Inside Startup Purgatory: Retention, Returns & Recession Warnings

I wonder if that dynamic will shift sometime later this quarter, where people are just maybe slightly less enthusiastic about AI and slightly more concerned about tariffs, but we still don't yet have a big meaningful company that's in tech world, in startup and VC world that's been like tariffs blew up my business it's the.

Week of April 28th. 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 teens attention over the past week. Our first topic is a piece titled Figma Plaid and the Battle to Retain Talent at Almost Exited Startups by Upstarts Media, which explores the rising talent war happening at startups that are just shy of an exit. Companies with strong fundamentals, late start stage traction and serious potential to go public or be acquired, but not quite there yet. So because the IPL window remains tight and M and A is sluggish, these almost exits are increasingly vulnerable to top talent being poached by other tech companies or even early stage companies offering more equity, upside and excitement. So employees at these companies could oftentimes feel trapped in limbo. Equity may be overvalued from the latest fundraising round, liquidity is unclear and growth has plateaued, and the article highlights how startups in the zone must shift their narrative from the rocket ship mentality to a resilient operator and get creative with comp and growth opportunities to retain high performers while waiting out market conditions. We often talk about the benefits of staying private longer from the POV of the founder, which is more control, less scrutiny, fewer distractions. But this article really highlights the downstream cost of that decision. So for employees it can feel like being stuck in startup purgatory, working at a company that operates like it's public but without the liquidity. Even when the tender offers are available, they often come with tricky tax implications and limited access. So wanted to get your baseline thoughts on this piece as well.

Yeah, first off, really glad to see Alex Conrad writing again under Upstart, so I'm happy for him. I wonder how many hoops we're going to continue to jump through to recreate and solve all the problems of the public market and the private market. And when I read that article I was like, oh, there's a lot of built in assumptions here. And the one thing I learned from my time at Google, I was there not immediately post ipo, but maybe a year, year and a half after the ipo, you there's some people at these big newly public companies that are hungry for another startup adventure. Those people I find tend to leave fairly quickly. I'd argue some of them might have already left Figma in particular. Then you have the second set of people, they like the big company experience but they want to be on the next private soon to go public company. Like when I was at Google there was a clear exodus of people to Facebook. Once it was pretty clear that Facebook was working, there was another exodus of people to Pinterest. So I think the other thing is you get these people who are at these big company purchases and they can see well what's the next rocket ship with a similar trajectory that's maybe two to three years away. And I don't want to go to the zero to one startup. And then I think people forget. Some of these people are going to make life changing wealth and they're going to change their lives. They're going to open a flower shop or they're going to write or they're going to stop working in startup tech ecosystem stuff. But I do think it's interesting that these companies do become vulnerable, but I think in two dimensions. One is even without the liquidity, I don't want to get too technical. You know, with RSUs in many cases you own the shares. They're not like stock options without going into the whole tax and exercise and when they come due, it's a different mechanism when you can walk out the door with the shares in hand, fully owned versus oh, I need to stay here because I can't afford to exercise or the exercise period post departure is too short. So I think it's a really interesting dynamic and I think the companies are sort of in different places because at least Figma has stated its intention to go public and I believe they've even filed the confidential S1. So they appear to be on the path, whereas Plaid is not on that path. And you know Plaid, if you click through some of the links in Alex's article, some of the stuff they do with RSUs I think was tied to the pending Visa acquisition that didn't go through, but they did that anyway. And there's a bunch of company specific tax obligations I'm withholding with RSUs that I would encourage you to A consult your tax advisor and B there's actually a pretty good article on Carta about how to think about the flowchart of when taxes are due with RSUs. My sense is the people that I know at Plaid and This is totally anecdote. Are very interested in remaining in the fintech ecosystem and starting new companies. And the people I've met at Figma have a more heterogeneous set of interests about what they might do next. Also, based on today's prices, Figma is about three times as valuable as Plaid. So that might also have something to do with it. But I think it's fascinating. In the past, the window between when a company was going to go public and it went public was relatively small, and then you got liquidity and then people could make their own independent decisions. So you'd start recruiting people up to the ipo, but you wouldn't stop just when the company went public. So I'm very curious to see how companies continue to manage this. It feels to me like Stripe is doing the best job, but I'd also argue that's probably because Stripe shares are highly in demand. And whether you do it through a tender offer or some other mechanism, there's just a lot more ways to get liquidity.

Speaking more specifically about Plaid, if they end up going public, I don't think they're going to do it in the next one or two years, but if they do, do you think they'll just end up having the same issue once they go public? People who are still thinking and debating about leaving, they're just going to leave. And how much is that an actual threat to the company?

I think notional wealth and easily converted to liquid wealth. I've observed most people behave differently. It's one thing when you're like, oh, based on the 409A or based on the last round's price, my ownership in this company is worth X. And it's different when you're like, oh, I can log into computer share or I can log into whatever system we use and I. I can actually see shares available to sell and if I push that sell button, money will show up in my account and maybe, yeah, it's subject to some restrictions. I think it's just really different and I think it causes people to ask the question, like a, do I want to be here anymore? And why? I have friends at Google who are still there from when I left Google in 2007. I have friends who are still there and it's partially for the money, but partially because they enjoy the work and they like the people and they've kind of figured out how to be at Google and the idea of figuring out how to be at another company is fundamentally uninteresting to them. And so it's very hard to assume that you can get in the minds of people. But what I will say is liquidity does present people with a different set of options than they have when they're just wealthy on paper.

The article also highlight how fragile the final stages of a startup can be. Yeah, what have been some of the warning signs you look for in these almost exited companies or later stage companies in general that suggest that there's a little bit of talent attrition brewing and how detrimental or impactful it can be?

I was interested to see just how much of the company the core we founders sold it before the ipo. I thought that was pretty irregular. I think the other interesting thing is in Silicon Valley it is very gossipy. So if it's a value based company with lots of employees, you get a sense from people I will say this, my friends who were at Google really did feel like there was a lot of upside on the other end of the ipo. So most of them a made so much money in the IPO or shortly after that there wasn't this crushing pressure to leave. But a lot of them also felt like Google had a lot of room to run. And my friends at Facebook it was similar. They had a lot of confidence in management's ability to find the next thing. And so I always worry if my friends are like yeah, I'm dumping all of this stock or if investors are like I'm dumping all of this stock as soon as it hits liquidity window. That might tell me that there may be top ticking the ipo. Or maybe there isn't as much interesting stuff on the other side once the company's public, but it's hard to know.

Well, moving on to our next topic, it's from a recent X post by Josh Kobeman highlighting the importance of VCs not only winning big via the power law, but also winning fast. He walks through an example showing that even if you could generate a strong forex gross return as a fund manager, the longer it takes to return capital, the more it drags down your irr, potentially to the point where you underperform public markets like S&P 500. Seems like the large exit that's fast is obviously the dream. Everyone wants a whiz in their portfolio. A company created roughly 5ish years ago and exits for $32 billion. I scrolled through the comments on this post and Adam Draper worded something that I was thinking about while reading the original one, which is quote how do you think about not having control over speed of when exits are dictated by the IPO market or the acquirer. So I wanted to get your reaction to that as well.

Oh, I have like so many thoughts about this. I'm glad. Josh post. When I talk to people who are running funds, this is very much in the zeitgeist because we talk a lot about how, oh, you know, like liquidity is hard to get. There's another more subtle shift. I talked to an LP at an event not too long ago and he said, I think all of you guys have to get ready for a world where Venture shifts from a cash on cash multiple business to an IRR business, just like your peers. And Venture has kind of had this, I don't want to say exception, but you know, because we run closed end funds that eventually do get liquidated unlike other vehicles. You could always argue that, like, hey, really playing the long game. We're trying to give you the biggest multiple of cash on cash. And that's okay. If you're going to fully liquidate and distribute the fund in 10 to 12 years, you can make that argument. But when you tack five more years onto that, it's reasonable to say, well, I let you hold my money for 17 years. The 17 years part is a big component. I could have done other things with that money, particularly in the out five years. And I think Venture is moving more to a business where I think we are going to be judged both on total amount of proceeds we return multiple, but also the implied rate of return on those. And I think that's a new mindset for Venture and I think it's kind of for the reasons that Adam said. For the most part, as a vc, you don't have that much control over the timing of wins. But if you play with the chart that Josh had, other things can happen. This is like my concern for pre seed funds is you can have a really backloaded fund that ends up having amazingly good IRR but looks horrible for the first eight to 10 years because you don't get early wins and you don't get early markups and then you get this big lumpy liquidity in years 9 through 13 and suddenly a fund that looked like a SWEE super underperformer actually starts to look quite attractive. But you had to wait a long time for the realizations. So I'm very curious to see how if LPs start looking at VC funds through the lens of IRR, and they already are, I shouldn't say, but if the IRR becomes a stronger weight, what do you do with younger funds, particularly Seed and pre seed funds where the managers have pretty much told you, even with secondaries, we can't really move the needle on the lumpy transactions for 10 to 12 years. I think there are going to be some LPs who say, one, an IRR basis venture has become less attractive relative to other things, things in my portfolio, and maybe I want to do less of it. And I think it's a reminder to managers. And this is the thing I talk to a lot of my friends about. It is important to understand how the people that give you money get graded.

Yeah.

And we have some LPs who get graded on IRR. And so if it takes us a long time to get them their money back, we are impacting their bonus, we are impacting their perception inside of their firm, and we are, generally speaking, not helping them get ahead in life. Sometimes there's nothing you can do about it. But I do think it's important as a fund manager to really understand. And we have other LPs who are just like, I don't get comped on IRR. It's like not part of our comp formula. I mean, I care about it, but I have other people were like, our bonus is tied to irr. And at the end of the year, if you don't do a good job on irr, I will make less money. I don't know if any of you know Chris Duvos. He's got a very funny story. I won't say it. It's a really good story. If you ever bump into Chris, you should ask him to tell you his story about where tricycles come from. I think one of the good things that's coming out of these liquidity conversations is it's forcing gps who maybe didn't always think as much about the pressure that LPs are under institutionally to better internalize the challenges that l face and to better appreciate what LPs are up against. And I think it means that venture funds are going to continue to be scrutinized differently, not just on how much money did you give me back, but, you know, as I say internally, we can't always change the destination of precursor, but we can change what it feels like to get there. And I think there's going to be a lot more conversations not just about, did you get me to three to three and a half X, but how long did it take? And how long did I have to wait to start getting my money back?

Yeah. To your earlier example of NLP asking funds to maybe not just win Fast but win more creatively. How much of that thought process from the LP's perspective is due to the fact that they're hearing that early stage fund managers are actually open to more secondary opportunities than prior years?

My sense is I think LPs have patience, but not infinite patience. And I think for a while I was like, well these are 10 year funds, but every now and then they're longer because you have some pre IPO company that you don't want to. You know, I think Will Quist had a thread not too long ago where he talked about slow ventures starting to distribute private shares in spite of all the chaos that might cause on cap tables. That's another way to solve this which is like I'm just going to give you the shares instead of me holding them now there's all this complexity about how do you think about carry and will the companies allow you to do it from a transfer. There's a bunch of practical questions but the sentiment is, hey, this is another way to push this problem back to LPs and say I'm not holding these shares, you are. And I think it's going to be really hard. But I think the message from LPs has been pretty consistent. If it's going to take longer for these companies to get public or to get liquidity and you're going to ask me to go along on this ride, I need you to be more aggressive in finding ways to get me money along the way.

Yeah.

And some of that's going to be secondary and who knows what other creative techniques. I think this is why you have continuation vehicles being a bigger thing. People thinking about what are other ways I can get LPs who want to get off the merry ground, let them off. And so venture is growing up and becoming a full part of finance.

Yeah. And I think that's why there are way more comps between private equity and venture capital than I've seen prior. And there's a good quote also in the threads of you can't buy a car with irr. The holding periods across private equity, that's been longer too than the usual two to three, three to four years. But in most cases you would expect private equity to have some sor, sort of an exit or a landing spot and return money back. And I think that's where the difference is between the two assets of classes is there is a fair share of fund managers where there is no money returned back at all even if you wait and look.

I think also in venture I've seen some higher funds. I'm like, yeah, you had a really huge exit at the beginning. That's actually not a repeatable, controllable thing. Whereas in private equity it is. And I will say this, I've seen the returns for a couple of really long tender adventure funds and they have high double digit lifetime irrs. I won't say what fund it was, but they had a very high, well above the S and p rate of IRR over a 30 year period. I'm like, that's actually pretty, I'm not gonna say it's repeatable, but that's pretty consistent.

Well, our final topic covers a research piece from Apollo's chief economist on how new tariffs are rippling through the US economy. Firms are reacting fast, earnings expectations are falling, capex plans are being slashed and inventories were stockpiled ahead of the tariffs. So nearly all early indicators are pointing to a broader slowdown. On the consumer side, things aren't looking too optimistic either. Through the report, sentiment is dropping across income groups. People are far more worri about losing their jobs and feeling less optimistic about the economy. You're already seeing this behavior shift. So folks rushed to make purchases before tariff hikes hit, credit card minimum payments are creeping up and international tourism is slowing and delinquencies are rising. The report ends with a warning that all of this could add up to stagflation, that tough combo of slow growth and stubborn inflation which makes life harder for both policymakers and investors. So early on when news of tariff shifts happened, I know we wanted to be as thoughtful as we could about how we talked our founders about predictions, just given the unprecedented circumstances we're operating under, looking at this data and taking into consideration the shifts and changes we've seen in the past few weeks, how has your thinking been shaped as it pertains to downstream VC and maybe more specifically consumer startup impact?

Yeah, I mean, I think there was a lot of back and forth beginning and at some point I was like, well, let's just wait for two things. One, let's wait to see where these tariffs sort of settle and if they're going to stick. We're in a moment where it feels like right now we're going to live with them for some period of time. Who knows, by the time we publish this something could have changed. Second, I tend to go to people who have a good macro view on these kind of things because I think people who understand macro can connect the dots on, well, if this thing happens, this next thing happens. This was one of the first analysis I saw that kind of could connect the dots between tariffs and downstream effects on people. And I've long believed that in general in business, people are good about ensuring themselves against known risks. And the things that people can anticipate happening or feel likely to happen, they generally have good plans for is usually the things that are unexpected, expected. So for example, like almost no company I knew when SVB happened had really thoughtfully prepared for what happens if the company that holds my money goes out of business or there's a general bank run. The same thing happened in the global financial crisis. Most people are like, well, what happens if the entire financial ecosystem grinds to a halt? Most people are like, well, that wasn't something I was insured against. And I think people have prepared for the first order effects of tariffs. Oh, what happens if my input prices go down or go up rather, what are we gonna do with our supply chain? The thing I liked about this rather grim deck that Apollo put together is there's a bunch of second order effects that happen, which is what happens to city tax revenue if tourism goes down in the city as a tourism tech. What happens to the airline business if people stop both visiting United States or America and stop traveling abroad during the summer? What happens to public sentiment if Christmas presents don't get here on time because they have to leave the ports in China on boats? And I think there's all of these downstream effects that will happen that I think most people, including me, have not fully metabolized. And I feel like there will be things that happen due to tariffs that will impact the startup ecosystem that none of us have really insured against or have planned for. It's interesting. This has been one of the like most telegraphed things I've seen where when I've talked to VCs, they're generally making the fewest changes to how they operate. Yeah, you know, during COVID a lot of people just said we are slamming the door on new investments for a while. There's nothing that could come in my inbox that would get me to move svb. The banking situation was like that, but not for very long. But there's a period of time people are just like, we are closed for new business. Global financial crisis. People were like, this is going to be bad. And you know, I told a journalist it feels to me like the tailwinds and desire to put money to work in AI are stronger than the headwinds of tariffs. And I wonder if that dynamic will shift sometime later this quarter where people are just maybe slightly less enthusiastic about AI. And slightly more concerned about tariffs. But we still don't yet have a big meaningful company that's in tech world. In startup and VC world that's been like tariffs blew up my business.

Right.

I think if VC starts seeing that in their portfolio and the place I could see it Happen is actually B2B SaaS where companies are just like our business is down due to the macro stuff and as a result we're going to buy less software I think until it starts to hit in boardrooms of software companies. I think a lot of VCs. My sense is there's like this tariffs definitely impacts you if you're a hardware company, definitely probably impacts you if you're CPG. But if you're a B2B SAS or AI company to date the feeling has been kind of like maybe this isn't as big a deal for them.

Yeah, I think about Shopify and what the change in traffic will look like there in Covid they saw an uptick and it was very good for their business this time around. Not sure how that'll shift and change. And then I see a lot of chatter within three PLs venture backed free PL solutions and how to get stuff from one end of the country to the next. Even if you housed all your operations in the United States, get realistic with how it'll all work to get your entire product from one door to the next. I think that there's going to be so much more impact broader than just even in our own precursor land. CPG companies that I know are now debating do we eat the tariffs or do we pass it along to the consumer and even if we ate them, will it still incentivize them to buy if they're delinquent on their credit cards for buying food?

Yeah. And I think the other thing is it's clear to me that there was some amount of inventory stockpiling so it could be a while before people feel it because there are companies that have inventory that they can work their way through. That's pre tariff cost of goods sold and like we'll see. I'm very convinced that whatever the impacts are on the startup ecosystem it will look obvious in retrospect but it is not obvious at the moment.

Agreed. Well we are all out of time today. Thank you Charles for stopping by. Thank you to our listeners listeners for hopping in as well. Please like and subscribe and we will talk to you all next week. Thank you. Bye bye.