Charles Hudson explains how Precursor Ventures decides which startups get follow-on funding. The firm concentrates most capital on companies it thinks will become its top 20%, treating that estimate as flexible and open to founder pushback.
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I just wanted to take a moment and share some of my thoughts about how we think about follow on financing at Precursor, as this is a topic that comes up from time to time and I realize I don't always get to talk about this with folks when we're making our initial investment. So to recap, when we make our initial investment at Precursor, it always comes from a place of maximum optimism. I believe every company we back is going to be wildly successful, is going to exceed all the plans that you all present to me, and that you're going to go on to be one of the top investments we've ever made. So when you make that first investment, it comes from a place of pure unadulterated optimism. However, when it's time to make follow on investment decisions, the calculus is a little bit different for me. By the time companies come back to ask for more capital, I usually know more about the opportunity, more about the team, have some sense about the progress that's been made, am smarter about the market, and frankly, have more information at my disposal. So when it comes time to make these follow on decisions, I have to balance that initial optimism I had with the realism that we've learned about the market, the team execution to date, and the probability that the company that you're building is going to be really successful. And when it comes to the way we think about reserving money for follow ons, we do keep some money on the side for bridges, extensions, emergencies or situations where people just really need help. That being said, the majority of the reserves that we hold back for follow ons are really designed to go into the top 20% of our portfolio. Now, when it comes time to make follow on decisions, I'm always asking myself the same question. Do I think the opportunity to invest in this company is going to allow us to buy more ownership in what I think will be one of the top 20% of companies in our portfolio. Now remember, this is a moment in time estimate. We've had plenty of situations where there were companies that were struggling at one point, figured out the issues that were getting in the way of success, and came back for future follow ons where we participated. And that 20% estimate is just that. It's an estimate. It's my sense of where our dollars can best be put to use to drive the best returns for the fund. So I hope this gives you some context about how we think about follow on decisions here at Precursor. I'm always happy to have a direct, clear conversation with anyone who wonders about our plans to participate in a future round or how we think about these things. And I hope this is helpful to you all as you think about your own future. Follow on Fundraising needs.
