large seed fund manager if the multi-stage funds are cherry-picking repeat founders and high-signal people. So I think it’s harder to execute the model of buying that amount of ownership. And the cost to buy it is probably double what it was three years ago.

Turner Novak:

And is this a capital supply/demand thing, like the amount of capital supply is way up? Or the demand is way up, so the pricing is increasing?

Charles Hudson:

I think what ends up happening is that the people who have access are able to raise amounts of money on terms that are hard to pencil if you’re a $100 million seed fund. How do you come in at a billion-dollar pre-seed, in quotes, valuation for a company when, even if it’s a $10 billion company, my problem isn’t capital deployment, my problem is cash on cash returns?

Turner Novak:

Yeah, ‘cause that needs to be a core position for you. But for the very large pool of capital, it’s more of an option check for the next couple rounds.

Charles Hudson:

Yeah. And if you think about it, the challenge with seed is... someone once told me, “You should always be nervous if someone else makes your job their hobby.” And what you have is seed funds who are like, “Hey, I’m running a model here,” which is ownership, entry price, and check size dependent in order to get the returns that I want. So seed is really important, and the physics of these rounds are important in terms of valuation, entry point, etc., and exit terminal size.

If you’re a multi-stage fund, you’re like, “Well, seed is a part of my strategy, but seed is a way for me to get access to companies such that I can put large amounts of capital into them in the future.”

Turner Novak:

And then also keep your brand as a VC firm.

Charles Hudson:

Keep my brand as a VC firm. So I’m actually more interested in the dollar-weighted aggregate cash on cash returns I can make from being in this company than I am the return on my initial seed check investment. Because in the grand scheme of things, it’s gonna be 1% of what I put into this company if it’s successful.

And those two strategies push you in really different directions. The latter strategy pushes you to be totally access-oriented and relatively price insensitive, because for the stuff that works, you’re gonna put a lot more money in in the future, and you have a seat at the table. And when you’re running a dedicated strategy, you have to decide, well, how elastic is this thing? Can I do 50? Can I do 100 post? Where does the rubber band snap? Which is why increasingly I think dedicated seed and multi-stage seed are two different businesses with different dynamics.

And I feel it when I talk to my friends at multi-stage firms about how they think about seed, and I see how hard some of the best seed managers I know right now are working to get into consensus hot companies. I think if you’re sub $100 million, the problem’s different, which is, the assets you’re buying are different than the assets that the other people are buying.

Turner Novak:

You’re saying sub $100 million fund?

Charles Hudson:

Sub $100 million fund, yeah. You’re probably looking at companies that are not on the radar screen of those other firms, and the risk is that no matter what you do, that basket of companies will never become interesting to the other folks relative to what they’re seeing, and you end up with a bunch of stranded assets. So I would say this is the hardest period for seed I can remember in my entire investing career.

Turner Novak:

Wow, okay.

Charles Hudson:

Hardest for sure.

Turner Novak:

I want to maybe talk a little bit more about that, but one thing you made me think about is, the bigger the pool of capital is, the more it’s about velocity, the movement of money, versus what the valuation of anything specifically is. ‘Cause they just see it as, if I can put in a very large amount of money and it’s worth three times more in a year, that’s incredible. You will just keep doing that all day, and that’s all you care about. So that’s really what you’re paying attention to, just the velocity of how fast you can put money in.

And it’s just the proximity to liquidity, basically. The closer you get to liquidity, whether that’s public markets, an IPO, how do the public markets value this idea? That’s really what you’re going for.

Charles Hudson:

Also, I’d argue we live in a world now of increased secondary sophistication. Eleven Labs, some of these companies, I’ve called them the perma privates. They have almost all the things you’d expect from a public company. Regular liquidity windows. Price discovery’s not that hard for the top 15 companies. You could call any secondary buyer, and they could tell you what the going price is for Databricks. It doesn’t need to be public. There’s a pretty deep and liquid pool of buyers, and in some cases buyers and sellers, for these names.

And it changes the game in terms of, if you decide to get out along the way, you can. But also, in a world where liquidity takes a long time to happen, I think more and more of VC fundraising from LPs is based on perception and velocity. So there are a lot of AI application-layer companies where I’m not sure that they will survive long term relative to the advancements in foundation models.

I don’t want to pick any specific company, so we won’t name them. But I think there are companies right now where if you said, “I’m in these five or 10 companies that are valued at tens of billions or multiple hundreds of millions of dollars,” LPs will be like, “I know that name. I’ve heard of that company. Oh, you’re in that company? That’s a hot company.”

Turner Novak:

Therefore, you’re gonna continue to get into more.

Charles Hudson:

And also, when I go to the committee and tell them, “Hey, Turner’s in this hot company,” they’re like, “Well, Turner must be a good VC fund.” And if you’re like, “Turner’s in 10 companies that I’ve done a bunch of research on that you’ve never heard of, but I promise you we’re good”...

Turner Novak:

That’s so hard.

Charles Hudson:

Some people will just say, “Is he in Anthropic, Databricks, OpenAI, Stripe, or SpaceX?” And if the answer is no, people will be like, “Okay, so you’re not in the hot companies. So what are you in, then?” And so I think it is this weird byproduct of concentration.

Turner Novak:

One of my favorite things to say now is, I am technically a pre-revenue investor in Anthropic.

Charles Hudson:

Yeah.

Turner Novak:

Because one of my companies I invested in pre-revenue was acquired by Anthropic. I got equity in Anthropic, so I can say that while telling you the truth. I’m a pre-revenue investor in the equity of Anthropic. It’s not quite the same, but that’s the thing people get most excited about, is like, “Oh, you have Anthropic in your fund.” And a lot of my LPs are like, “So how much of the fund are we gonna get back when this IPOs?”

And I’m like, “I have no idea. I’m just gonna give you the shares when it goes public, because you’re not paying me to make that decision.” This is a Jesus-take-the-wheel thing. I didn’t know this was gonna happen, and you’re gonna make some money from it, but there’s way other companies in the fund I’m actually more excited about that will actually make more money. It’s just so far away. People don’t really care that much yet.

Charles Hudson:

They don’t, and I think the attention span is concentrated in maybe the top five names, which feel very liquid. Maybe the top 25 companies where there’s at least an active market for them. And everything else, it’s hard.

Turner Novak:

And so you mentioned you think this is the hardest time to be an early-stage investor. So what’s the strategy? How do you survive, and what do you do?

Charles Hudson:

It’s funny. There’s the intellectually, morally superior route, like, “Hey, I’m gonna invest in the things I want to invest in, and I’m gonna stick with it, and eventually I’ll be proven right.” I’ve been guilty of this at times.

And right now the challenge is, LP attention is sorting seed managers. They’re like, “These people have access and appear to be in the hot companies. We will continue to fund those managers.” If you’re doing things that are contrarian, or not yet understood, or whatever term you want to use, there’s a set of LPs who are like, “Well, the game on the field right now is enterprise AI.” We don’t actually know if most of these enterprise AI companies we’re funding are gonna turn out to be good investments when it’s time for liquidity. Right now, that’s where the heat, light, and energy is, and if you’re not in those companies, some LPs are like, “Maybe you just don’t get it. Maybe you’re not any good.”

“What are you spending time on if you’re not chasing down this next harness or model, whatever it might be? Because what I’m hearing from the people who work at the big funds, where I’ve given them all of my money, is that’s all they care about. So are you telling me that they’re wrong?”

Turner Novak:

They have 100 people doing research all day, adding all this value, talking to founders.

Charles Hudson:

And all they care about is this one very narrow sliver of the market. I’m like, well, you can walk and chew gum at the same time. This can be really interesting and important, and other things can be interesting and important too. So one strategy is, you just hope that you have LPs who are supportive enough, or you can finance your organization through this period of having deeply misunderstood companies that feel out of favor, and when the tide comes in it’ll come in anyway.

The other one is, you go, “You know what the game on the field is? The game on the field is chasing and getting onto the cap table of hot AI companies.” Either because, A, I deeply believe that these companies are the future, or, cynically, I believe that being associated with these companies and getting the markups and the brand affiliation with the people who will lead them will make the survival of my fund easier. Because without LP capital, most VCs would go out of business.

And part of raising LP capital is having a product that LPs want to fund. Right now, if you’re in a bunch of the really hot AI companies and the ecosystem thinks that’s the person who sees the best hot AI stuff, you will have a relatively straightforward time raising capital. If you’re pursuing some other strategy that’s not perceived as being as interesting or as popular, you’ll have a harder time. That’s been my experience.

Turner Novak:

Yeah, and when you think about the P&L, the income statement of an asset management firm... you need revenue, right? You think, is this a good business? Is this a bad business? How much revenue does it have? And the revenue comes from taking a clip of management fees on the amount of capital that you raise. So the incentives, if you have an asset management firm and you want to increase revenue, it’s increased management fees.

So if you’re taking that strategy you talked about earlier, there’s two buckets, and can you graduate to the bucket? It’s pretty bold to say, “I’m gonna sit in this bucket where there’s not as much revenue for my company, and graduate.” And then maybe you build a reputation over a long time of, oh, Charles has 10 companies over the past 10 years that have become generational businesses that he gave money to when there was no consensus around it. We just know he’s gonna do it again. But that’s not someone meeting you for the first time, when you’ve never done that before, going, “Oh, sure, I’m in.”

Charles Hudson:

Super hard. Two years ago I was on a panel at an AGM for an LP I love who is sadly not an LP in my fund, and I was on stage with three other seed managers, and we were talking about this topic. They asked us, “What’s your strategy?” I said, “We’ve always been sort of 70% first-time founder, 30% repeat founder. That feels like a good equilibrium for us. But a lot of the people that we back, they’re just not popular when we fund them. We don’t look for those people on purpose. It’s not like, oh, if you’re popular, I’m interested. I’m just like, it’s totally fine if the people we meet are a little raw or a little hard to underwrite.”

I don’t mind that. I have two years to work with them to help get them better understood. I don’t like this legible term, so I’m not gonna use it.

Turner Novak:

Legible to capital. I love it and hate it.

Charles Hudson:

I love it and hate it. I try to avoid using it, but it is the thing. And I’m like, “I can help you become easier to understand and tell your story in a way that will get investors excited.” And the other people on the panel were like, “We’re uninterested in your strategy.” One of them basically said, “If I can’t compete with and beat the multi-stage funds on the deals I want, I don’t want to be in this business.”

I was like, wow, because I think they have that part of the market in a bit of a vice. Every year the multi-stage funds get better and better at going after the most obviously pedigreed people raising seed rounds, and they get 5% better, 10% better every year. And that vice just gets tighter and tighter, and eventually there’s not much left. Now, my argument is, all of the great companies, in my opinion, are not gonna come from the pool of repeat or well-known founders.

If I thought that, I’d close up my shop and say, “Well, the vice is gonna get tighter. They’re gonna take 100% of the opportunity, and 100% of the winners are gonna come from the pool they dominate.” That’s what a bunch of LPs are like. If you think it’s 100%, all the best companies are gonna be repeat people who are good friends with VCs, who are gonna raise big seed rounds, you should just abandon your seed strategy. And if you think 0% are gonna come from that pool, you should never put nearly as much money into big funds.

No one thinks it’s zero that I’ve talked to, and only one person I know thinks it’s 100. So the only question is, where does that slider rest? Is it 50/50? Is it 75/25? I don’t know where it rests, but I do know that I continually meet teams where I’m like, “These companies are going to matter,” and they didn’t fit the screen of what those folks were looking for.

Turner Novak:

So an interesting data point along that. One of the prior guests of the show, by the time this comes out it’ll have been a couple weeks ago, his name is Nuno at Chamaeleon Ventures. They built this product internally. For hedge funds, they do a lot of factor investing, so they’ve built this strategy that borrows from hedge funds, taking a bunch of sentiment, and it gives you a bunch of data and you make a decision.

One of the data points that they found, I believe it’s 76% of all unicorns did not have a fund over 100 million lead that first seed round. So basically what it’s saying is 76% of unicorns, their seed round was led by a small fund. This is historical data over forever, so obviously this is a moving number. But it essentially goes to show that a lot of the biggest companies, the first investors were not a big pool of capital.

The caveat is, of course, the market is changing. We should look at it in the past year. That’s the hard part, because if you look at it in the past year, you don’t know which of those companies will go on to become big businesses.

Turner Novak:

What the consensus says will tell you that the highest valued companies are probably the ones that will go on and become big. But that never actually happens. So it’s interesting that, like you said, it’s somewhere in the middle. But where in the middle is it?

Charles Hudson:

It’s funny, I had a similar conversation. Every fund, we take a little bit of money from a big multi-stage fund, usually for the relationship and also for me to learn from them, how do they operate, how do they think about the world. And I was hanging out with someone who put money in our last fund, and he said, “You know, we just did this big analysis, and it turns out seed valuations are noisy. If you look at companies that were ultimately successful, the price at seed is very noisy. Some of them are very expensive, some of them are very cheap. Price is a signal more of capital access than of ultimate value.”

He said, “When we looked at the Series As, it’s not anything like that at all. The good ones are all expensive. There’s actually a very strong price-quality correlation at Series A historically.” And I’m like, “That makes sense. By the A, you should know a lot more about the business, and the ones that look good should get bid up.” So it’s one of those things I think about a lot, which is, as information becomes, in theory, better understood, pricing should become somewhat more rational.

Turner Novak:

Yeah. And then the interesting thing is, okay, so everything that’s going on today, we kind of did this exactly five years ago, during ZIRP. Oh my God. Have we learned anything? Is this okay? Is this all justified because of AI?

Charles Hudson:

It’s funny. I’ve gone on this journey on this topic.

Turner Novak:

‘Cause my initial thing was like, we are crazy. ZIRP was insane, and we’re doing the same thing.

Charles Hudson:

Can I do, like, a two-minute philosophical...

Turner Novak:

Oh, yeah. Definitely.

Charles Hudson:

Early in my venture career, I was like, “Well, there must be a corrective force for mistakes and bad behavior.” I think within firms there are corrective forces. Partners do get asked to leave and do get fired when performance isn’t up to standard. But I think about 2021. I asked an LP who has a lot of exposure, I said, “You know, 2021 was crazy, right?” He said, “Yeah.” I said, “You remember my 2021 AGM? All of you guys were all over us. Those marks aren’t real. What’s this stuff worth?” And then people wrote blog posts about never again, and we kind of overdid it, and now capital efficiency’s back. That lasted for ‘22 and maybe a chunk of ‘23.

And I asked this LP, “Well, who did you fire as a manager based on the performance and decisions they made in 2021?” And the person’s like, “Well, none of our core relationships.” I was like, “Okay, so you just ate it.” He’s like, “Essentially, yeah. They made a mistake, but it wasn’t such a big mistake that we fired them.” And I was like, “Well, who did you fire?” He’s like, “Oh, we fired some emerging managers because the totality of their track record was 2020 and 2021.”

I was like, “That’s a low consequence decision. Those people have no power.” And I was like, “Well, what does it mean to invest in a business where the capital providers have limited corrective power?” If this AI stuff doesn’t end well, I don’t know how many firms are gonna go out of business because they went YOLO all in on very expensive AI deals that didn’t work out, if those firms have established brands and strong relationships with LPs.

And so I think maybe my lesson from 2021 is, it’s as dangerous to sit out a bubble as it is to participate in one. And it’s actually potentially more dangerous to sit one out, because it’s not as if the people who were sober and restrained during 2021, in my opinion, have gotten a lot of credit from their LPs for having not participated in the circus.

So I’m like, is that really what modern venture capital is about today? If there’s a speculative frenzy, the rational thing to do, if your goal is to remain a venture capitalist, might be to participate in the frenzy, even if you have deep skepticism about the final outcome.

Turner Novak:

‘Cause you need to remain relevant.

Charles Hudson:

You need to remain relevant. You need to remain in business and be able to raise capital, and to do that, your firm has to be relevant and feel like you get the message. That leads you in a really different set of directions, if that’s true, than it would if you’re just like, “Hey, the people who go crazy and lose a bunch of money on bad things will be punished, and the punishment will be you will not raise another fund.” I don’t really think it works that way.

Turner Novak:

Yeah, ‘cause tying back to how venture works, you just have to be right once.

Charles Hudson:

That’s right.

Turner Novak:

If you go crazy, and you were right, yeah, you were really crazy, you lit a lot of things on fire, but you were right on one of them, and that’s the point. You could argue that was the best strategy.

Charles Hudson:

I don’t know what else is in Menlo’s fund, but I know they got a lot of Anthropic, and I don’t think it matters. Whatever else it is, I’m sure they’re great companies. For the longevity of their firm, I can’t believe there’s anything else they’ve invested in in the last five years that matters even 10% as much.

Turner Novak:

One of my friends, Pratush at Susa, he has this thing where there’s the power law. We all took the power law pill. But really, in a lot of cases, a lot of people just swallowed the whole bottle of pills. It’s like the power law, but 10 times, 100 times more. It’s the ultimate power. All that matters is you get one company that returns the industry. And if you’re in that company, that’s the point. So who cares if you invested in Web3, if you invested in, to your point, enterprise AI, an AI app that’s actually not worth anything. It doesn’t matter.

Charles Hudson:

Doesn’t matter. What you said, I think, is really true. I met somebody who invested in Anthropic at a billion in a desire to pick up the logo, and that person’s up hundreds. They’re gonna get a greater than seed return. And this is the other thing I’ve tried to explain to my team, not well. If you think about it, the goal of a seed manager is to get really high cash-on-cash returns in the early stage. With the benefit of hindsight, Anthropic at a billion was early in its development but not early on an absolute price basis.

So how do you think about companies where you could still see 200 to 300x price appreciation at entry prices that look really different than what we’ve done in the past?

Turner Novak:

And on that note of rationalizing something, I’ve heard the data centers in space thesis, where this is the final frontier of computing. It’s early, and the entire area around the Earth, the other 99.999999999% of the mass of the solar system, is just data centers. And the upside is a million x from here. I’m exaggerating this quite a bit, but if you believe that, then it’s still early to invest in that trend. And that comes back to the point of venture capital, which is you’re investing in something where the upside is unbounded. That’s the point of this.

Charles Hudson:

I think in some ways this goes back to something I hadn’t thought about. You just made me think on this. In the beginning of my venture career, stage names were useful. They served us because everybody kind of had a lane. It was good to know, “Well, this is my lane. My lane is seed.”

Turner Novak:

And my friend that does Series Bs at Coatue, I’ll let him know when I have a company raising a Series B.

Charles Hudson:

And he’s not interested in As, and he’s not interested in seed. And now I think there’s no lanes anymore. We’ve adjusted to the fact that everybody’s gonna be in everybody’s lane. But maybe seed managers as a group, we’ve been slower to realize that we can get the kind of cash on cash multiple returns we want at later points of entry. And that still might be early in the grand scheme. It might not be the first or second round, but it still might be an opportunity to find a crazy return.

I remember when Keith did Stripe at a billion, and a lot of people were like, “That’s nuts.” And I’m like, “Not if it becomes a meaningful part of the internet’s GDP.” It’s not nuts. It’s a really good company that’s aggressively priced, and now a lot of people are like, “Wow, if I could do Stripe at a billion, I’d be quite happy.”

So it’s also made me realize that for companies that are really, really working, once they’re really working, maybe the optimal thing is to find a way to be a part of those companies, even if it’s off-model for you. I wouldn’t go buy a bunch of common shares off some shady secondary exchange. But maybe find a way, if you have access, to get on the cap tables of these companies that matter. ‘Cause every time we’ve done that, I’ve learned things about the market and the way those companies operate that were not obvious from the outside.

Turner Novak:

Interesting. ‘Cause the point of this is just find founders that are building generational businesses and help them out. Give them some money, and you’ll make money doing that. Whether it’s Stripe at a billion or a CPG company at one million. I have a friend who’s not a CPG investor, but two of his best investments have been angel checks into CPG companies that were raising 150K to start a new cereal brand or something. And he made a hundred x return in a couple of years. That’s Anthropic levels. That’s incredible.

Charles Hudson:

It’s funny, our CPG companies right now are thriving. I think partially ‘cause most people are like, there’s not a lot of AI threat for those businesses. And also none of their competitors can raise capital. So that’s one market where, if you have capital... and also most of them have had to live for the last five years on limited capital, so the businesses are actually pretty efficient. Much to my pleasant surprise, they’re some of our top-performing companies.

Turner Novak:

Yeah, and that’s why I come back to the entry valuation you come in at being so important. Those are the two levers. It’s what price do you pay, and then what price do you get when you sell? And those two things can make any investment interesting.

I think you need to buy high-quality assets, whether that’s the founder or the business that exists. Make sure it’s good, the best you can find. But you can have a great company be a bad investment where the valuation is just too high, because you paid too high of a price. So any investment is interesting when you take that lens of, what do you pay? What can you get for it in the future? And I don’t know, it’s almost like we’ve kind of lost some creativity in that process over time.

Charles Hudson:

And I think that’s why I tell our team, “I’m always just trying to figure out, how could this company become valued 200 times more than it is today?” ‘Cause if that happens, factoring in future dilution, we’ll probably make between 75 and 100x return on it.

Turner Novak:

Is that your model, like, can we get 100x return on this single check? And this is in share price, right?

Charles Hudson:

That’s in share price net of dilution, which normally, just for simple modeling purposes, if you assume you need 200... so you can do an investment at 25 post. You just have to believe it’s gonna probably be a $5 billion company. And a $5 billion company, with asset price inflation and general inflation, in seven to 10 years... that’s maybe a $2 billion company today becoming a $5 billion company in 10 years.

So I’m always telling them, you have to believe that it’s gonna be of that order of magnitude, otherwise you shouldn’t do it. You’re giving up too much of the upside at 25. And if it’s a billion-dollar company, you’re gonna be like, “Oh, I made 15, 20 times my money.” Good. But a company of that scale should deliver more for you.

Turner Novak:

One thing, I feel like maybe we talked a little bit about this, but do you feel like there’s an addiction to consensus, just investing in consensus?

Charles Hudson:

Yes. But I think all of the things the system rewards right now...

Turner Novak:

Are feeding the addiction.

Charles Hudson:

Are feeding the addiction. And it’s such a big circle, I don’t know what’s first. I’ll give you an example. Dropping out of college used to be a low status decision. The high status decision was finish college, get a good job. Dropping out was either you couldn’t hack it, or you were crazy enough to think you had an idea that was so good it was better than graduation.

I’d argue that dropping out now has become a high status activity for college students at elite universities. Partially because 20 VC firms have fellows on campus or scouts who can give you money to start your idea and get a million bucks or something. And VCs, I think, still haven’t updated their firmware, and dropping out is a signal of seriousness. I’m like, well, if you got into Stanford and you drop out, you still got into Stanford. You’re a pretty smart person.

Turner Novak:

Yeah. That’s the hardest part, is getting in. It’s easy to finish.

Charles Hudson:

Maybe you can’t get a job at McKinsey or Goldman Sachs ‘cause they would want you to graduate, but it won’t stop you from getting a startup job or being in tech. So it’s not as risky a thing anymore as it used to be to drop out of college to do a startup. So there’s a lot of energy around, let’s find these 18 to 22-year-old cracked AI dropouts. If you’re one of those people, you are going to get found.

There’s a lot of belief that people coming out of a small subset of companies have some earned secrets that will make them more successful as founders. There’s a lot of people who are just like, “I just want repeat founders in an environment like this.” So there are whole subsets of founder archetypes that are kind of like overfished tuna. Everyone’s like, “Oh, I want tuna.” We can’t all eat tuna. We’ll run out of tuna. So there’s so much concentration on that population of people.

But also, if you’re an emerging manager, and you’re like, “I want Sequoia, Andreessen, General Catalyst to do the follow-ons of my portfolio,” you’re like, “Well, one easy way to do it is find the founder archetypes and profiles that I know they’re looking for, and find them a tick before they find them.”

Turner Novak:

Talking about velocity. You’ll move quick.

Charles Hudson:

You’ll move quick, and you’ll find them two months before they find them.

Charles Hudson:

And then your whole deck is like, “Hey, I found these 10 companies two months before these big multi-stage funds, and I did them at price X, and they did them at price 3x. My whole portfolio’s marked up two and a half x as a result because I found all these great companies before them.” And everyone goes, “Wow, you found companies before these firms that we think have excellent judgment.” Everything pushes you in that direction. When you don’t have those signals, and you go try to talk to LPs or other founders, they’re like, “I don’t know any of these people. These companies you know, are they even any good?”

Turner Novak:

I’ve noticed this tipping point. My strategy initially, and it’s always kind of been, is these non-consensus companies that you think will graduate. And so I’ve had some that have been graduating. And it gets so much easier when people notice the portfolio companies. It’s night and day between having some of these consensus companies, where you were actually early in them before they were consensus. And I’ve gone back and forth of like, “Man, I should’ve just done that from the beginning. I should’ve just tried to get allocation to OpenAI and raised $100 million and retired. I could’ve done that. Why am I messing around trying to give somebody 250K for this crazy idea that no one else thinks is a good idea?”

Charles Hudson:

It...

Turner Novak:

But it’s fun. It’s more fun to do that, in my opinion.

Charles Hudson:

It is more fun. And I’m curious, these companies are gonna go public soon, and we’re gonna know a lot more about them as publicly traded companies, and I wonder if these are blips, in the sense that these companies just happen to be sitting on the most important technology of this generation in a very strong control position, and that we are not going to see other companies like this anytime soon until there’s a new technology wave, because the thing they’re doing is just really special and rare and unique.

Turner Novak:

So you think there was this hole we needed to put a trillion dollars into the capital markets over the past couple years, and once they go public, that drops to 500 billion or 250 billion. You just don’t think we’ll need that capital anymore.

Charles Hudson:

Or we’re not gonna find companies that can both grow to tens of billions of dollars in AR but also consume hundreds of billions of dollars in private capital. I don’t know where the next one of those comes from.

Turner Novak:

So did you see this? We’re recording this, it was either yesterday or today. Alphabet announced they were raising an $80 billion private round. Did you see this?

Charles Hudson:

No.

Turner Novak:

So Google is actually raising 80 billion, I think it’s 80 billion, to invest in AI.

Charles Hudson:

Like data center infrastructure stuff, or companies?

Turner Novak:

I haven’t read it yet. So this is the classic tech bros on a podcast thing. You kind of were like, “It could be anything.” This is a classic, just, tech bros on podcasts going, “Did you see this? Oh, this is the...” whatever. But it’s kind of interesting because you used to think you had to be a private company to do that.

And when you think about the incentives for an investment firm, it’s all about the management fees. If you’re investing traditionally as a public market investor, you used to be able to charge roughly 2 and 20. 2% a year, 20% of the profits. You got paid quarterly, which is pretty awesome. It’s mark to market, you get paid. There’s been pricing pressure because there’s no differentiation. So instead of being able to charge 2%, you maybe charge 1% per year. The carry also comes down to maybe you only get 15 to 10% of the profits. And also, you’re at the whim of the market. So if the market pulls back 30% in a year, your revenue drops 30%.

Versus if you’re in the private markets, you can charge 2%. Some people charge more than that. And you also have a reason to structure these really big step-ups in your management fees, and it also doesn’t go down as a market. So the incentives for an investor are to be a late-stage private market investor. That’s really how you make the most money. But Alphabet’s now raising capital in the public markets, I’m assuming. So that $80 billion, who takes the fees on that money, I think is pretty important in how the market will continue to change.

Charles Hudson:

Going back to something we talked about earlier about this big fund, small fund thing, I think if you think of the largest firms in our industry as scaled asset management firms whose principal business is venture capital, their behavior makes sense. My sense is those 10 firms really compete with each other. They don’t compete with me. They compete with each other for zero-sum access to the very best companies. General Catalyst now has the lending financing product that’s non-dilutive. One of our companies just took a very large chunk of that.

I expect you will see more innovation from those firms for two reasons. One, the only way you can grow your firm is to either grow your core products or launch new products, and the answer would be, “Yeah, we’ll do both.” And this desire to grow AUM and fund size is a very real pressure. I think about a firm like Thrive, where they have really great access to the most important companies in our industry, and the limitation to how much money Thrive could deploy is really how much money the top 10 companies on the internet would take from them. It’s not how much money they could raise.

And in a world where you have companies like OpenAI and Anthropic where us putting in $10 billion doesn’t really mean anything in the scale of what they need to raise... for an asset manager, that’s the dream. A highly valuable company with a voracious appetite for capital that’s highly regarded by other people. I don’t know that it gets any better than that if your goal is to grow AUM.

Turner Novak:

And why would you choose to not participate? Of course you would. So it’s interesting, and as a participant in the ecosystem, whether you’re an investor or founder, you just need to know that. There are opportunities to benefit from it, to counter-position against it, to make money yourselves, to be in it, to become part of that.

Charles Hudson:

And that’s just been my one frustration with some of my seed or emerging manager friends. There are things that are happening that you don’t like. They’re still gonna happen. And you can complain about them, or criticize them, or mock them. It’s probably more useful to figure out, “Well, what does this mean for me, and what am I gonna change about my business as a result?” And the answer probably shouldn’t be, “It doesn’t impact me, and I’m changing nothing.”

Turner Novak:

Okay, so it’s an interesting question then. What is the strategy at Precursor today? On your website it says you do about 30 to 40 investments per year. So what’s the general strategy if I’m a founder talking to you, or I’m an LP? What do you do?

Charles Hudson:

The goal is to get into post-idea, pre-product-market-fit companies. The majority of those will be companies that are raising at sub-$10 million valuations, with a lot of first-time founders. And if that’s our major, our minor is there’s a lot of repeat people I’ve met in the last 30 years in the Valley. They come to me, but they don’t raise on terms that work at that sub-$10 million valuation. But I’m like, “These are good founders, and I think on a risk-adjusted basis, they’re likely to be successful.”

And the prices at which they’re raising are prices where I still see how we make money on those companies, and we do those too. First of all, those founders don’t really ask me for much help. They don’t need it. But part of what I’m betting on is that you will have access to capital, and you have management experience that makes you, on a risk-adjusted basis, more likely to succeed than the first-time founders. So we’re the barbell. We’re paying for experience and access over here, paying a premium. And over here, we’re paying a steep discount for the unknown, for founders where no one knows that they’re gonna be any good, for markets that are maybe not interested. And as long as some of these work and some of these work, you end up with a really great fund.

Turner Novak:

One thing that I saw, and literally Claude told me this, so I don’t even know if it’s true, might’ve been hallucinating. The way you do the principal role at Precursor, you actually give them money that they can make decisions with. So how does that work? How’s that a little bit different?

Charles Hudson:

I started talking to a bunch of my LPs, like, “Well, how are you gonna develop your team?” And I was like, “I’m more interested in allowing them to express their judgment than I am developing them.” This whole can-you-teach-people thing, I’m not sure if you can teach people venture. I think what you can do is you can give them money and figure out what they think good looks like. And then I, as the person who runs the firm, can decide, do I want more of this person’s judgment and taste in our firm, or less?

The answer is never, “I want the amount that I have.” A friend of mine said, “There’s only two kinds of companies in your portfolio: companies you wish you owned all of, and companies you wish you owned none of.” And I’m like, “Well, that’s a little harsh, but I understand the sentiment.” So I start everybody on our team with a budget. Think of it like a mini fund. It’s fully discretionary to them, subject to a couple of constraints. I give them a check size constraint, so they start off with 25 to 50K checks, like a big angel. They have to conform to our LPA, so you can’t invest in prohibited sectors. And they have to generally be credibly pre-seed companies, so you can’t go put 50K into a triple-layered SPV into Anthropic.

Turner Novak:

Yeah, as fun as that would be.

Charles Hudson:

As fun as that would be. And so I tell them, “I’m judging you in the beginning more on underwriting and less on performance, because I want to know that you can identify great founders, work with them, and get on the cap table. I don’t want you chasing just hot markups so that you can say, ‘Oh, well, my portfolio’s up 3x, so you have to make me partner.’”

And then with each successive fund that they’re with us, I increase the check size to figure out, can this person win access onto cap tables of the same quality with a larger check? ‘Cause you’re gonna displace better people, and it’s harder to do that. And it keeps going until you write the same size check as I do. And if at any point in time I think your performance isn’t good enough to continue, I tell the person, “Thanks for playing. It’s not gonna happen for you here.” The only terminal state in this program is you make partner. And if at any point in time you either decide you don’t want to do that, or I decide you’re not gonna do that, the experiment is over.

And my LPs at first were like, “Well, why don’t you put your thumb on the scale? Why don’t you make them get your approval?” I’m like, “Because that will then become part of their algorithm, and they will just say, ‘Well, I only have to sell him on this deal, and he hates X, Y, Z category,’ or, ‘I don’t think he’s gonna like this,’ and they’ll talk themselves out of it. I’m trying to figure out what they like.” Not what they like that they can sell to me, but what do they actually like?

And it’s actually not a very expensive program to run. The V1 for a person is between 250 and 500K. And I get 10 yes decisions from them about companies that they picked, and I can decide, “Do I like this?” My LPs went from being like, “This is very irresponsible,” to, “Oh, this is actually a very good way for you to get a sense for their judgment, rather than giving them $5 million after they’ve been at the firm for five or six years and just saying, ‘Go crazy with this.’”

Turner Novak:

So you go from zero to 5 million in one of these cases.

Charles Hudson:

So we go from zero to 500K.

Turner Novak:

Well, I’m saying other firms.

Charles Hudson:

Yeah, other firms. They’re just like, “Hey, you’ve been here for a while. You’re a partner. Here, you just...”

Turner Novak:

Now you can start.

Charles Hudson:

Now you can start.

Turner Novak:

So in other firms, you maybe don’t even get to do that. How does it work in a traditional venture setting?

Charles Hudson:

The way to think about it is, most people, if you come in as an associate, it’s probably gonna take you two to two and a half years to get check-writing privileges. If you come in as a principal, maybe it’s a year. The one gate is, to get into the program, you have to source something that we work on together and that we close, so that I get to see how you work. And then after that, I’m like, “This is your audition. This is your ticket to show what you can do.”

And in this environment, I told our team the bar for what a winning company looks like has gone up in my mind, because LPs are holding me to a higher standard. I was like, “Guys, 3x in 15 years is not very good.” It’s really not that great from an IRR standpoint. 5x in 15 years is the equivalent of 3x in 10. So the bar for what a great company looks like in the context of our fund has to go up, because I don’t think the hold period’s gonna come down.

Turner Novak:

It’s probably gonna keep extending.

Charles Hudson:

It’s probably gonna keep extending, so maybe 7x is really the new 5x.

Turner Novak:

But the other side is, for a high quality asset, there’s a lot of liquidity. So again, do you want to sell those high quality assets or keep holding them? But it could be a 7x fund return in three years maybe.

Charles Hudson:

And we now take a little bit off in the B if we can.

Turner Novak:

I think I actually saw that, yeah.

Charles Hudson:

We take a little bit off, mostly ‘cause now our Bs are five to seven years old by the time they get to the B. So taking a little bit off and returning it to LPs is probably not the worst decision in the world. If they’ve gotten to B, it’s a de-risked asset, but not a riskless asset. And clawing back some amount of capital makes sense, so we do that too.

Turner Novak:

How do you size up and decide how much to sell? Is it the same every time, or is it contextual?

Charles Hudson:

I talk to a lot of people, and they’re like, “You should just pick a formula that works.” Some people are like, “Anything above X valuation, we sell Y percent.” I just said, “We should try to sell 20% if we can in the B, provided that it’s not hostile to the company, that they’re supportive, that the pricing isn’t crazy, and ideally we’re selling it to the new round lead.” Which is what we’ve done the last two times we did it.

Turner Novak:

It’s interesting. A16Z put out some data on the amount of capital deployed by stage, secondary, crypto, etc., over the years. I may be remembering this wrong, but I think they bought something like $1 billion in secondaries in either ‘24 or ‘25. So it’s a pretty big chunk of their strategy, buying secondaries. The number may have been $500 million, but it’s still an astronomical amount of money compared to a Precursor selling 20% in a Series B.

Charles Hudson:

And look, there’s only 100 points of equity in a company to go around. So at some point... the private equity guys figured this out. There’s this handoff, the middle market guys sell. There’s a mechanism, and I think venture is figuring out... I tell everyone, we’re a part of finance but also apart from finance. And I think we’re discovering everything that everyone else has discovered before, continuation vehicles and secondaries. We’re discovering all of the financial engineering because the sums of money in these asset management firms are getting to the point that figuring out how to get out on a regular basis is more important than it needs to be.

Turner Novak:

One way that I’ve heard you describe what you do, I think there was a post that someone made where you had a sample of your deck, and there’s this axis, this quadrant. It might be helpful for people to understand, and you’ve basically said this already, but it might be helpful to restate. Where do you operate in that quadrant typically?

Charles Hudson:

The quadrant has two different dimensions. One is, what do you know about the business, and what do you know about the founder? So if you know a lot about the business and a lot about the founder... I don’t know, we’ll make this up. If Mark Zuckerberg started another social network tomorrow, if he even took outside capital, it’d be at, like, infinity dollars, right?

Turner Novak:

Yeah. He could probably get a billion dollars from someone pretty quick.

Charles Hudson:

That’s right. And you’d be like, “Oh, the guy knows what he’s doing.” Or Yann LeCun.

Turner Novak:

Oh yeah, that happened, right?

Charles Hudson:

That happened. Somebody who people are like, “This person knows a lot about LLMs, and he’s a high-profile founder.” So that upper right-hand quadrant, those are expensive deals where people feel good about paying them ‘cause they’re high consensus.

There’s another quadrant which is, you know a lot about the founder, but you don’t know a lot about the business. I call that your business school roommate or your former coworker who you think is a smart person, but you’re like, “I don’t really know what they’re building.”

Turner Novak:

Yeah. A second-time founder who’s taken on a slightly weird idea, but he’ll figure it out. You know she’s really good.

Charles Hudson:

That’s right. There’s market for that person, too. Then there’s what I call strangers with data, which is a person who moves to San Francisco from, I’ll make this up, Louisiana, starts a company, gets to 50K in MRR, and people are like, “I don’t know this person. They didn’t go to college. They’re not my friend. But the traction’s interesting enough that I’ll at least investigate the business and maybe get to know the person.”

And then there’s people where you know very little about the person and very little about the business, and almost nobody wants to fund those companies. And we spend a lot of time in that bucket.

Turner Novak:

Really?

Charles Hudson:

And it’s not efficient. You meet a lot of people, and you’re like, “Uh...”

Turner Novak:

You might do 100 meetings and find no founders that you get excited about.

Charles Hudson:

That happens sometimes. But the asymmetric upside from finding these people, because most people never meet with them... It’s funny, when I started the fund, everyone’s like, “Oh, you’re gonna end up with all the rejects of the seed funds.” I’m like, “Well, not if I do my job properly. If I do my job properly, I’m gonna meet all the people who haven’t quite figured out how to get in front of those firms, either because they’re not far enough along with the business or their network isn’t developed enough to get the warm intro to get in front of them.”

But if I’m re-rating the stuff that they’ve already passed on, you’re right, I will fail. But if we’re finding stuff that’s been unrated, that has never been underwritten, then I think we’ve got a shot.

Turner Novak:

One thing I think would be interesting to talk to you about, ‘cause you’ve probably seen this more than... you’re probably in the top .001% of the world of people who’ve seen those kinds of founders. What is it typically like to raise money when you’re a founder in that case? What are you usually going through when you are extremely non-well-known and you don’t have a lot of data around your idea?

Charles Hudson:

It’s really hard. Raising money for a private venture-backed company is really different than anything else, because it’s not like going to the bank and you’re like, “Here’s my five-year financials, and I’m raising money for an ice cream shop,” and the bank’s like, “I know how ice cream shops work. Here’s some money.” First of all, you gotta find a way to get in front of these people.

Turner Novak:

Is that hard typically?

Charles Hudson:

I think in 2019 through 2021, we went through an era where people were like, “Maybe venture should become more open. Maybe we should be more welcoming of outsiders. Maybe this warm intro thing is a little too much.” And then AI happened, and everyone’s like, there’s so much slop, and there’s so much scaled outreach. I’m now gonna go back to human filters and put more weight on those, because it’s too much to process without that. And if you’re new, you maybe don’t have the relationships.

You also probably don’t even know how to tell your story in a way that works for VCs, which is different than the way it would work for a bank or even for an angel. And third, there’s a set of process and style steps around how you run a fundraise that you might not know. So I think we can help people with that in the beginning. Many of the people I invest in, they don’t know what they’re doing when they go out to raise their first company. Also, recruiting and hiring is hard when you’re doing it for the first time if you’re not embedded here in the network. You didn’t work at Google, you didn’t work at Facebook, you didn’t go to Stanford or Berkeley.

Turner Novak:

And that’s one of the risks for VCs, by the way, can you hire good people around you? Well, Yann LeCun probably will be able to hire great people.

Charles Hudson:

Shouldn’t have a problem.

Turner Novak:

So what are you looking for when you’re meeting these people and they’re unrated? How do you start to rate them?

Charles Hudson:

The biggest thing I’ve learned is, one, it really does help if you’ve been in some kind of zero to one experience. It doesn’t have to just be a startup. It could be you started a nonprofit, you’re a college kid who started a club at school, you worked at a startup, not as a founder, but you were one of the first 15 or 20 people. I need to know that the chaos of zero to one won’t faze you.

Turner Novak:

Does it faze a lot of people?

Charles Hudson:

Oh, man, does it ever. Especially I find people who come from highly structured corporate backgrounds. The lack of structure tends to paralyze or overwhelm them in many cases. Not in every case, but in many cases they’re like, “Wow, this is hard.” They’re either too slow or too tentative, or they want to recreate everything they had at their old shop. Can’t make decisions. There’s a lot of failure modes there.

The other thing I’m looking for, and this is very squishy in some ways, but I know it when I see it, is people who have untapped management potential. I meet a lot of people where they were an individual contributor, and they worked at a company where their job was small by design, because the company’s like, “Look, if you leave, we can’t be dependent on you. You’re an individual contributor, so we’re gonna keep you in this box.” So their hiring strategy, fundraising, budgeting, charisma, all of these things have been suppressed because they’ve never been able to use them in that environment.

And like I tell our team all the time, we’re mostly hiring CEOs who’ve never done this before. So our job is to try to project, for whom will the added responsibility be something that causes them to flourish as opposed to shrink?

Turner Novak:

Interesting. I kind of think about it as, would this person be a good public company CEO? That’s part of the formula. It’s not everything, but that’s what you hope, right? You hope in 15 years they will be leading the earnings call, after they rang the bell a couple weeks ago. That’s really everyone’s goal at the end of the day. So can they get there?

Charles Hudson:

I agree. And what helps give me confidence is we’ve seen a lot of people in the last 12 years go from rough around the edges or inexperienced to quite polished and successful and effective in three years. So I know for the right people, the development can be very rapid.

Turner Novak:

What have you found to be the traits of the people who can get to that development? When you’re sussing out, do I think you’ll be that person, are there other things you’re looking at?

Charles Hudson:

A lot of times I try to figure out, what does this person know about this problem they’re trying to solve, and how did they acquire that information? And what can I glean about the way that they go about problem-solving from how they gathered that information? Some of them are just like, “Oh, I’ve read a lot of stuff online.” I’m like, “Well, you gotta go talk to people, or get closer to the actual work.”

Turner Novak:

So that’s a good indicator, people who are getting closer to the problem?

Charles Hudson:

Part of the problem is, founders now know that urgency is something that VCs are looking for, and people will sometimes fake a level of urgency during a fundraise. It’s performative. And then you start working with them, and you’re like, oh, the you that was fundraising was a lot more urgent and driven than the you that’s running the company now. I’ve seen this happen in a few cases where people have adopted a personality that doesn’t survive.

Turner Novak:

I’ve definitely seen the, “our call is on Thursday, and we’re closing the round in 24 hours, and you need to make a decision,” kind of urgency that was not real.

Charles Hudson:

It was not real. Or I see people who are lightning fast on every reply during a fundraising process. Then you’re like, well, that’s not really what the email experience of dealing with you is like on a regular basis, or the follow-up. But part of this is, we’re trying to make speculative bets on unproven people. And if we’re right 10 or 15% of the time, we’re gonna do really, really well with this pool of people, because the pricing dynamics make it such.

Turner Novak:

One thing, maybe a slightly different topic, that I think you have an interesting perspective on. You actually made some videos giving people advice. So if I’m somebody who thinks I really like investing, made some good angel investments, or I’m working at another fund, and I want to start my own fund, I want to start Turner Novak Capital, which, I mean, Banana Capital, I’ve done it. What do you usually go through with people when they say, “Hey, I want to start my own venture fund”?

Charles Hudson:

During the pandemic, I had so many people who were reaching out, and every call I had was the same.

Turner Novak:

I was literally one of those people, I’m pretty sure.

Charles Hudson:

No, you were fine. But I had people where everyone asked me the same questions. And I’m like, “I have an hour for you,” ‘cause during the pandemic I had a bit more time. 48 to 50 minutes would be fund admin and how do I get started and what do I need to know about LPs. And the last 10 minutes would be the stuff that was actually unique about them.

So we’d finish this hour, and people would be like, “This is great. When can we talk again?” I’m like, “Well, not anytime soon. We just spent an hour together.” And I realized I wasn’t getting what I wanted out of that hour. So I made a video series, which is, “This is everything you need to know.” And I tell people, “I’m gonna give you an hour. I probably won’t be able to give you another hour anytime soon. There’s an audio version, a video version, a text version. You can consume this thing that I built, and we will spend the majority of the time talking about the things that are uniquely relevant to your fund. It will be far more fun for you. You’ll get way more out of it. You don’t have to do that. You can also just not read it, and we can spend the hour, and we’ll probably spend a bunch of time on stuff that you could’ve read. I’ve agreed to spend the hour with you in either case.”

And I’ve had three people, now three, before I talked to you last it was two, now three people who’ve watched the videos and been like, “I don’t want to be a fund manager.” And I’m like, “Why?” They’re like, “Well, basically what you’ve told me is the investing part is only one-third of the job.” I’m like, “Yeah, you have a management company to run, which is like running a law firm or an accounting firm. You have to go fundraise for your fund. And then you get to invest, too.”

So if you really like investing, being a fund manager is more of a management job than an investing job for a lot of people, especially if your firm grows in size. We have 14 people. I spend a non-trivial amount of time on non-investing things in addition to investing. So I was like, “If you really want to be an investor, find a structure that allows you to invest without all the overhead.” So we had our first emerging manager in residence with us for a year.

Turner Novak:

Oh, interesting.

Charles Hudson:

We never really talked about it. He’s a good friend. He’s closing his first fund, I think, next week. And I was just like, “Hey, if you want to raise a fund, you can hang out with me for a year, and I’ll help you figure out, how do you decide the capital call? Why do LPs get irritated when your K-1s are late? How do you pass tax and audit? How do you choose a tax and auditor? I’m gonna help you see all of the things so you at least know what you’re signing up for.” ‘Cause I think most people are like, “I want to start a venture fund so I can raise enough money to invest.” And I’m like, “Well, that’s not great. You might be happier doing one-off SPVs. You might be happier with a smaller operator fund that you run on the side.” But running an institutional venture capital firm is really three jobs. And when I explain it to people, they’re like, “Oh, I thought it was just an investing job.” I’m like, “No. Not as a founder.”

Turner Novak:

Are these videos public anywhere?

Charles Hudson:

Yeah, they are. It’s like a public secret. It’s a Notion page I have that I freely give out to people.

Turner Novak:

Can I throw it in the description and people can watch it if they want?

Charles Hudson:

Yeah, totally.

Turner Novak:

So they can watch all those, pause, come back after 50 minutes. So then what’s the last 10 minutes of the conversation like? How do you usually go through what makes you unique?

Charles Hudson:

Honestly, the main thing, and maybe you’ve experienced this, ‘cause I know people come to you for advice too now, people are just like, “This is my strategy.” I’m like, “It’s not unique.” And they’re like, “What do you mean?”

Turner Novak:

So what’s usually not unique about what they say?

Charles Hudson:

It usually boils down to, “I’m a smart person with a good network.” I’m like, “So is every other person you’re competing with for capital.” And they believe that to be true also. I’m also on the investment committee for Screen Door, which is a fund of funds for emerging managers. Through that, I’ve seen, wow, some of these decks are really bad. And they’re not bad design, they’re not bad content. They fail at the core question, which is, this is the most important question I ask myself every day: why are the founders that are in our strategy gonna pick us?

They put a right to win. I’m like, I don’t know about all that stuff. All I know is that we have to have a really clear reason why our... and I think for these first-time founders that are post-idea, pre-product market fit, we are one of the best landing places for those people in terms of the amount of support you’re gonna get, the founder community we can plug you into, and the help we can give you in your first two years. I think we’re very good at that work. Are other people good at it too? Absolutely. As long as that’s true, and we do our work in maintaining good relationships with our network, we should attract the kind of founders that fit our strategy.

Half the people I meet, I’m just like, “You want to co-lead seed rounds? Great. Here’s the top 10 seed firms. Who are you gonna beat? Who are you gonna bump down the stack so that you can be in the top 10? Or what are you doing that’s interesting?” And sometimes I meet people and I’m like, “It’s you. It’s a cult of personality. It’s really you. You are the main attraction, and you should just lean into that.” They’re like, “Well, our strategy.” I’m like, “Your strategy’s not interesting. You’re more interesting than the stated strategy.”

And in some cases, people tell me strategies, and I’m just like, “I just don’t think that will work. I don’t think that’s available to you.” I met someone who’s like, “Well, we want to lead top tier Series A firms.” I’m like, “Well, how are you gonna beat Sequoia, Andreessen, LightSpeed, Index, GC?” And their answer I found to be utterly uncompelling.

Turner Novak:

What does the average bad answer look like when it’s, “I’m gonna get the hottest companies and I’m gonna beat all the best firms”?

Charles Hudson:

I think most people I meet think of venture capital like stock picking, which is, “Oh, if I identify the asset, I can just go buy it.” I’m like, “No, no, no. If you identify the asset, you have to convince them to sell you equity.”

Turner Novak:

Yeah. You have to convince the asset to pick you.

Charles Hudson:

That’s right. The stock picks you, it’s not you pick the stock. And I think this is a fundamental misconception I find in a lot of first-time fund managers. The other one I find is, I meet a lot of people who are spinning out of established platforms. And I talk to them, and it’s like, “Well, how much of your success do you feel like came from the domain behind your email address?” And people are just like, “None.” I’m like, “None? You don’t think it helped you at all to have the @famousvcfirm.com?” I’m not asking you to say all of it. That would be disingenuous too.

But I find those people have a different problem, which is for them, the whole business of running a fund is usually an abstraction, because they have an IR team that raises the money, and a finance team that does the wires, and a tax team. There are all these functions that are abstractions to them.

Turner Novak:

That’s how I describe it to a lot of friends who have been from that. All the teams that you have, the departments, there’s like 10 different teams that do these things. I just do all that stuff myself. Everything is different. My marketing is, I make memes, and I have a podcast that people listen to. It’s totally different than what your firm does for marketing.

My capital call strategy is, I just call 25%, and I tell my LPs a quarter or two ahead of time when the capital call’s probably gonna happen. But there are teams that have that strategy. So maybe you have a line of credit to bridge it. And the fundraising, it’s the IR people, and sometimes you join the calls. I have to do all that myself. It’s pretty hard. There’s a lot of stuff that goes into it.

Charles Hudson:

And you have to do all of these things. So I tell them, in the first fund it’s kind of not as bad, because you don’t have an existing portfolio to service, and you can just decide to not meet companies while you’re fundraising. You get to fund two, three, and four, and you’re like, “Oh, I have a whole business over here called my existing portfolio that I have to continue to run while fundraising.” It’s hard.

Turner Novak:

My issue is I keep meeting companies while I’m fundraising.

Charles Hudson:

Me too.

Turner Novak:

So it’s always been... it’s like, man, I just really need to spend more time on this, but ugh, there’s just so many cool people you want to meet still. And it goes from there being five people doing it full time, 500% of the time, to me doing it 20% of the time, when I should be doing it 500% of the time.

Charles Hudson:

It’s hard.

Turner Novak:

One thing you’ve talked about, you’ve written about this, you talked about there’s two kinds of deserts in venture capital. There’s the first desert and the second desert. Maybe we can talk about what it is, and you can talk about your experience going through these deserts. I don’t actually know what the second desert is. So when you started Precursor, first fund, you went through this process we just talked about.

Charles Hudson:

Yeah, it’s brutal.

Turner Novak:

So what was that like?

Charles Hudson:

I think I talked to, like, 300 LPs. I would’ve talked to more. I couldn’t get more people to talk to me. A lot of people were just like, “I don’t like your portfolio construction. It’s too many companies, not enough ownership,” and I respect that. For a lot of LPs, portfolio construction is close to religion. And so I just accepted that.

And it was hard because I didn’t really know what I was doing fundraising. I was learning by doing. I’d been at Uncork, but Jeff did all the fundraising, so I’d observed. But it turns out observing and doing are quite different when it comes to fundraising. Also, in the beginning I didn’t understand what my LP fund manager fit was. I didn’t know who liked us, and it took me a long time to figure out, oh, we’re not really that popular with fund of funds and big endowments because our fund is small, and our portfolio construction. But family offices and smaller institutions, they seem to like what we do, so let’s spend more of our energy there.

Turner Novak:

So how do you qualify LPs when you’re doing your very first fund? How should I think about who I should talk to?

Charles Hudson:

I think it’s really important to understand what are the things about your fund that are potentially problematic. So I’m a single GP, and when I started Precursor, I thought, oh, the single GP thing is gonna be the real sticking point, so I’m gonna qualify everybody on single GP. And a lot of people were like, “Ah, you know, I did Steve Anderson’s fund a long time ago. I did Sacca’s fund. I’ve done solo GP.” That wasn’t as much of a disqualifier as I thought. The real disqualifier was portfolio construction, and I didn’t know that when I started.

So then I was like, oh, well, I have to make sure people are at least open to my portfolio construction. Otherwise, I’m gonna waste their time and my time, and I’d rather not do that. And then I started saying, “Okay, well, how big is our fund? How much of our fund do I think an LP would like to be?” A lot of LPs I met were like, “Well, procedurally we can’t be more than 10% of your fund,” for some people. And in practice, 20% is about the max. So I’m like, well, I’m raising a $15 million fund. I need to find people who can write $1 to $3 million checks if I want to get this done. ‘Cause people who want to write a $5 million check, they’re probably gonna say, “Ah, I don’t want to be a third of the fund. It’s too much exposure.”

And then I was like, well, who writes those checks? And ironically, most of the advice I tell people is, “Go find a fund manager who’s one to two funds ahead of you, who closed recently. Those people generally have the best intel about who’s actually deploying and the kinds of LPs that fit your filter.”

Charles Hudson:

But the hardest part is figuring out... ‘cause I don’t know if you had this experience, I’ve gone and talked to people, and they’re like, “I just had this meeting with this LP. They suck. They’re the worst.” I’m like, “That’s my largest LP.” Or they’ll be like, “This person’s so difficult.” They’ll be like, “Oh my god, that person loves my fund. They’ve been super supportive.” And I’m just like...

Turner Novak:

It’s like your mileage may vary.

Charles Hudson:

That’s right.

Turner Novak:

It depends. So did the pitch evolve at all over time? Did you change anything with your pitch, or was it more dialing in on the specifics?

Charles Hudson:

No, I changed one big thing. And I see this less today, but I still do see it sometimes. When I started my fund, it was right when AngelList had started doing SPVs. And I was friends with the AngelList guys. So I went to their office. They’re like, “You know what would be kind of novel? What if you had this small fund and you just ran SPVs?” This is in 2014. “What if you ran all of your follow-ons on our platform as SPVs? You could invite your existing LPs, and we have this vision of eventually bringing outside capital to the platform. It would allow you to keep your fund level reserves low, continue to participate in the follow-ons of your best companies, and then you have economics on this stuff outside of the fund. So you get basically single company, you get an American-style waterfall. You get this better deal over here.”

Turner Novak:

Imagine doing an Anthropic SPV with that, and you get paid to carry it around. Doesn’t matter how the rest of the fund does.

Charles Hudson:

Doesn’t matter.

Turner Novak:

And LPs also are excited with that, like, “Give us some Anthropic.”

Charles Hudson:

That’s right. And I did all that, and it was in the deck, and I went and showed somebody who’s been doing seed investing longer than I am. And all the novelty and the fun, this SPV thing, it was all on the front of the deck. It was the lead. It was, “We’re innovating on the seed model.” This person was like, “You don’t understand LPs. This is gonna scare the bejesus out of them. This is too much innovation, too much novelty.” I was like, “Well, what should I do?” He goes, “Put this in the end, in the appendix. You want vanilla ice cream with sprinkles.”

And I was like, “Oh.” And I didn’t really appreciate what he meant. And I took that first version of the deck to people, and they were just like, “I don’t even know how to explain this to my committee. This is so many moving parts.” I’m like, “Not really. It’s one moving part.” But I was like, “Oh, wow, to you, this feels novel. I think novel is good, and for you, novel is scary.” And it was a good reminder that different people have different preferences. Leading with the novelty was fun for me, but not fun for the audience I was trying to convince to come invest in our fund.

Turner Novak:

Okay. So the first fund was fifteen million. What was the evolution of the fund strategy over time?

Charles Hudson:

Then we did thirty-one, forty-nine, eighty-five, and sixty-six.

Turner Novak:

And over those different periods, did you have any changes to the strategy? Any changes to the LP base?

Charles Hudson:

We had a lot of changes to the LP base. We added a lot of foundations and funds in two, three, four, and five. In fund one, we had a lot of family offices and individual GPs who could underwrite direct deals. So I’d bring them SPVs, and they’d be like, “Oh, that company’s interesting. I’ll put a little bit of money in.”

And then we had all the foundations. They were like, “Hey, no fair. We don’t have a direct team. You should do an opportunity fund.” I’m like, “Would you fund it?” They’re like, “Absolutely.” So we did an opportunity fund. It was really small, because a bunch of my other LPs were like, “Well, I already have exposure to Series A and B companies through other vehicles. I’m with you to get the early stuff. If you need me to do the op fund, I’ll do it. It’s really not my preference.” And I was like, “Oh, I just spent a bunch of time raising this off-cycle op fund that people aren’t as enthusiastic about as I am.”

And then for a while, it was only me writing checks, and then the check-writing team expanded. Those are probably the only meaningful changes. We’re still sub $100 million, still doing predominantly pre-seed with some seed, still trying to get in early. Another lesson I learned, for our fourth fund, which ended up being eighty-five million, my original goal was I want a $20 million breakout op fund, and the main fund should be 65 million bucks. And I went to my LPs, and they’re like, “Please don’t make us take two small funds to committee. It’s so much work.” I’m like, “Well, they’re not stapled.” They’re like, “Thank you for not stapling them also, but please don’t make us take these two things to committee.”

And I was like, “Okay, I hear what you guys are saying. What if I mashed them together and had some liberal but defined and bounded crossover provisions, such that the eighty-five functioned more like two funds?” They’re like, “Much better.” So that’s what we did. And then the fifth fund, I was like, we need to be somewhere between 60 and 75. I don’t need the appendage of a growth vehicle for this one based on what I know about the world. And we also started pre-marketing that fund before SVB crashed. Everyone’s like, “We love you. We have all the money in the world for venture.” Then SVB crashed, and they’re like, “We don’t know if we have any money at all.” And so I went and tinkered with the sizing of our last fund. I was like, “This is a weird time to raise. A lot of people have existential questions about venture and the US banking system. This is probably not the time to force the issue.”

Turner Novak:

That’s fair. And then, are you in this second desert phase? What is the first desert, and what is the second desert?

Charles Hudson:

The first desert is, you’re just trying to stay alive for your first three funds. And there’s all these programs. There’s Raise, and there’s Emerging Managers Circle. There are all these programs that want to help you be successful. There are LPs who have dedicated pools of capital to keep you in business. It’s like being in a warm blanket. People are trying to make you successful. There’s a lot of peers going through the same thing. That’s the first desert.

Turner Novak:

If you get through fund three and get to fund four, you made it, right? It’s over, you’ve navigated it all, and you’re good.

Charles Hudson:

But a lot of that stuff goes away. A lot of your LPs who helped you with the first three funds are like, “Well, that’s the business we’re in. We’re in the one through three business.” Then I was like, “Well, who does four and beyond?” They’re like, “It’s for you to figure out, sir.” And you’re no longer emerging, but you’re not Sequoia. You’re not so established that you’re a no-brainer for people.

And I find when I got to fund four and five, I’d go talk to my emerging manager friends, and their problems were problems of survival, and mine were problems more of scale and growth. And I’m like, “Oh, I remember being really wound up about the thing you’re talking about. It just isn’t my problem anymore.” No shade, I just have different problems now. I have problems of figuring out which people on my team I’m gonna promote, and what I want to do with my LPAC, and what is the longevity of our firm. Taxes. I have different problems now.

Turner Novak:

Yeah, we got distributions. When do we sell? These are good things, like, we’re gonna make a bunch of money for everyone, but man, this is a hard decision.

Charles Hudson:

It’s a hard decision. And then it’s also, I have fewer peers, and the people who had advised me when I was fund one through three, most of them had retired or were far less active in venture. So I’d go to them, and they’re like, “I’m kind of out of the game.” And so you find yourself having to recreate from scratch a community and support system, when there are far fewer people that you know who are still around.

Turner Novak:

So really the challenges just never go away. On the company side, people are scaling from zero to a million, from one million to 10, or 100 to a billion. The challenges are always there, they’re just different.

Charles Hudson:

They’re always there.

Turner Novak:

One last thing I wanted to ask you about. You wrote a post about the last 250K effect. So what is this concept of the last 250 grand?

Charles Hudson:

I started noticing this very strange phenomenon where I’d have these companies and I’m just like, “Guys, you gotta cut burn.” “No, we can’t cut burn. Everybody here is great.” I’m like, “Okay, fine. We gotta cut one of these.” “No, everything we’re doing is needed and essential, and we gotta do it all.” I’m like, “Okay, fine.” Then the company gets down to, I just picked the last 250K because that seems to be about where it happens, and they’re just like, “Oh wow, we have four months of cash left. Okay. We’re getting rid of our office. We’re selling all of this stuff. We’re canceling this middling project, and we’re firing this person on our team who’s not operating, and we’re gonna laser focus and put all of our energy behind this one product we have that’s working.”

And they’re like, “Oh my God, I was so afraid to make all these changes, and because I was forced to, I realized that our company was bloated. This is so much better.” I’m like, “It could’ve always been this way. But you needed to experience this weird near-death moment to get the level of focus to do the things that are necessary for the business.” And I just wish I could get people to have that experience without literally getting down to their last 250K.

I’ve had a lot of founders who, when I posted that, they’re like, “Yeah, you’re right. I thought I needed it.” I was dealing with a founder who has a medium-sized team, and I was like, “You should be able to make it work with a team of this size or smaller.” He’s like, “I can’t imagine these things.” I was like, “If you had to do it, you’d find a way. And the only reason we’re having this conversation is because you don’t believe you have to do it.” And he finally did it, and he’s like, “Oh, wow.” I’m like, “Yeah, those people weren’t bad, you just didn’t need them.” He was conflating, if they’re good, I need them. I was like, “No, sometimes there are good people that you’d love to keep in the org, but you can’t afford them or they don’t fit into the plan.”

Turner Novak:

It’s almost a sense of urgency, where once you get down to the wire, you figure it out. But you weren’t close enough to the wire to have to figure it out yet. So can you get there sooner? Let’s say you have 5 million in the bank, you have 40 months of runway. Can you get there faster?

Charles Hudson:

I have a company that raised $8 million and they said, “Well, here’s what we’re gonna do. We’re gonna put $5 million in this other account over here, that’s our money, but we’re just gonna run the business on this 3. And we’re gonna run it on 3 until we find product market fit and something that’s really growing and working, and only then will we tap the 5. If we cannot find it on the 3, we’ll figure out if we just return the 5 or what we do with it. But we’re not gonna behave as if we have 8. We’re gonna behave as if we have 3.” And it was a little artificial, but it worked for them. They have product market fit now and it’s working.

Turner Novak:

That’s good. I feel like I’ve seen it quite a few times with teams. As they get down to the 250K, it’s not always that number, but all of a sudden it seems like things start to work. It’s because of this weird urgency thing, and you trimmed maybe the worst engineer, or you didn’t need an HR person, or the ops person, and you can automate someone with AI, and you’re like, “Ah, maybe we didn’t quite need it,” and it just magically starts to work.

Charles Hudson:

Shocking.

Turner Novak:

This has been an awesome conversation. Thanks for coming on the show.

Charles Hudson:

Thanks for having me.

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Find transcripts of all other episodes here.

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