Episode #13: Rob Go, Zain Rizavi, New York Times

I think it's also important to remember founders choose firms, but they also choose people. I tell people they go, there's so many venture firms out there, they go. That should tell you a lot about the level of satisfaction that founders have. The fact there are many firms tell me how frustrated many founders are with the choices that are available and they.

Want more choice it's the week of December 16th. Welcome to the Learning Corner, a Precursor Ventures podcast.

Welcome to the Learning Corner by Precursor. I'm Nia Farnam and I'm 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 over the past week. This is our final episode of the year and we're lucky enough to film it in person thanks to the ALECOR team who generously loaned us a conference room in New York City to film at Topic number one Repeat Founders and the Risk of a False Positive While repeat founders certainly bring experience in pattern recognition, the article highlights some critical learning moments and inflection points that are oftentimes overlooked by repeat founders and the investors who back down. Therian's founders are typically always sought after in the venture ecosystem, but with the influx of capital into AI innovation, this group is being handed even more capital with higher valuations out of the gate in hopes that investors can gain a competitive edge and a quickly evolving landscape. The piece calls out an important dynamic quote, money that is too easy to come by and is actually thrust upon you when you aren't looking for it can lead to a trap of early false positives. What may seem like a high class problem can become a nightmare as you find yourself stuck with an okay but not great idea and the burden of a company that you aren't that excited about building. So I thought this piece was a really refreshing reminder that venture is still a game of evaluating opportunities, not just resumes. The repeat founder advantage is really real, but this there's no shortcut in validating the actual business idea in market. So Charles, as someone who evaluates repeat founders and first time founders all the time, how do you approach the risk of false positives and differentiate between founder risk and skill versus situational success?

I'm really glad Rob wrote this article. I think one of the big themes in venture right now is just the over rotation towards either repeat founders or people who are super early and well known tech companies. I think we're kind of overdoing that theme right now. About 2/3 of the founders who back at Precursor are first time which means a third of them are repeat. And a couple of things I think one of the big things you get from repeat founders is at least they've gone through the startup journey. Once they kind of know about incorporation, they have some point of view on people. Usually the pace doesn't scare them. They skip a lot of the very obvious first time founder mistakes. And that's nice. Couple of things I've observed. One is the more successful the founder, I think the harder it is for people to say that Ember has no clothes when it's not working. I've had repeat founders, founders in our portfolio. I've talked to and I'm like, well, is anybody helping you? And the essential TLZR message I've gotten from them is Luma repeat founder. They assume I know what I'm doing. And I think sometimes people forget that a repeat founder is always a first time founder in the new company that they're starting. It could be the same people, it could be the same space, but it's a brand new company, it's a different market at a different time. And we have lots of repeat founders in our portfolio and they need help too, but they need help on different things than the first time founders do. I also just think depending on the zone or the area, the person's biggest experience may or may not be a huge asset. Have one person who's built three companies in the exact same category, I think it's pretty helpful to have that context and to know the people in the ecosystem and to know the tech. We also have some people who've pivoted from B2C and then gone into B2B. And some of that translates and some of it really doesn't. So I understand the lore of the repeat founder. You tell yourself a story that this person learned a ton, they're not going to need as much help. They're going to be better because it's their second time. But the idea still has to be good and the person has to be the right person for it. And I think some of this occasionally if you're not careful, can be. Well, if this doesn't work out, at least I have a really clear narrative to tell people, which is, hey, was a repeat founder or was employee number two from SpaceX? What was I supposed to do? They answered is you're supposed to find people who are successful.

The article closes with some recommendations for repeat founders in the market, suggesting things like continuing to monitor burn, keeping a high bar for product market fit, seeking out investors who are willing to Go along with the journey. And lastly, kind of what you just said, being able to pull the plug early, I feel like these are also the same things that we would recommend to first time founders. So I was curious, what are the differences that you might give from a recommendation point?

When you're a repeat founder, people have expectations for you that are different. People are like, oh, this is so and so you did this other company and they were successful. And people's expectations for you can be this way that I see repeat founders have. So you have to do something that was bigger and better than the last thing you did. Even if your last company was a public company, like heavy savvy, how do I top that? And the idea I have has to sound big right away. And I think one of the nice things about being a first time founder is nobody puts those expectations on you. In most cases it's like, do your best and like, whatever you can do. And so I found founders, sometimes when it comes to idea selection with a repeat, they pick things that are impossibly large. I'm going to redefine real estate. I'm like, well, real estate's like a gigantic category, but what are you going to actually build? I'm going to try to do everything. And because they get more resources and because people put fewer bumpers around them, the burner usually gets higher, the team gets bigger, they take a bigger swing. And I'm just like, that's. You can't. There are no shortcuts. As article says, you have to find the idea, validate it, build it, scale it. And so we've become quite empathetic to VP founders and the pressure that the ecosystem puts on them.

Is it the founder's responsibility to look inward and think like, is this actually the market I want to make another splash in or is it the investors?

I think in a perfect world, there's a conversation that goes on between both parties, like, hey, is this working? I do know investors who are afraid to criticize the feed founders or even suggest that maybe it's not working.

The dynamic completely switches.

Yeah, they have, they have a lot of power. And also we're just in a world where there's so much capital, people are getting thrown money, including by us, sometimes before they've really figured out what it is that they want to do. And in that dynamic, if someone's like, here's $10 million, you figure it out. You're like, well, I don't know what I'm doing. They're like, I don't care. Here's $10 million for you to figure it out. That's a lot of pressure. And you know, I've I've seen people who've gotten $2 million in and said, I don't have an idea. I'm like, give the other eight back. It used to be normal to just fold. Hey, we tried. We don't have another good idea. Rather than doing some wild pivot, we're going to give you the money back and we're going to go off and find a new idea we might come back to you with, but we're not going to just burn down the rest of the cash in search of something interesting to do.

The next article comes from indiscreet musings titled Invest first, Investigate Later. The article references legendary public markets investor Stan Drunkenmiller famously followed conviction as opposed to an extensive deep diligence run to buy a large stake in Nvidia. Prior to the zeitgeist of ChatGPT and AI, the prioritization about opportunism allowed him to make significant gains before others could, knowing that if a broader sentiment had changed, his fund could always sell. The article goal goes on to highlight this clear divergence between private and public investing. Quote Once a venture capitalist commits, there's no selling out of a position. If the thesis unravels, the capital is effectively locked for the duration, amplifying the consequences of rushed decisions driven by speculative mania rather than substantiated insight. This article is such a sharp reminder of how fundamentally different venture and public markets are. In public markets, you can make quick trades, reassess daily, and cut your losses. In venture, with the exception of the Secondari conversation which we've had, you're making decade long bets for AI specifically. It's clear that there's tremendous value here. We just can't say specifically where from both a scale and durability perspective. So I was curious to know what resonated the most with you on this essay.

I've told a bunch of people the core of this argument, which is that in venture you're long until the company goes public or goes out of business. You're sort of stuck with these assets. Everyone's like they're secondaries. But you can only sell the good stuff. There has to be actually someone who wants to acquire that security on the other side of that trade or no chain habits. And I think this is a fundamental difference about venture. And there have been some cycles where I've said, well, we're not going to go along that category until we figure out how it works. Because if you make a bunch of bets and a bunch of investments upfront and we're wrong, we're stuck with those companies. And if I think about when I started meeting companies in Web three, I was like, this doesn't really compute for me. I understand the world you're describing. So understand how we get there from where we are and like, who wants to live in that world other than the companies creating technology? So we didn't do a lot of investing and there were some things that really took off and ran up and we weren't a part of those companies. And on the way up I was like, oof, did you make a mistake? And then when things cooled, I'm like, I'm glad we're not building a basket of those companies. And I think about this a lot in two dimensions. One is, you know, we have a confluence policy where we try really hard to never invest in two companies. And so I'm like, all right, before we make this investment, by saying yes to the investment, we're foreclosing the opportunity to add any other company that does this. And is that okay in a world where we could trade a bit, but we'll buy this one and if we find something better, we'll sell the one we have and we'll buy the better one. And I think trading and investing are two different disciplines. And I've always said like these long hold periods in venture are a feature in the bug done right. It causes you to stop and think, is this company building something that's going to have value in 10 years or is it building something that's consequential for a moment and I've talked to some people who are, I would say playing AI more like a trade than an investment. They've told me this is where all the action is. We don't know what's going to happen, but we're going to buy a basket of companies with a belief that some combination of this basket is going to work well enough to make the basket valuable. Okay, but what if you're wrong? What if you're wrong on the macro direction? What if you're wrong on timing? What if you just pick the wrong basket? But in the trade, when a trade has momentum behind it, it can continue to go up for a really long and we're see with video and then some other things. And so I think what there's a lot whenever we sit out of a hot steam or a hot sector, I'm like, wow, watch all of the money and momentum that's piling into that category and are we making a mistake by not chasing it? And in most cases we won't find out for a couple of years.

More of a personal question for you, but do you ever grow envious is maybe a strong word, but of the fact that public markets can trade after winds have turned and jump in and out of investments so quickly.

I would say instead of envy, I have admiration for people who have a good sense for when to get out of something that's working. In venture, I think we learned in 2021 we're not as good at the trading part of the business that is selling out of companies that are working on the secondary market as probably we should be. I wouldn't say that every firm was better. That we didn't do as well as I would have liked. That made me realize like, wow, it takes a certain discipline to know, hey, this trade has performed really well for me at this point I'm going to get out because the probability that this trade is going to continue or something has changed in the narrative and sometimes you're just like the vibes have changed about this company. And so we're going to shift. And I really admire people who can consistently do that because it's not part of my job. And frankly we have some companies in our portfolio that weren't doing well for long stretches of time and because we were forced to remain in them, we supported those founders, we worked with them and they turned it around. Whereas if it had been a trade, you'd be like this trade's not working, don't stop.

The skill set just feels completely different than what venture is set up to do. Specifically early stage venture where you do diligence on a company that has no financial, no background, different trading Nvidia, which has years long worth of progress. Our last featured article of the year is from the New York Times called what Is Venture Capital Anyway? Which walk through the origin and growth stories for Benchmark and Andreessen, two titans in the industry that continue to sit on completely different ends of the venture marketing and approach spectrum. Benchmark represents the traditional model of VC smaller focused funds with leader teams. Andreessen embodies more of the VC empire, larger funds, broader public private marketplace, extensive support services and aggressive scaling. From 2009 to 2023 we've gone from 232 billion in AUM across venture to around 1.2 trillion. The bigger is better strategy argues that tech disruption requires more capital to tackle society's largest problems. The drawback to this could be overinflated valuations, bloated firms, and diminished returns. All things we've talked about. Supporters of Sting's model FIDs very clear that the firm only makes money when its companies make money. Drawbacks are that it's sometimes harder to compete on price if there's less wiggle room there for deals with the hotter companies. Last week on the podcast, you hinted at recalling what it was like when Andreessen hit the scene and kind of shook up what it was like to be a vc. I'm actually curious to know what. What was the sentiment coming from the founder's perspective, if you remember that at the moment, because Andrew Eason came to the market trying to be a better partner to founders than traditional investors were before.

Boy, it's a big question. I remember when they made their big splash, people were like, we don't do this in venture. Like, it's a quiet industry. You don't make a big splash. I think these two firms culturally are so different. You just go to their website, I mean, the benchmark website, value website, and you know, Benchmark probably has. I know how many people they have, not a lot. And Andreessen has hundreds of employees. And I think Andreessen hit the market, I think with this view that this is a business model that hasn't been disrupted. So we're going to enter the business as a disruptor. We're going to do a bunch of things that other people haven't done, and we're going to do them because we think it will create a better product. You know, people have all kinds of feelings about that firm. People I know they're only really care about one thing, which is how do we make the best product that will attract the very best found founders and the planet to want to take our money. They're intensely competitive, just like all of those times your firms are. And so I don't think it was disruption for disruption's sake. You know, there was no real talk of. I mean, Sequoias obviously had recruiting people, but there was no talk of platform at scale until they came in and said, look at all of these people over here working on your behalf. Do you want the 30 people we have in M and A and relationships and BV? Do you want these 30 people working for you around the clock, which is that possible, or do you want this, like one really sagacious partner, Rolodex and time and like it was just a different product. And I think for me, the big question is in most corners of finance, the trend is towards agglomeration and big firm. If you look at pe, PE is kind of dominated by gigantic firms. Then you have your Thoma Bravos and you had driven. You have specialist traders who are also much bigger than they used to be. But the trend in most finance businesses is that capital concentrates in a few large firms, but also performance becomes more stable, but lower. I've talked to a lot of LPs who are large LPs in these big funds. I think most small fund managers misunderstand the role of those positions and those LPs it's. You are not comparing the expected return of a $50 million seed fund with the expected return of a $5 billion venture fund. They play different roles in their portfolio and the returns expectations are different. Yeah, I think this is like a perfect article to like encapsulate all the things I've been like, like stressing. And I don't think we can reverse this big firm trend because we have. I think Carter just put out a chart with something like 45% of the capital this year was raised by 2 less than 2000 firms. Index, General Catalyst, Lightspeed, Andreessen, Xcel. These firms, in my opinion, are not going to voluntarily get smaller. The only way they will get smaller is because their performance goes down to the point where LPs decide they don't want to support them. And there is not a line of people out the door waiting to take those huts. So my sense is the conditions that would have to be true for that to happen are incredibly unlikely to happen unless there is a macro rotation out of Adventure on the Perv. If all the LPs, they were packing up our bags while we're going home, then maybe. But still, I think those will be the last firms that they quit. And so I think for most people who are not one of those 10 to 12 really large firms, the question is, is this a phase in which case those firms will realize, oh, we're too big, we're not nimble, we can't make decisions, we're missing out on good deals. We're, we're too big, we have to change our fund size. And if it's just the face, you probably shouldn't change the way you operate. Is this a permanent shift where, hey, this is the new reality and if you don't adapt to it, you put your head in the sand. Putting a hand in the sand and not wanting it to be true won't stop it from happening. Or is it really something different? I think this question of how big can the firm get and still be called a venture firm is a really interesting question. I don't have the answer. Like, my sense is the benchmark. People aren't going to change what they do because they believe it works. The Andreessen people and the big firms aren't going to change what they do because they believe it works. And you know, my Pollyanna hopeful view is that there is room for both for one simple reason, which is venture firms only exist because founders choose them. And if founders had monotonic preferences and said, we only want these big platform firms, then only those firms would survive. If founders said we only want the one on one bespoke boutique experience of dealing with a smaller firm, then only those firms would survive. I think the reason there's a world in which all of these people can win is that it really comes down to the preferences of founders. If founders don't have uniform preferences, there's room for multiple models to win. I think it's also important to remember founders choose firms, but they also choose people. A really successful vc. I talked to you one time. I said, hey, how has your firm stop being on top? They've been arguably the most successful venture fund in the history of our industry versus that. It's simple. If we can't convince the very best investors of every generation that this is the best platform to be on, we will lose the talent war. And if we can't convince founders that they should take our money over everybody else's, we will lose. He's like, those two things are very simple to say. They're incredibly difficult to do across leadership transitions and generations. And I was like, yeah, it's one of those, like, simple but not easy answers. I tell people all the time, they go, there's so many venture firms out there. I go, that should tell you a lot about the level of satisfaction that founders have of product.

Yeah.

If the founders were thrilled with their experiences of VVS, a very small handful of VCs would do all of the deals and there'd be nothing left. The fact that there are many funds tell me how frustrated many founders are with the choices that are available to them. And they want more choice.

Well, a little bonus topic, since it is the final episode of the year, and even though we've only done this since the end of September, we've been able to release like 13 episodes. Talk about 35 plus different articles and dead reads from across the ecosystem. Charles, looking at 2024, what's been, you know, the biggest learning moment that you've.

Had this is very ironic. I think I had sometimes forgotten the importance of, like, just getting started. And I think about our little podcast and just like, we just had a conversation at coffee, and we're like, we should do this. And I think it's very easy sometimes to overthink things. And as I tell a lot of the founders in our portfolio, sometimes the most important thing to do is to just take the first step. Do the first thing, do whatever the thing is that's in front of you, and the next right thing to do will reveal itself to you. I've talked to them like, well, how'd you come up with the ideas? No, no, we were already reading all these articles, so we started talking about them and, like, the other things revealed themselves. I think if we'd sat down and tried to plan this out, we'd probably still be planning it.

Yeah.

And I think about the precede workshop we did. It was the same thing. I kind of told Ashton, I want to do this. And they, like, enforced time pressure meant we just had to make a lot of decisions quickly. And it's something I preach to our founders. And this experience, for me has been a good reminder of, like, the importance of just getting started thinking the them.

Yeah. And you can overthink at any stage. Just because you're feeling like you're overthinking it or you're not thinking hard enough about it doesn't mean that you don't have the skill to do it. Take the first step. Every theme of 2024.

Absolutely.

We are out of time. Thank you, Charles, for launching Off Learning Corner with us. Thank you to our subscribers and our listeners for jumping in. We're so excited for the year ahead, and we can't wait to tune in with you all next year in 2025. Thank you.

Sam.