Are You an Option or a Bet? Menlo's Venky Ganesan Admits Seed Is an Option

We've always been a low ownership, high upside firm. And for a long time, the seed people were like, nope, gotta have 20% of the company, otherwise can't do the deal. Business model, portfolio construction, let me show you my spreadsheet. Now people are just like, well, if the companies are big enough, it's more important to be in them than to worry about how many basis points of ownership you have. And I think this is the biggest change in venture in my career, which is that There's really just one model in the business right now, which is it's sort of $10 billion company minimum or bust. If you can't demonstrate to people that you have one of those, the probability that you will raise more money to keep going is incredibly low.

It's the week of October 5th. Welcome to The Learning Corner, a Precursor Ventures podcast. Welcome to The Learning Corner by Precursor. I'm Mia Farnham, and I'm joined by our GP and managing partner, Charles Hudson, where we will be talking through the articles and Goodreads that caught our team's attention over the past week. Our first piece this week is a post on X from Steve Bizzallo over at Foundation Capital, and the idea is that every startup obsesses over its cash runway, and the clock it actually should be watching is its relevance runway. Plenty of companies right now raised a big round a couple of years ago and have years of cash on paper, but the race they're really in is against becoming irrelevant, and that is more pressing than any financial pressure out there. He points to data integration and workflow tooling, a layer that got heavily funded over a 2 to 3 year window with products that were best in class when they shipped. And now a customer can get a good enough version with a few prompts in Claude or Codex. His advice comes in 3 parts. Decide honestly where you are staying independent and find a home while there is still a buyer if you cannot see a path back. Or assume you will have to reinvent the product more than once, even past $50 or $60 million in revenue, and rebuild the vision because cash buys time, but it does not buy motivation. He closes with the statement that nobody can tell you how long your relevance runway is. Figure it out before your best engineer does. Steve, in this piece, is likely writing a bit to companies sitting on a lot of cash from 2021 or 2022. Charles, how does the relevance runway idea apply at our stage, at the earliest stages? I know we've been talking a lot internally about the importance of velocity and iteration speed more and more with our founders at earlier stages.

I think it's really important at pre-seed and seed, everything pre-Series A, because I think a lot of those companies are like, oh, I have a lot of money. I don't need to worry. I have 3, 4, 5 years of runway at our current burn. And for a lot of these companies, people are the primary expense. So if you have a small team and you don't have some crazy inference or compute spend, you know, a $2 or $3, even a $5 million round, you might have multiple years of runway, which I think can give companies a false sense of security. You can just say, oh, well, we're not gonna run outta money anytime soon. And, you know, a long time ago I wrote that thing about like the last $250K and how short financial runways can actually drive people to have a level of urgency around solving a problem that doesn't always exist when you feel like you have time to solve it. And I've certainly met companies that Raised a lot of money on one premise. That premise didn't prove to be true. And they've kind of continued to either chip away at the same problem or something else. And I'm like, guys, the market has moved on. Yes, you have runway and you have time, but that money has no insights. That money and runway can't and won't tell you what you should do. It's just the opportunity to stay alive. And for a lot of companies, I'm like, staying alive isn't the goal. Building something meaningful is the goal. And if you're not careful, you can miss your window. Or the market that you're in can move without you.

I like that quote that he said, and you touched upon it just now, cash buys time, but it doesn't buy motivation.

Yeah.

Steve talks about people who can pull off a reinvention on your team. So stay at that $250K moment are likely the same people who have options elsewhere. And so I've had that conversation countless of times with founders who assume that once they've raised a specific large amount, talent will come. One, that's, that's not true. Not in this market. And then 2, perhaps you can attract them to your team, but you have to incentivize them to stay. The question becomes, how do you instill that? Risk in founders is another reason why it's important to stay quote unquote relevant without bleeding over into some of the performative things that we talk about all the time as well that feel ingenuine or poor use of time. Like there's this balance between, I think, relevance and then performative behaviors that are just a waste.

I think there's this really interesting balance between knowing where the market that you're going after is. And like one of the, one of the things that I see happen is people are working on a problem. We'll take personal assistance as a relevant current example. I think there were a lot of people who were like tinkering with ideas at the margin and were building things and they felt like they had a lot of time before they needed to deliver on a product. And then Instinct and Muse come out and you're like, okay, well now there's no more time because you have 2 companies that You know, by all accounts are growing very quickly and people's perception of that category has changed. So if you were like, oh, personal assistants are 12 to 24 months away from being relevant and useful, well, that day is now. So if you had a plan that was based on you having a lot more time, that plan has to go out the window. And if you're not one of the people that's already scaling and you've been tinkering or chipping away, I think it's going to be hard to break through. And I could name 8 or 9 other categories where all of a sudden they become hot, capital flows in, and there are companies that have the resources to continue on that path.

Yeah.

And if you're not one of those companies, you have to ask yourself, like, how am I going to respond to this moment? And what am I going to do? What are we going to change about our strategy to remain relevant, which is different than being like financially viable? And I think there's a lot of companies I meet who are just like, oh, well, the fact that these other companies in our category have raised a lot of money changes nothing. I'm like, no, it should change something. Doesn't mean you have to go copy them, but it like the dynamic in your market has suddenly shifted and changed.

And in some ways, we've talked about this a lot when there are new emerging markets and People are engaging with tools and technology in a way that they haven't before. Some of the first companies that come out with the biggest splashier rounds are maybe earlier indicators of how people start interacting with those types of tools, and there are learnings that are taken from them. So they're not always the biggest companies in the end, but it doesn't necessarily mean that if you were building and you're not one of the hyperscalers, you get to kind of tinker alongside them. I don't know if that's the best use of time.

Yeah.

There could be a scenario where in a couple years, We pop out and we're like, wow, we learned a lot about how consumers interact with personal assistants. And like, we got, we got that wrong with the biggest companies. We talk about Webvan and Instacart back in the day.

Yeah.

Like, it took a couple other things to fall in place for mobile to be the place that people felt comfortable about ordering things right away. Here I could see similar realization, but if you've raised a small round trying to attempt to do the same thing, you don't get to buy 48 months of runway. Like you have to really figure out and have that conversation with yourself and your team.

I mean, the principal advantage most startups have is speed. And if you think about it in some ways, like speed and runway are in like, there's like a tension between those 2 things. Speed gives you the impetus to move quickly and get more done and to be fast. And runway gives you in some ways the comfort that you have time to plan and be patient. And I think runway is really, really useful post-product market fit. Because it allows you to make the kind of investments you have to make to scale. And in some ways, I've always felt like there's the optimal amount of financial tension in an early-stage startup. And I think pre-product market fit, it's somewhere around 18 months is actually the optimal amount of tension. It's enough that you don't wake up every day thinking like, oh my gosh, am I going to be able to pay my team tomorrow? But it's not so much runway that you're like, oh, we have time. And I think in startups, you never know how much time you have because the market can change. And particularly in this era, the bigger thing, the reason I really like this post is like relevance is the issue. People's attention spans for problems are really short. And we go from talking about RAG to reinforcement learning to inference, the harness, like people get fixated on new things and they pay attention to them for some short period of time. We'll call it a quarter. And then something new captivates their attention. So when like the market begins to get focused on the thing that you're doing, it really does help to be ready. I worry much more about companies that have too much runway as opposed to the ones that have too little. The ones that have too little always have urgency.

Yeah.

Because they're staring down the barrel of like the end. Right. And the ones that have too much, I worry sometimes they just get too comfortable or they think that like the market will move at the speed that they want it to, not the speed that it's actually moving.

The last piece I wanted to talk about here was Steve's point on this is the one of the best M&A markets he's seen in years. And you can't see kind of that path back to relevance. You should try and find a home while there's still a buyer out there. It's such a difficult conversation to have with founders. And also the reality is for most of those situations, if you can't find a path back to relevance, the acquisition path is gonna look a little bit less juicy than likely the last valuation that you raised at.

Yeah.

Wanted to ask you, what have those conversations looked like? What's the right timing around those? We've talked a lot about you definitely can't fundraise and look for an acquisition at the same time. Can you seek out relevance and M&A opportunities at the same time, or You think about that in a similar way?

It's a, it's a good point. I think at some point you have to decide like, hey, do we have an independent go-forward company? Yes or no? If the answer is no, then the question's like, well, is there somebody who would value the team that we have? And I do think if you're working on problems that feel relevant in the moment, the surface area of people you can talk to is just much greater. But at the stage where we operate, pre-seed and seed, I think most acquisitions tend to have more to do with the relationship between buyer and seller. How well do those companies know each other? How well do those teams know each other? Because usually you're not buying revenue. And you're rarely buying like a product capability that's like a must-have. Usually you're like, oh, these people would be valuable to us as part of our team, either because of their like innate ability or because they've worked on a really relevant problem. And we're, you know, they worked on image recognition and we're trying to scale up our image recognition team and picking up this team of 3 people is a fast way to get scale. But I think when you're working on problems that aren't as relevant, not only are there fewer buyers, oftentimes those buyers also know that they're not as relevant. Their ability to pay is limited. And so I think in startup land, I think we're getting a crash course in how quickly quickly markets can move and things that were once super important problems can become trivial overnight and things that weren't even on people's radar screens can pop up and become massive markets. So I think we're in one of these eras where timing really does matter.

If we're using that logic, if it's early and you're approached by a potential acquirer, do you consider that acquisition more than you did like 3 or 4 years ago just because the window of sensibility over time closes a little bit quicker? Like I could imagine, and I'm talking more about the acquirers that like The larger scale, someone who's like, listen, if I don't acquire you, I'll go down the block to your competitor. Do you think people have to think about that a little bit more than they did years prior just because the pace of change is so quick?

I think Jason Lemkin is probably the person I've seen write about this the most. I do think startups have this idea that like, oh, well, acquirers are interested in us today. If we just keep going, we can revisit this conversation in a year. But maybe you can't. Maybe they, maybe the company that's talking to you will have solved the problem either through acquiring somebody else or through their own capabilities. Or more importantly, maybe the problem you solve will go from being the number one problem they have to the number 5 problem. And they're just like, well, we don't need to buy, or we don't need to buy a solution to our number 5 problem. It can just remain the number 5 problem and we'll just deal with it. So I've seen a lot of companies where you get one M&A offer or you get a series of interest and the company's like, well, we're going to keep going. We'll revisit it. And the next wave of offers doesn't come for several years, if it ever comes again. And so I always tell people, the most dangerous thing you can assume is that because people are interested now, They will remain interested. And that again, that you dictate the timeline and that if you decide, hey, this isn't something I wanna pursue right now, if you continue to grow and remain relevant, sure, you'll continue to get other bites at the apple. But for many companies, that's not what happens. They have a moment and if they don't seize it, it's really tough.

Well, our last Need to Speak, because it is just such a big one, there's just so many routes we could go with, is the 20VC episode with Benkie from Menlo Ventures. It's been making the rounds on X. Lots of discourse in different directions. While the interview is an hour some, notable moments where Venky's framing is that you have to think about the venture portfolio as a bunch of options. Every seed check is an option bet to see if a company is outlier. On ownership, he would rather take 2% of a trillion-dollar company than 20% of a $100 million company, which is what Mello did with Anthropic. Venky expects that if this cycle cracks, it will do so on a major debt-free default rather than equity market markdowns, and he thinks venture now has to Beat the public index by a thousand basis points because every startup pays a tax to Nvidia, the hyperscalers, and the model labs—all of which an LP can own with no fees and no carry. There was a ton of commentary on this episode, and I know Harry tagged you on X Free Forethought specifically, especially when they talked about seed and how it's structurally changed bigger funds just coming earlier. Specifically during the portion where Venky admits Menlo is somewhat indifferent to seed valuations because they're buying a seat at the table. Which Harry admitted in the podcast that this game is making his job harder as a smaller fund. Yeah. Venky upfront calls seed an option bet. And then I'm even gonna reference like Sarah Guo even piped in on X, strongly disagreed with that strategy herself. Obviously wanted to pause here for your thoughts on the episode itself, those portions specifically.

To me, it's like really this whole conversation is fascinating because when I first got into seed investing, the big multi-stage funds vigorously denied that seed investing was— and like, there was a whole narrative, which is, which was like, hey, if you as a founder really care about signaling risk, this notion that if Menlo does your seed and doesn't do your A, it's going to create problems. So to avoid that problem, you shouldn't have big multi-stage funds in your round early. It's dangerous for you as a founder. That narrative worked for a long time. And then I'd argue maybe 5 or 6 years ago, coming out of the pandemic, it Stopped working. I think a lot of founders were just like, either I don't care about signaling risk or I don't believe that it exists. And I think though, for a long time, there were a lot of multi-stage funds who were just like, nope, seed is not an option. It's not spray and pray. We care deeply about our seed investments. We try to treat them like first-class citizens in the portfolio. They said all the right things, whether they believe those things or not. And Venky's just like, let's just dispense with the notion. These are bets. These are bets. I think it's been true for a while. And I think we're in a place in venture where it's no longer heretical to say that. And I think part of it is when I, when Harry wrote that post and it asked me like, what do you think about seed as an option? I'm like, the customer for the seed round is the founder. There was a moment in time where founders really cared about the signaling risk and there was a strong preference to have seed specialists leading that. Like there was a moment where that was the case. I don't think that that's the case universally anymore. I think there are some repeat founders who are just like, I'd rather have $10 million dollars from Sequoia and be left alone. That's actually what I want. I know what I'm doing. I know how to get in touch with them if I need something, but I don't need all of the architecture and support of a specialist firm. I want world-class people to judge that I have a good, a good team and a good idea to give me capital. And if for some reason I don't build a company that's worthy of clearing their Series A bar, no one should fund it. That's the answer. I don't want to go find somebody who wants to give me a chance to keep going. If I can't clear their bar, so be it. And by the way, if I do clear their bar, they have the infinite money machine for me. I don't have to worry about financing again. And I think that's been a big shift, but that, that started happening 6 or 8 years ago with repeat founders who just said, I don't care about this signaling risk thing. I don't care about any of this other stuff. This isn't, this isn't my issue. I'm glad Venky came out and said it. The other thing that like made me chuckle is, you know, we've always been a low ownership, high upside firm. And for a long time, the seed people were like, nope, Gotta have 20% of the company, otherwise can't do the deal. Business model, portfolio construction. Let me show you my spreadsheet. Now people are just like, well, if the companies are big enough, it's more important to be in them than to worry about how many basis points of ownership you have. And I think this is the biggest change in venture in my career, which is that there's really just one model in the business right now, which is it's sort of $10 billion company minimum or bust. If you can't demonstrate to people that you have one of those, the probability that you will raise more money to keep going is incredibly low. There's just like very little appetite. And, you know, 12 years ago, people would have been excited for a $1 to $2 billion company. And now people are just like, well, that's a Series A or B stage company, depending on the category. That's not the game we're in. And I think it's very hard for founders to envision what a $5 to $10 billion opportunity looks like if you haven't been around one. Because that's been my experience.

And along that ownership piece, in the podcast, it was interesting watching Harry and Venky joust about ownership and their perspectives on it. Harry kind of like said out loud, like, it just feels like ownership's kind of out the window, don't you think? And then Venky did push back saying like, no, you still want ownership early because it is insurance for mid-sized outcomes. And once a company is an obvious outlier, there's no alpha left. It's just position sizing. And I appreciated Harry pushing back and saying like, do you care about mid-sized outcomes? Is that something that you're even interested in? What are your thoughts here? Is it mostly hindsight bias too?

Also, I think one of the big things that's changed in the way that multi-stage funds approach seed is in the, like, before times, not only was it spray and pray, it was spray and pray with small checks. It was like, oh, we got $100K from a scout at this big funder. Oh, we got a $250K check in a $2 million round. And so those firms were also buying relatively small ownership. So, so maybe to some extent, The signaling argument was at least intellectually consistent. It was like, why would you take a little check from a big fund where their presence on the cap table is going to influence the way people think about your company? Now, at least when I see the multi-stage funds show up and seed, they're buying like 10 or 15% of the company. They're buying a lot. And I think the question is, as a founder, how do you feel about your largest shareholder being indifferent to outcomes that could be life-changing to you? And I think if they're just indifferent, maybe it doesn't matter. If Venky or whoever it is just says, I don't, Really care if you want to sell this company for $100 million. You have my blessing. I won't give you any more money to get there, but I certainly won't stand in the way. Is that the worst thing in the world if you're a founder shooting for a middling outcome? Where it becomes, I think, a problem is if that person gives you a bunch of grief about the fact that you're not Anthropic, or if there's a small outcome that you want to achieve and the person says, no, keep going. I mean, you can do what you want, but our firm will be disappointed in you if you don't find a better idea. I think there's the pressure of the weight of capital. I think if you have a $2 to $3 million experiment and it doesn't work, 2 years later, you're onto the next thing. If you raise a $10 million seed round, you're probably gonna work on some version of that company for more like 3 to 5 years. And entrepreneurial lifetimes are finite. You only get so much time.

And I would imagine because there is more private capital in the market than there was years prior, even if Mamo or another mega fund doesn't come into your round, you will find somebody else to fund you in some capacity after, whether or not there, there's signal attached to that. If you wanted to continue your journey tinkering around, you likely could because Yeah. People are hovering around the hoop in a way that they hadn't prior.

And to be clear, I think most of this discourse about multi-stage firms investing in seed is primarily about consensus founders or consensus categories. I think those firms would push back and say, no, we do everything. I tend to find them showing up the most in the things that have momentum or in the people whose backgrounds are easy to underwrite. So I think the silver lining for other people is if you're, if you're in the, we want to fund consensus founders in consensus categories in seed business, that business has been getting harder and harder every year for a decade because the multi-stage firms feel like they want to be a part. If you're willing to look to the left or the right of consensus to find different profiles, I find that there's less competition there.

Yeah.

Now those companies are sometimes harder to finance. They're hard to get people excited about, but if they work, they can easily rejoin the mainstream later. So I just think to Harry's point, yes, seed has gotten harder because the multi-stage firms have adapted and they're like permanent players in this category.

Last piece, and it was a good soundbite from the podcast. Benji says Menlo's going for broke, like they're going all in, they're throwing everything basically in one direction to be one of the biggest players to ever sit within venture. Do you feel like the going for broke approach applies to everyone now in venture in a way that maybe a couple years ago you would've said like everyone can kind of have a different strategy? What's your reflection on that statement?

This is the most concentrated version of venture capital I've ever seen. Both in terms of capital and attention focused on a pretty narrow category. I'll never forget this. I won't name the person who said it. I was hanging out with somebody 12 years ago when I was first getting started in Precursor, and I was telling him about our strategy. And he goes, you know, I have a friend who invested in 3 optical networking companies in the dot-com boom. And he named it. They were all big outcomes. And he's like, that guy was never right about anything ever again in his venture career. And it didn't matter. I'm like, what do you mean? He's like, well, those outcomes were so massive and so large that like, it didn't matter that he never found a second thing. He was so right about one category in one moment that he's done for generations. And that's always stuck with me. And I think there's a lot of people right now who are looking at AI in the same way and saying, if these companies turn out to be what we think they are, there's nothing else that matters. There's nothing else that will matter that we could be doing now and probably Candidly, there'll be nothing else of this scale that we could do in the future. And I said this to our team this week. I give Menlo a lot of credit because I think the strategy that they employed was largely available to anybody who wanted to take it at the time. There were lots of other venture firms who I think were trying to figure out, hey, like, how do we, how do we make ourselves even more relevant than we are today? And it, and, you know, I think they decided, hey, AI is a big theme. We could remain the Menlo of old, or we could go all in on AI. We could try to get into one of the most You know, I don't think most people really thought Anthropic would end up being as consequential. I wouldn't even ask, I wouldn't even ask them to tell me that they thought it would be this consequential. That's not the point. I think they made the decision that like, hey, we're going to bet the firm on this AI thesis. If we're right, we're kings. And if we're wrong, we're probably actually no worse off than we were before, which is a fund that's going to have some storytelling and some work to do to continue to exist. And I give them a lot of credit because I think there's probably dozens of venture firms who are looking at the same fact pattern. And Menlo chose to do what they chose to do. And others didn't. And so I think it is also important to remember in this business, and I think it kind of connects with some of the things we were talking with Rob Go about in the previous episode. If you don't like the position you're in, you should change it. You should change something about your strategy. You should change something about your firm. You should change something about your approach. And as much as I like joke with some of my friends who are now deep tech, hard tech, defense tech specialists who used to be in something else, I'm like, at least you've recognized that the times are changing and you should change too.

Well, we are all out of time today, but thank you, Charles, for jumping in. Thank you to our listeners for Thank you for listening as well. Please like and subscribe, and we'll talk with you all next week. Thank you.