Episode #11: Chris Neumann, Forbes, The Economist

If something happened in your ecosystem that makes your startup less attractive, you can't run away from that. The same is true in Venture if something's happening in the macro that maybe imperils your model, you can't put your head in the sand. You have to say, hey, look, it's possible that that's where we're headed, and if it is, what are we going to do? The number one thing to do is to stay alive and have a plan and make sure that you're there when things play out.

It's the week of December 2nd. Welcome to the Learning Corner, a Precursor Ventures podcast.

Welcome to the Learning Corner by Precursor. I'm Mia Farnam and I am joined by our GP and Managing partner Charles Hudson, where we'll be talking through the articles and goodreads that caught our team's attention from the past week. Our first article is by Chris Newman, titled In Silicon Valley, no Answer is an Answer. Chris writes about a unique but pretty well known cultural phenomenon in the tech world, where non responses from investors, founders and partners often carry implicit meaning. The piece dives into how this norm of letting things drift can oftentimes lead to confusion, misaligned expectations and wasted time. Neumann argues that learning to read between the lines and recognize when silence is in fact a form of rejection in some cases, just for now is an essential skill for navigating the ecosystem. His perspectives shift the burden onto the person seeking clarity to take control of their time and energy. At Precursor, we do really try to close the loop on as many conversations with founders as possible, and that's inclusive of the submission form on our website. That being said, there are always cases where sometimes the loop doesn't end up getting closed or an email is is missed and fall through the cracks. That's actually different than what Chris is describing here, where an email is read and there is no response whatsoever. So would love to hear your thoughts Charles, over the hundreds of emails that hit your inbox.

I emailed Chris and told him thank you for writing this post because I think there are like three different things that happen to people in the Valley. One is, you know, people have written thousands of blog posts about how ghosting is evil. And to me ghosting means something really specific. That's like you got multiple conversations in with somebody and they just disappeared on you and you feel like hey, something was happening here, there was movement, but like they just disappeared. That feels, I think, weird. I try not to do that. I would be lying me if I said I've never unintentionally ghosted a founder where I've gotten busy and I've been like, I've meant to write that person back. And just things have gotten in the way that I think people have a justifiable feeling of frustration when you're like, hey, I was three or four meetings in with this person. Whether you're a GP talking to an LP or a founder talking to an investor. It feels weird. Like we had, like, some kind of conversation and relationship and it just disappeared. I think that's different than sending a cold email and hearing no response. Like, I try to get back to everybody who responds to us, even cold. But sometimes I read emails, I'm like, this is so irrelevant. And I don't really think this person put any thought into sending this email. I don't think I owe them a reply. And early in my career, when my bosses told me, it's like, no one owes you a reply. Like, let go of the belief that anyone owes you a reply. They have their priorities. You may or may not fall into those, like, get over yourself. And it was hard to hear. But I'm glad I heard that early in my career. And look, we send a lot of email on behalf of our portfolio companies. You know, they're fundraising and they'll ask me, can you reach out to so? And so I'll send that person an email because Chris said, I'll wait a week or so, I'll nudge them again. And if they don't follow up, I assume one of two things. They have something else more important from their point of view that they were working on, and they didn't feel like it was important to get back to me, or it simply isn't of interest, then they don't really want to get into why. And I've had people like, well, you ping them twice, can you ping them again? I'm like, I mean, I could, but now we're getting into, like, cringe desperation zone. And you're probably actually doing, to the article's point, more harm than good. Just last week, I had somebody where someone had sent me two emails to meet this person, and I'd meant to reply. And in both cases, I got busy. And the person who I supposed to meet emailed me was like, hey, I see we're gonna both be at the same event. I'll just introduce myself there. I was like, oh, all right. Like, problem solved. So sometimes the answer is like, find another way or another channel. Don't continue to hammer the person through the same channel. And if you're Asking people to do this stuff on your behalf, like, let them be the guide. Let them sort of manage those relationships. They maybe have a better context on how often and how much is too much. So I don't know. Like, I think though, yeah, if I could go back in time and undo anything I did in Fund one, I was like the person Chris wrote this article about. I mean, there were LPs, I was like, hey, it's been five times since I've emailed to you and I still haven't heard back whether you're interested in our fund. And of course, if you've emailed somebody five times with no response, that is the answer. And I think in a selling context, you wouldn't get that upset if a prospect just said, like, you sent a cold email to someone you thought might be interested in your product and they didn't reply, you wouldn't be as upset. But I get it when you're a founder, like, you are the product to some extent. And so it is easier to take it much more personally than if you're sending cold email on behalf of IBM and nobody replies. You're like, it's just part of the job.

There are some folks that you really don't want or don't need seeing the sausage being being made. And so if you know that they're not interested in, maybe it's okay to just keep them out of the updates, et cetera, and I'll meet you at a time that I know will be better suited for your strategy. How do you kind of wage that as a founder when you're pre seed and like, maybe I'm not around by the time that I need to come back to you?

Also, I just have come to learn I never know what's going on in somebody else's inbox or their life. And I've sometimes had people who are normally very responsive. I've sent them stuff and they haven't replied and I follow up and they don't. And I'm like, well, that's weird. And then I'll see them two months later and it turns out there was some terrible thing happening in their life. And I'm like, gosh, had I known that, I would have been able to contextualize the thing I was asking you about. And even I would've said this is a lot less important than the thing you're dealing with or trying to solve.

The next topic comes from forbes. It's titled LP Predictions for Venture Capital in 2025. This piece outlines some broader insights from LPs about the evolving VC landscape, including the ongoing liquidity crunch, increased focus on fund manager differentiation, and a sh toward concentrated portfolios. One prediction from the article is that LPs are going to start placing greater value on smaller specialized funds rather than large generalist ones. They argue that focus and expertise will drive stronger returns in a market where capital efficiency is becoming critical. This week you released on your substack an essay outlining three different future states of early stage venture. I would love for you to walk through those at a high level because I know you actually have one scenario that greatly differs from that last takeaway that I just provided from the article about smaller specialized funds rising and larger funds taking a backseat.

Yeah, I'll get to the slide in a second. I read this article, I was like, I hope most of these things are true because it would be great for anybody who's a fund manager if, you know, especially if you're a small fund. If LPs are more interested in small funds and are going to be more active in allocating and care about manager differentiation, that sounds great as somebody who runs a small fund. But you know, we had our annual meeting. I can't believe it's been two or three weeks now. And you know, one of the slides I presented was this three different future states of venture because I think seed is a 20 year old ish asset class. At this point it's very clear to me that the conditions under which seed was created are different than the conditions that exist today. So as I explain our LPs I'm like, Look, historically seed has been this link in the chain of the venture value ecosystem. Seed funds do a lot of the 0 to 1 work predominantly with first time founders. And the Series A funds come and pick from that pool of companies. The ones that have made the most progress seem the most promising or otherwise the most interesting and those companies graduate and move on. And seed funds continue to be to some extent kind of like a finishing school for people who have a rough idea of what they want to build. And it's very symbiotic. The seed funds take a lot of the early 0 to 1 risk. The series A funds harvest the stuff that's winning. It's very beautiful symbiotic relationship. It's great. Doesn't feel to me like that's likely going to be what the next 10 years look like. So I was like, all right, well what could the next 10 years look like? One scenario is big funds and small funds just operate really differently. But there's still some overlap. So, you know, big funds. Now whenever I talk to folks at Lightspeed or Excel or the big funds and I ask them like, you know, what does big enough look like for you? It's really five to $10 billion exits. And we've done enough venture math on Learning Corner to know that, you know, if you've got a multibillion dollar fund, you need outcomes in the 10 to 20 billion dollars range for your 10 to 20% ownership stake to matter in the context of your fund. But for a $100 million fund, a billion dollar outcome is great. A couple of them is phenomenal. But a billion dollar outcome doesn't really help a $5 billion fund solve its problem. So I was like, what if you end up with a universe in which there are small funds that are happy with a set of outcomes and big funds which need outcomes that are almost an order of magnitude bigger. And we're all venture capitalists, we're all in the same industry, but we have really different business models. And this notion that seed is a finishing school for series A for the big fund down. And there's sort of two different venture ecosystems that operate really differently. But the third one, which I'll admit as a small fund manager was the most uncomfortable to examine, but you can't run away from things that are scary, is what if big funds just take over the seed business? You know, most multi stage funds have seed investing programs that are bigger than most seed funds. And my presumption is they can raise those funds whenever they want. And to me what that means is big multi stage funds are a permanent fixture in seed. They're going to be here as long as they want to be here, and they're going to probably start cherry picking more of the repeat founders, the proven folks, people who don't want 1 on 5, but who want 10 on 50. And the big funds can write that check. And I'd argue most seed funds cannot build an entire portfolio of 10 on 50 entry point investments. The math just doesn't work. I talked to an LP who told me, well, what if all of the returns come from repeat proven founders? I was like, well, if that's the case, if that's your belief, you should actually only allocate to the big multi stage funds. Because my belief is they're going to capture a disproportionate share of those founders, in which case you're left with a world where smaller seed funds are fighting over a much smaller pool of alpha and it becomes much harder to make the argument that smaller funds have a role in the EcoSystem from an LP standpoint, when you can capture most of the gains of seed by giving your money to a big fund. Now look, I think there's a big difference between 0% of the alpha and seed coming from repeat people at a hundred percent. I don't think either of those extremes is right. But the closer you get to 65, 75% of the dollar returns in seed coming from the pool of people that are likely going to be attracted to multi stage funds, the harder the case is to make for being a small seed specialist manager. And I think in the same way I would tell the founder, hey, if something happened in your ecosystem that makes your startup less attractive, you can't run away from that. The same is true in venture is if something's happening in the macro that maybe imperils your model, you can't put your head in the sand and you can't also wish it away. You have to say, hey look, it's possible that that's where we're headed and if it is, what are we going to do? So you know, I have lots of thoughts about what we would do if it turns out we're in some combination of world two and world three. And the number one thing to do is to stay alive, is to stay alive and have a plan and make sure that you're there when things play out just like it is with a startup.

One of the quotes from Integra Global Advisors was 2025 will be one of the best VC vintages in many years. While in an aggregate on an index level I can get on that training. I do feel like we're missing some caveats here that could quickly shift how successful your fund could be even if you start in a really favorable year for fund managers. So would love to know what those could be from your pov and I feel like we touched on a little bit of those in your last response.

I also think like this whole notion that 2025 is going to be a great vintage year, I'm like, I think every year is going to be a great vintage year. I'm an optimist. But you don't know for seven to 10 years. So I actually don't know what you do with that information. If someone says 2025 is going to be a great year, I'm like great, you should allocate now. But you're still not going to know for seven to 10 years. I think the biggest delta for the 2023 to 2026 vintage funds, I think is going to be what happens with AI. If you just look at the amount of venture dollars that have gone into that theme and you know me and Mia, I'm not a thematic investor. I think we're basically the venture business is leveraged to AI right now. If AI turns out to produce tons and tons of winners or even a few mega winners like OpenAI or Anthropic, it's very possible that like those will look like great vintages. If it turns out that AI doesn't perform to expectations. There are so many venture dollars crowded into that theme, I'm not sure how any of those vintages look great at an index level. So it's funny, I think a lot of people said 2024 is going to be a great vintage because it's so hard to fundraise. And I'm like, but if everyone thinks it's going to be a great vintage because it's hard, people still have to allocate.

Final topic is an article from the Economist. It's titled Has Sequoia Capital Outgrown Its Business Model? The article examines how Sequoia, one of the most iconic names in venture, is adapting to a vastly different competitive landscape. It highlights the firm's efforts to return to its roots, focusing more on early stage investing while grappling with the challenges of maintaining its dominance in a market flooded with new entrants. The piece notes quote, the number of smart founders is not a function of the amount of money available. I think you actually said something quite similar a few podcasts ago. This highlights the increasingly crowded field of venture capital, where firms vying for a limited pool of high quality opportunities. To combat this, Sequoia is deploying a handful of strategies like scaling down its international operations, doubling down on initiatives like Ark, its startup school, and more. So whether or not you believe that Sequoia should feel like they need to make massive changes to stay at the top of their game. On a more general note, it's clear that venture firms adapt in cycles in response to market shifts. I feel like we're probably experiencing one right now, as opposed to being more proactive and being more adaptable and knowing that we can't be comfortable forever. So from your perspective, Charles, this ties into something that you were alluding to in the last topic. What are some of the things that precursor maybe had to embrace or deploy to continue growing irrespective of a turbulent market?

Yeah, I mean, look, I would never bet against Sequoia. They're incredibly good at what they do. They've been very good across generations for a long time. And whenever I talk to the partners there, they have almost maniacal paranoia about staying on top. And I find when you have a maniacal paranoia about staying on top, you tend to adapt and change and be aggressive. And so I would be the last one to suggest that Sequoia's in deep trouble. They're quite good at what they do. But I do think that line you mentioned for me is the fundamental question I have about venture right now. As more money floods into this asset class and as more money gets concentrated in a smaller number of companies, I think that the number of really successful people who start companies is an independent variable to capital. It'd be great if just pouring more money into venture meant more smart people would have good ideas. I think it's the other way around. I think in general it's money that chases good ideas, not money that creates good ideas. I think a lot about our firm 10 years ago, simply being a pre seed focused fund was a differentiator. It isn't anymore. There are lots of other people who've recognized that pre seed is interesting. And so we've had to broaden the way we talk about what we do. And we do some pre seed and seed now, whereas in the beginning it was mostly pre seed. I would say in the beginning I didn't feel like we needed to spend as much time with repeat founders because I didn't think that was our thing. And I was pleasantly surprised by the number of those folks who were interested in taking our capital. But those investments happen on prices and terms that are very different than our core model. And getting comfortable with that idea took me some time. There's been a lot of things we did ironically that people do now. We started doing 30 minute video or phone meetings only as a first meeting, I want to say in 2017 and 2018. And that that was largely because San Francisco traffic was so bad that asking people to come to Union Square, where our old office was, didn't make any sense. So I was like, let's just do the first one. And our LPs were like, how can you get to know people on the phone and on video? It's like, it's what we do. And we started doing fintech in Africa and a lot of LPs were like, Gosh, I don't know. How do so I don't know. I think you have to always ask yourself, like, where are the opportunities? And like, what are the things that we could be doing that we aren't doing and why aren't we doing them? I think nowadays on the one hand precedes a lot more competitive than it used to be. But I'm also like we've been doing it long enough that we have a pretty good brand. So I'm glad we started 10 years ago. I tell a lot of fund managers I couldn't pull out the deck we used for precursor 10 years ago and raise on that deck today because the world is different. To raise a brand new fund today I'd need a really different story and approach than we needed 10 years ago. And the irony is like the reason it was a great idea to start 10 years ago is because most people thought it was a bad idea to do pre seed. So I'm always asking myself like what are the things that other people think are bad ideas today that will feel like good ideas in a few years? And that's also like the website submissions. A lot of people are like why would you spend time on that? I'm like well because eventually if we can get good in convincing people that applying on the website gets real eyes on your business plan and you could actually get money that way, it basically uncaps the number of people we can meet top of funnel. And a lot of you are like well I don't want to deal with cold website. I'm like great. By the time it's important to be good at it, we'll be good at it because we've been working at it for many years now. And I'm always asking myself like what are the things that people think are like not important or not good ideas today that three to five years from now you'll want to be good at.

The article also mentioned Sequoia's attempt to build deeper founder relationships through programs like ark, which is their startup school. So it's very common for multi billion dollar funds to have accelerators and incubators and studios within the fund. But do you think that this high touch hands on approach is a necessary component for all types of VC funds to stay competitive in the earliest stages?

I have sort of a weird view of how competition works in venture. I think most people in venture compete with a really small set of people that they consider to be their peers and the rest of the industry to them is noise. And when I talk to people at the really large multi stage firms, while they're theoretically concerned about smaller seed firms that are nipping at their heels, they spend most of their time worrying about are we beating our peer set of firms for the most competitive. So, you know, if you're at lightspeed, like, am I beating Index, Excel, Greylock and Sequoia for the deals I really care about? Because when you lose at that level, that's generally who you lose to. And so my belief is that, like, if firms at that level feel like they want to make investments in these programs, I think it's only to attract a really specific founder archetype and one that they feel like having this program gives them an edge. I mean, that was the whole original thesis for these platform teams, is that it would give you either a marketing edge in winning deals or it gives you a post winning improvement in your odds of success advantage because your platform team would help those founders, you know, solve problems or whatever. And it almost doesn't matter which one of those things is true. It could be either or both. I think there was a window of time where having a platform team if other people didn't have it, was an advantage. Now they all have them, so they're table stakes. You don't get bonus points for having one. And so I think, like Andreessen's got Speedrun, Sequoia's got Ark. I think there's always going to be an arms race for the big funds to figure out what can we do. Some of them have technical fellows. Like, there's always going to be a desire to get in front of the top 1% of founders and to build that relationship three to six months earlier than your competitors and to build it deeper and better. So the fact that they're, they're continuing to innovate tells me that they feel like they can't be complacent.

Well, we are all out of time today. Thank you, Charles, for joining. Thank you to our listeners for tuning in. Please like and subscribe and we will talk to you all next week. Thank you. Bye.