Episode #7: Ubiquity Ventures, WSJ, Equal Ventures

If my hypothesis about where Seed is going is right, there's some things we have to do differently. But the core job doesn't change. It's still about finding great founders, helping them figure out the core questions of their business, and setting them up for success. It's just that that setting up for success might not mean trying to get a Tier 1 VC fund to do the Series A. The skill sets we might need in advising companies could be really different it's.

The week of November 4th. 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 caught our team's attention over the past week. Topic number one Three things you'll never hear from a solo GP it's an interesting take on the unique challenges and realities faced by solo gps RA written by the Ubiquiti Ventures team, shedding light onto the unique ways that solo gps manage their funds that differ from funds with multiple partners and a more structured ic. Specifically, the piece talks about the difference in how solo gps are able to address deals compared to non solo GP led funds when it comes to things like bandwidth limitations, inner politics to push deals to the finish, and more. Charles, what are your thoughts on the idea that solo GPS are often perceived as having the same capabilities as larger firms, but with fewer resources? While I agree with a portion of that, I do feel like it greatly oversimplifies the difference in structure.

Yeah, I mean, obviously I have an opinion on this as a solo gp. It's funny, me, like when I first started the fund, One of our LPs said like, well what. What advantages do you have? I was like, well, speed is a big one. And he said what? I said, well, I don't have an ic. If I like a company and I meet them in the morning and I can make some calls in the afternoon, I could give them a decision by the end of the day. That's very hard to do in a partnership context. And I do think partnerships can allow you to say and do things that I think are like, not intellectually honest. And I do think the whole like I couldn't get it through my partners is I've always found that to be a really unsatisfying thing to tell a founder because it either means like you didn't do a good job presenting the deal, you don't have the authority or power in your partnership to like convince people to do it or you're weak. None of those is like a good thing. It's the same message, but I think it lands. I think it's better to just say, I really want to get this done. I push hard and there was just like too much resistance. I think this whole couldn't get it past my partners. To me, that always just feels like you didn't try that hard. I've oftentimes found that to be a cop out, which is when I've talked to people about that ex post, they're usually like, yeah, I floated it and people seem not that into it and I wasn't going to pound the table for it because I didn't want it that badly. I also do feel like knowing that you have the authority to make a decision on something changes the dynamic of a first and a second meeting versus, like, ooh, I'm really excited about this. Now I have to figure out how do I translate my enthusiasm and a lot of the fundraising advice we give our portfolio companies is your job is to like infect the person you meet in the first meeting with a level of enthusiasm that will allow them to go back to their team and advocate on your behalf, because most of that work is going to happen without you in the room. So I think the decision making thing is a big deal and you can't be weaselly and be like, my partner. Like, you don't have partners. And I've actually enjoyed the fact that I kind of have to tell people the truth with the exception of the issue being something about the founder or the person that's unlikely to change. Other than that, I'm like, we should tell people as much truth as they can handle. If I think it's the market, it think it's the market, I think it's the product. You should just tell them, this is what I got stuck. Doesn't mean I'm right. But this is what like kept me from getting to. Yes.

The article also touches on the idea that solo GPS must be more selective due to limited bandwidth. And so as someone who operates in way more of a team oriented environment and precursor, how do you manage the balance between being selective and see a wide range of opportunities?

I think it was Nikhil Trivedi from Footwork who wrote a post about the various forms of venture firms. And I think he was the first person I met who sort of differentiated between a solo capitalist and a solo gp. And I think of like a solo capitalist being somebody where it's like just one person, their phone and their Laptop, no staff, no associates, no principals like Oren Zev or I think about Ashmit Sandana or Manu Kumar, I think of as like solo capitalist. People who are just like a single decision maker, operating with little to no human capital infrastructure around them, which is different than being a solo GP. And we have 13 people, we have like a real firm. I do think the fact that we have great people at Precursor and the fact that I like doing more deals means I don't have to focus on being concentrated from a deal standpoint. I do have a finite amount of time I can spend with portfolio companies because I've got to do fundraising and I got to run the place. Many of the solar gps I know run more concentrated fund strategies and it's partially because their belief is they'll do their best work spending more time with fewer companies. I think I do my best work spending slightly less time with more companies. A lot of my friends are like, oh, you have the personality for somebody who could do this. You context switch really quickly. Like, you can kind of think on your feet, you're willing to work really hard. I was like, yeah, and I love working with people like Sunil who can go deep because I, I tell a lot of people it's a great cap table when you can have someone who has the breadth of Precursor, but also having an investor who can go deep, who can talk to you three hours a week, every week if you need it. It's a really powerful combo. And I love co investing with concentrated people and bringing like our special sauce to the table, but also getting to learn from them about what it means to run a much smaller book.

Well, moving on to topic two, AI startup Perplexity in talks to double valuation. It's another read that came from the Wall Street Journal where it's reported that the AI startup Perplexity is in talks to raise $500 million in new funding, which would more than double its valuation to $8 billion. This rapid growth is riding on the coattails of OpenAI's massive $157 billion valuation and demonstrates how the market is still very bullish on AI startups, even as other sectors slow down. And we've talked about massive valuations for AI platforms a lot on this pod. I guess one thing I haven't asked you is what are you hearing from fellow GPs and MPs at other funds who are running to be included in these deals? What do they say is their rationale for underwriting these types of companies?

Boy, mia, I've heard a lot of things I think there's some people who are doing a bit of trophy hunting and they're like, look, if this is going to be one of those companies, even if we're getting in slightly lower than our entry point, this is probably a name or a logo we're going to want to be able to say we were involved with. And to some extent I get it. Google has proven that search is just a massive business. And Google hasn't had a real meaningful scaled competitor for let's say 20 years, ish, maybe 25 years at this point. And I think in my conversations a lot of people use AI powered tools in the same way they use search engines. They ask them questions and they want the answer but instead of getting a bunch of links, they get an answer with links to the underlying data. Now I am not an investor in Perplexity. I have no idea how that business is doing. But I do think people are looking at the scale of search as a business. It's very clear. That doesn't feel to me today that Google is going to as dominant in AI search as they were in traditional web search. Based on my experiences as a consumer, one thing I will say is I like Perplexity. I've used the product quite a bit. I'm trying to figure out like what's the special sauce and what they're doing. Oftentimes I find the search results when I go through the sources, I'm like, oh, these are highly ranked pages on Google where Perplexity has done a fantastic job of summarizing and identifying the content that matters. But is that enough? But in some ways they're going through all of the challenges that Google went through, like hey, don't crawl my stuff. Actually just kidding, crawl my stuff so that it gets found and gets in there. And look, OpenAI has been pretty clear that companies that are doing search like this, whether it's Glean or Perplexity, they'd prefer that their investors not invest in companies working on these areas. And part of me feels like, what if ChatGPT eats it all? I understand the intellectual case for Perplexity. I think it's a great product, it's backed by really great people that I think very highly of. And I'm like, but gosh, like what if with, with many of these platform shifts like the most dominant company or companies get more dominant with each cycle. Like we had many more interesting companies in the like on premises software world and the cloud. And I think it's because cloud and these big infrastructure plays allow you to achieve just enormous economies of scale. And what if like ChatGPT just ends up doing this too? But look, that means Everybody who's not OpenAI is probably not going to want to rely on OpenAI and someone's going to want it. So I think Perplexity is super interesting company. I think Glean is super interesting. I think the intersection of search and AI is interesting. But it also just tells me that a lot of people are willing to make a pretty big directional bet on this product. And I give Perplexity props on one thing in particular. I think they've been very aggressive in distribution, in finding other premium services, whether it's LinkedIn or Uber, and figuring out like, how do I get you to become a Perplexity Pro subscriber essentially for free, and get you in the habit of using Perplexity so that when the time comes to pay for it, like, I have all these questions, like, is the ultimate business model going to be subscription or is it going to be advertising like it was for Google? Like, so if you said, hey, I think the intersection of search and AI is going to produce minimum one big standalone company, Perplexity is probably a pretty good directional bet.

Along those same lines. I mean, Perplexity is working on, you know, monetizing across multiple channels and kind of shared more details about that, the enterprise versions, consumer subscriptions. And then it got me thinking, kind of in a funny way, does a company like Perplexity actually have to tell your future revenue streams to potential new investors? Like how actually important is it for these companies to have well thought out plans for growth with new capital? I just assume that there are droves of venture funds who want to go place money there for your point of logo chasing, etc. How does that affect the way that money is going to be placed there? And what does that say about the space itself?

Earlier this fall it might have been Elad or somebody tweeted like some query volume number on Perplexity, but I think it might have been cumulative. I don't think it was like a daily. This is the one nice thing about private markets because the people who invested in this company are smart. I'm going to assume that they asked good questions and that whether it was query volume or subscribers, I'd be very curious. With all of the sort of first year free subscriptions, like what's the future conversion rate? I'm sure there was a robust conversation about the future business model. I wonder if the bet was made based on data or based on a belief that this is something people will pay for and use. Because this is the thing I think is interesting. ChatGPT already, we know, has a pretty meaningful direct to consumer subscription business. And the question is like, will people pay for two AI subscription products or three if you've got. I mean, I'm a weirdo. I pay for anthropic perplexity and OpenAI, but that's like for research. So I don't think, I don't think a normal consumer is going to spend $60 a month on AI tools. And so to me, I'm very curious. I mean, I wasn't in the room for those conversations, but I'm very curious about what those folks underwrote in terms of the business model and like how far into the future they were underwriting. And they're smart people and I would like to think that they exercise good judgment.

We're onto the third topic. It's one I'm the most excited actually to ask you about. It's Reflections of an Emerging Manager. It's the final topic for the episode, and it comes from the Equal Ventures newsletter. This article highlights some key lessons learned in the early years of running a fund, the challenge of raising capital as an emerging manager, the importance of founder investor relationships, and the need for patience when building a firm's track record. I know you recently attended the Emerging Manager Circle hosted by Equal Ventures in New York, so I'm really curious what resonated the most with you from this article?

First, huge thanks to the Equal team for putting together an amazing event. It was like part homecoming, part conference. It was. It was really awesome. I think for me, you know, we're by most LP standards, no longer an emerging manager. So I did feel a bit like an interloper. It's kind of like going to someone else's high school reunion. I thought it was an important event to talk about, well, what's the state of emerging managers, particularly as more capital flows to the established funds? Like, what does it mean to be an emerging manager? Like, what are the outlooks? I would say two distinct points of view presented at the conference. One is like, emerging managers are great and here to stay. Changed nothing about the course. This too shall pass. I think there was another sort of like subtext where emerging managers aren't going away per se, but what it means to be an emerging manager. How we'll operate, what we'll do is just going to be really different and we're going to operate in a really different world as emerging managers. And it's like, worth keeping that in mind. I was very much of the mind that like whatever era we've been in for Seed for the last 10 years is kind of over. And I say that not in a doom and gloom way. I say that in the like the strategies and tactics, whether it's graduation rates or trying to like figure out how to front run, like what the big funds are going to do or just like general lack of competition, that era is over. But these eras don't last forever. Exceed is a 25 year old innovation adventure. There are very few things MIA we do the same way today that we did 25 years ago. And why should seed VC be any different? And so I think it's actually quite exciting that Seed is changing now. Look, it's not as much fun if you're new to the business. And I told people on stage I don't think the pitch that worked for precursor in 2014 wouldn't work today. When I did it in 2014, I was like, what? What is pre seed? Like? I've heard this term from Manu Kumar, I've heard it from Tim Connors, I've heard it from a few people. But like, this isn't a thing. So it worked because like pre seed was so new. Like all of the surface area was available. To claim most people were like, is precede a thing. By the time I got to fund three people's like, okay, there's Precursor, there's a four, there's wonder, there are other funds. If I'm interested in pre seed, why should I choose you? And that happened in five years. It went from like, this isn't even a thing. Like, I used to get invited to conferences because like we were the only precede font people like, oh, quick, we need a pre seed perspective on the seed panel. Many things were easy and now there are many more pre seed funds. I don't know. I think sometimes the venture capital business is a business that funds risk takers but is in and of itself fairly conservative. And I'm just like, guys, like, it's okay if things change. If you have a strategy that only worked in those conditions. Yes, this is like unambiguously not good for you. But I'm like, the point of the business is to adapt to whatever's on the field. And I feel like our job as a fund is to say, okay, and we've been doing this over the last year. If my hypothesis about where Seed is going is right, there's some things we have to do differently, but the core job doesn't change. It's still about finding great founders, helping them like figure out the core questions of their business and setting them up for success. It's just that that setting up for success might not mean trying to get a Tier 1 VC fund to do the Series A. It might be setting them up to go private, to stay private longer and to be profitable and to grow and to maybe sell the PE like the skill sets we might need. And advising companies could be really different than they were before, where a lot of it was like, I'm very good at getting you in front of decision making partners at these big funds. And because that was the glide path for most companies, that was a valuable skill that just might not be what the next 10 years looks like, more.

Specific to the event itself. And I've never actually asked you this question. When you're in a room surrounded by your peers, some with years behind you and then maybe a few a little more ahead, does it ever become difficult to see others succeed in a time where capital becomes harder and harder to come by? I feel like you are one of, I feel like the stronger mentors within the space for fund managers who specialize within, precede and seed. But as capital kind of constricts, how do you maintain a mindset of we can all succeed together when the reality is there will be some funds that will not succeed?

It's really hard. And there have been some speaking opportunities I've turned down because I'm like, I don't have a positive message for the people that are going to be in this room and I don't want to lie to them. It sounds weird. I think the nice thing about this year has been I've talked to more people who've made the decision on their own that they're not going to continue. And it's been interesting. Some people have said, I like investing, I don't like being a fund manager. So I'm going to find a place and a platform where I can write checks and I can help founders, but where I don't have to raise capital or run a management company, which I totally get. I've met other people who said, I gave Venture a shot, I did a fund. I do not like this job. I prefer operating or I prefer consulting or I prefer doing something else and I don't want to do this. I've also talked to operators who've been doing it on the side and they're just like, I scratched my itch. And I now know that my post retirement career will not be Venture. We talk about the downside of people leaving. I think the upside is I have some friends who in three or four years learned that something wasn't for them. And if they hadn't done it, they might have devoted 10 or 12 years chasing a dream that once they caught it, they might have been like, oh, this isn't what I thought it was going to be. I don't like this as much as I thought I would. And so it's hard. The other side is I have people who I used to advise and help who like, they don't need my help anymore. They're like, progress well beyond anything I could do. And so that's the part, you know, that keeps me excited. I think about the work we do at Screen Door and we fund managers. I'm like, those people are going to be very successful. The window of time I have to help influence or advise them is very small based on the rate at which they're learning and growing. It was hard. I was on stage looking out and I'm like, some of these people won't be here next year. The good news is they'll probably be replaced by brand new people. I've talked to a few friends who are just like, they've raised one or two funds and they can't fundraise, or they've had team issues that are like, going to get in the way of them moving forward. And I don't want to see anybody go out of business Adventure.

I do like your perspective that most of the folks who maybe won't go on to raise subsequent funds, it will be for the better of their specific personal careers that they can find more fulfillment in an area that maybe they wanted to spend more time in elsewhere.

I mean, the only real reference point I have is I was working in the Internet in the late 90s, early 2000s, and there were all like, today so many new venture funds, accelerators that like, were created. And many of the people who left venture in that era were never seen in venture again, in many cases by choice. Now some people, like, their fun blew up and they wanted to get back in and they couldn't find the toehold and they had to go get a job. But many people I know were just like, I tried venture, it was cool. It's not for me or it's not something I want to pursue anymore. And they moved on. And those people are just like, I see them in other walks of life. Like, they're still in tech, they're still an entrepreneur. Like, they're just like, not adventure.

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