Episode #26: Bradley Tusk Says VC Is Dead, Investor Learnings From The Last Overheated Market

I do think in good markets people are a little more forgiving of founder quality, but in tougher markets it's the only thing that matters. So you might as well just always make it matter and then you never have to worry about the market sort.

Of landscape it's the week of March 31st welcome to the Learning Corner, a Precursor Ventures Podcast.

Welcome to the Learning Corner by Precursor. I'm Mia Farnam and I'm joined by our GP and Managing Partner Charles Hudson, where we will be talking through the articles and Goodreads that that caught our team's attention over the past week. Topic number one is a piece from TechCrunch's Equity podcast featuring longtime political strategist and venture investor Bradley Tusk of Tusk Ventures. In the podcast he shares that after raising three traditional venture funds, he will not be raising a fourth. It's important to note that Tusk Ventures is just one of Bradley's successful endeavors with Tusk Strategies, a well known political consultancy, being another one of which we'll live on. It was actually through the success of Bradley's political consultancy and strong track record of offering equity for service services that caused him to pause, take a look at the job of a fund manager and really decide if he wanted to continue down that road. In fact, he acknowledged on the podcast that he was generating more returns across those arms than the traditional venture model was creating. And coupled with things that we talk a lot about on this pod having to manage the wishes of LPs, run the fund admin and backhouse operations, Bradley seemed really confident about his new plans ahead. What stood out to me the most is that he's sharing this after making the switch, not in the hypothetical what if timeframe that we often hear from people encouraging alternative paths. I thought it was specifically refreshing to hear Test say he tried traditional vc and actually this hybrid model makes the most sense for my skills and how I can add value. So curious Charles, if you've seen other people quietly pivot to this model and how you think it fits into the broader landscape of early stage venture and startup growth.

I read the article and listen to the podcast. I thought it was great. I find it really refreshing when people talk more about the business. Having been on the Screen Door investment committee, this is one of the things I'm constantly testing for is trying to figure out do people really understand what they're signing up for? Is this something something that they truly get? Because me as you and I know this is a three pronged job. There's the fundraising piece of going out and raising money and dealing with LPs, there's a fund management piece and there's the investing piece. And oftentimes before you become a fund manager, it's hard to know which of those three things will come naturally to you and you'll enjoy and which of those things will feel more like a job and require more motivation to get them done. And I thought the cool thing about Bradley's interview was he didn't reject the fact that being a fund manager requires you to manage LPs, be cognizant of their liquidity needs, fundraise, run a fund. He's going to be said like, if that's the job, I'm not sure that that's what I want to do. And in a lot of ways, that reminded me of the conversation I've had with a lot of operator led funds, particularly those that were raised in 2019 or 2020, when things were pretty hot and where founders felt like, hey, I can scale my angel investing that I've been doing on the side and also run my company. And a lot of those folks, I think in the last couple of years when I've talked to them have said, you know, running a company and building a fund is really hard. You know, I got to do audits, K1, I got to fundraise, I got to think about liquidity timelines for IPs. The angel thing was more fun because I wr checks, and when the money came back, great. But I didn't have all this admin overhead. And a lot of those folks have decided to either go back to being angels, go back to being scouts, or simply just focus on their own companies. And I think it's healthy for people to have the experience of trying the whole job and figure out what parts of this work for me. And if I think about some of my own peers, whether it's Chris Howard with what he's done with ritual, or if I think about what Hunter and Satya have done with the latest evolution of Homebrew, I think you're seeing a bunch of people earn the right to sort of look at the model and say, these are the parts of it that makes sense to me. I want to continue to work with founders, but I want to do it in a way that feels like authentic and matches where I am in my life, what I want out of this job, and to sort of tweak or tinker with the model. And I think it's great. And I think it's pretty rare to find somebody who's been as successful as Bradley to talk as openly and honestly about the parts of the job that maybe just were less interesting.

I found his story particularly interesting because he has such a tangible track record of delivering real strategic value. So like helping Uber navigate regulatory hurdles city by city. In that, that context, I think swapping services for equity really does feel like a very real and very fair exchange. But it also made me think about how a lot of other funds market themselves as also being value add or promise an entire suite of services that the moment a check is written, they're available to you as a founder. But in reality, I do think very few people can actually deliver that at the level that Bradley can. And overpromising that kind of support I've seen can actually backfire and hurt a founder's trust and honestly progress. So I know at Precursor we don't brand ourselves as a massive platform fund, but I know we genuinely try to be helpful at every point along a founder's journey. So how do you think we draw the line between offering meaningful founder first support and then slipping into this territory of marketing speak, which is common across the industry?

Yeah, boy. I feel like for pre seed companies you don't need a platform, you need to find product market fit. And if we could build a platform that would help people find product market fit, that'd probably be an investment I'd make. I'm skeptical that there's a way to do that as an investor, but I do think there are people like Bradley who have really specialty expertise in a domain that's relevant. So I think if you're dealing in a regulated industry, someone who's got a proven track record at both the national and the local level is a valuable partner to have and it's probably worth trading some equity for access to that. I think about also Sempervirens when it comes to navigating the sort of insurance selling through the employer channel, there's some folks on the GTM side who I think are have really proven expertise when it comes to go to market. And then there's some other folks who I think have proven experience in recruiting. They can actually really over deliver on that. But I think the generic services platforms, I've never really understood those and the value prop because I think when they first came out, whether it was first round or Andreessen, a lot of founders said, wow, this is an amazing offering. But I don't think they all stopped and asked like, well, there are many of us in the portfolio and few of these resources like how are these going to be allocated. And I think most of these firms are pretty strategic with where and how they allocate their internal platform resources. And in many cases you have to earn access to those resources through performance. And for me the question's always been if you need help with marketing. If I were a founder, I would always ask do I want to use this firm's in house person or do I want to go into the marketplace and find a best of breed person? In some cases the firm's person is the right person, in other cases that person isn't. And I think over time, founders have gotten better at asking the tough questions of people who have platforms like, hey, tell me what your platform team has done to win, show me some examples and let me talk to the founders that you helped to see if their story about success matches what you're telling me. So I think they're a really effective marketing weapon, particularly for first time founders. But it's never been something I thought was part of our offering as a pre seed fund.

And I think at the earliest stages, I know that every fund will say that they offer sounding board support, but there is definitely such thing as bad sounding board support and I find that that can be extremely destructive as well. But oftentimes sounding board support at the earliest stages is the one mechanism that you can probably use to help you get to the next stage. And that's truly built on trust and just having a strong relationship with your investor to your example of kind of these larger platforms and capabilities that are offered. I know that there are some founders who almost feel like overwhelmed by them and don't want to bother the investors too much to navigate them. I don't think this is the purpose at all. But I've heard from one founder of like, I don't want to signal that I need all this support which then destroys the entire purpose for what it's built. But it goes back to the fact of sounding board support, a strong relationship and just trust is oftentimes some of the most important tools you can have in the toolkit at the earliest stages.

My general view is we should do fewer things, but do them better. And to their credit. Like we have companies that have taken money from some of the big platform firms. And I've been in board meetings where the CEO has said, hey, the A16Z team or the Excel team or whatever big firm it was helped us with these specific customer intros, they helped us with these things. They brought in somebody who helped us with the model. So I don't want to discount the services. But to the point I said before, I think if you're going to do them well, it takes a real investment of time, people and resources. And I don't think consistently that everybody does that well.

Our next topic comes from a very brief but great LinkedIn post by Rob Goh, co founder and partner at NextView. He shares some really grounded lessons from investing through the last overheated cycle. When deals move fast and valuations soared, it really was easy to get swept up in the momentum. So his four takeaways really hit home for me. Number one, chasing bargains didn't work. It was better to keep your same lens and pay a higher price for a great company than to lower your standards just to get something at a good value. 2. The human element does matter. When markets are hot, investors often overlook true founder, investor fit, trust and personal chemistry, and Rob does feel like it'll come back to bite you later. Third, deploying slowly often wins. The funds that waited for the right pitches and didn't rush to deploy capital, they most likely outperformed. And then fourth, traction still tells the story. So great product market fit shines in any market, and companies that grew fast and aggressively through the frenzy are often the ones that emerged the strongest. I think Rob's comments about the temptation to chase normal deals at normal prices was really interesting. Easy to tell yourself that you're being disciplined in the moment, but in hindsight it might just mean you're lowering the bar. So curious to get your perspective here. Thinking about the last time the market felt a little overheated. And then right now the crazy thing.

Is the last time the market felt this overheated wasn't that long ago. Three years ago. And it's funny because we've always been a firm that's emphasized entry price as part of our model. A lot of our LPs ask me, hey, in 2020 and 2021, you did kind of hold the line on price. Do you think that was a good decision? And what I've told them is I'm not sure. But I went into it saying prices are going up. We're more or less holding the line on entry price. I recognize that we are creating a situation where there could be adverse selection in a portion of that portfolio, because in a hot market, if everybody's raising at higher prices, there's the possibility that those that are raising at reasonable prices are doing so only because they have no other options. Now the one thing I've learned is it's probably true that we do have A bit of adverse selection in that portfolio based on the early data. But the other thing that I always have to remind myself about in venture is oftentimes the bad news shows up earlier than the good news. And I'd also argue some of the companies that raised at above market prices also raised more money. So the fact that those companies haven't failed or died yet doesn't mean that they will ultimately be successful. And so there are certainly some cases I can think of in the last cycle where I was maybe a little too strict on price and we probably should have said yes, with the outcome being that we probably would have made money, but made less money than we would have if we'd entered at a rational point. And I think in this cycle it's way more important because the price inflation and AI companies, it feels to me at the seed and pre seed stage is much greater than what we saw for SaaS companies. And so I do think it's generally a good practice to say if you're in the market, you should have some sense of what the market price is for the kinds of companies you want to bid on. And it's probably better to pay a little bit more, but also to raise the bar in terms of the amount of conviction you have to have about the team and the people in order to say yes. And probably the biggest thing I've changed about the way I invest since 21 is I've gotten a lot more granular about what we're looking for in people. And it's a mix of quantitative things like the amount of zero to one startup experience they've had as a founder, as an employee before starting the company to more qualitative things to like, do I really think this person's going to be able to lead and inspire a team of 10 to 15 people in the next 24 months. And I do think in good markets people are a little more forgiving of founder quality, but in tougher markets it's the only thing that matters. So you might as well just always make it matter and then you never have to worry about the market sort of landscape. And so I think this whole question about when do you overpay? And playing the game on the field is really hard. And I also think the flip side is always easy to tell yourself, well, these are the prices that it takes to get into these companies. I'm like, but that doesn't mean you're going to make any money. Someone's like, oh, you know, really hot deals with people from OpenAI or Anthropic are getting done at this price. And if I want to do those deals, that's the price. I'm like, that's cool. That doesn't mean it's a good investment for me. It always comes back to, there ought to be things where under our model, which is fairly entry price sensitive, there always be categories, founder profiles that are of high quality and fit our model. But it also might mean that whatever the hot thing is doesn't fit our model and we should do less of it than everybody else. And that's sort of how I've been thinking about AI. I'm like, there's a lot of companies I've met that are interesting, but at 50 posts I'm like, that's not really our strategy or model. So it doesn't mean we'll do none of those, but we're certainly not going to do a fund full of them.

Yeah, I feel like I know the answer, but could you think of a time when you met a founder who was really wonderful and very spectacular and their business model was very unique and you had an idea of the price in your brain and it went a bit over? Do you feel like if you had anchored yourself at a different price, you would have gotten over the line or do you feel like it didn't matter in the end?

Wow, that's a super tough question. I can think of a handful of cases where I wanted to do something at 8 and the founder wanted to do it at 12. And I'm like, it doesn't sound like a huge difference. It's a 50% premium over the price that I want to pay. And I said, you know, in the grand scheme of things, it's probably better to be in this company than to get the price that I want.

Yeah.

I'll also say there have been companies I've met that are raising at 20 and 25. And I'm like, that is an ultra premium valuation. It kind of demands outperformance. And the one thing I found that is sometimes odd, as if you see when we've done these expensive deals, they've then gone out, they've done the seed at 25 and they've done the A at 40. And you're like, wow, like. Or 50 posts you're like, that's pretty great, but doesn't feel great because you're like, I paid such a high entry price that the short. And look, we're not in the short term markup game, but it just doesn't feel as great when you're like, Oh, I could have maybe waited three years, gotten a bunch of data and paid twice the price. Would it have been worth it? I always tell people, like I'm always trying to discount back to what do I think the end game looks like and what are the waypoints along the way and does getting in at this point. So, you know, 10% of the time I'll just say we're going to be price agnostic. This is a team we want to work with and we're a price taker for 90% of the things we invest in. I expect the price conform to our model.

Rob also mentioned that in these hotter markets, investors sometimes want to write a check without really making an emotional commitment. That line really stuck with me, especially when so much of what we do at Precursor hinges on being a real thought partner. So as a solo GP with like a million other hats that you wear at the fund every day, how have you been able to catch yourself from actually entering into that mode?

I think one thing that I've learned over time is different between investors and founders. I think a lot of founders, like, I got money from this firm, so I'm going to get the full experience of being a member of their portfolio. And I think investors are sometimes like, look, there's companies where I wrote a lead check and took a board seat, and there's companies where I wrote an experiment check or a scout, like, whatever euphemism. It's a small check that maybe doesn't come with a lot of attention attached to it. And I've had founders who've gotten upset and like, this person's not that engaged. I don't get. And I'm like, well, they wrote you a 50k check. To them, that is not a check that rises to the level of like paying a lot of attention. And historically, what I found is some of those checks can create the worst of all worlds. They're never going to be financially meaningful to your firm, but they can create a lot of damage reputationally with LPs. So I'm like, well, why write them? Also, I think sometimes there's a temptation to apply a lower standard to small checks. So this is why I've tried to keep our house check, the house check and not say like, oh, you should write the full check. But if you kind of like the person, you're curious, like, throw in 50k. I just think it's better to spend the time and try to get comfortable. Like in most cases where I've written 50k checks, it's because of the Round dynamics. I've wanted to write 250 or 500 and the person's told me I don't have that for you. I have less and I'd rather be in the company than not in the company. And that's been sort of the trade off I've made. This is why I've been like very resistant to sort of saying, well we'll just throw in 25 okay? Unless me one specific example. Sometimes we do have repeat founders who are just like, I don't plan to ask you for anything. I have zero expectation. I simply would like you on the cap table or I'm offering you the opportunity to join our cap table but this isn't going to be a high touch relationship.

Any advice for founders who are maybe navigating those conversations with investors and maybe get the sense that maybe the investor on the other side isn't really emotionally attached to the investment and it could be just like, like don't overthink it. But curious to know what you think.

I always tell people on the founder side, most VCs have spent a lot of time figuring out what size checks they want to write and what ownership they sort of quote unquote need to make the math work for their fund. If you are in the power alley of that and you're like getting an on model check, you're going to fit it in nicely in the portfolio. And if you're not, you should just be aware that you're an outlier and there's a chance that as an outlier you won't get the same treatment, you won't get the same attention, you won't get the same mind share. But that firm that you would if you were a full size check and sometimes that's okay, but don't go in I think with full size expectations if you're getting like a more modest check.

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