VC Charles Hudson on the new LP timeline

Hi, I'm connie loyzas and this is alex gove and this is strictly vc download.

Hello and welcome to today's episode where we are joined by Charles Hudson, founder and managing partner of Precursor Ventures, a pre seed and seed stage venture firm that invests at the very beginning of company formation. Charles brings a unique perspective to early stages investing, having navigated the evolving landscape of venture capital through significant market changes. As someone who's been investing at the earliest stages for years, he's witnessed firsthand how shifting market conditions from the SVB collapse to rising interest rates have fundamentally changed how limited partners think about venture as an asset class. In our conversation today, Charles opens up about some of the most pressing challenges facing seed stage the tension between long hold periods and LP expectations for liquidity, as he puts it. Historically, LPs understood that seed funds would have the longest hold periods, but recent market volatility has many reassessing whether they want to wait seven to eight years or potentially even longer for returns. What makes Charles's approach particularly interesting is how he has adapted to these new realities. Rather than simply accepting the traditional, he's been systematically exploring secondary liquidity strategies, focusing on what he calls the most friendly end of the spectrum. Selling shares to new investors, leading rounds, sometimes even alongside founders taking their own liquidity. Today we'll dive into his data driven approach to portfolio management, including some fascinating analysis he conducted on what would have happened if his fund had sold all positions at the Series A, B or C stages. The results might surprise you and offer valuable insights to anyone thinking about portfolio construction and exit timing in today's market. We hope you enjoy this chat with Charles as much as we did and we'll see you back here next week.

Charles, you know that we love talking to you. It's so great to reconnect. Let's talk as a starting point about your new fund. Congratulations. I haven't talked to you since I saw the news you raised a $66 million fifth fund.

Yeah.

Awesome.

And I feel like I talked to you when I raised the first one. So it comes full circle. As you can imagine, last year was a really interesting time to fundraise for a small venture capital fund, not a big one. And happy to talk as much as you'd like or as little as you like about the environment and some of the things we saw out on the fundraising trail, particularly for LPs, who, as you can imagine, are going through a lot of challenges right now.

Yeah, I mean, I'm sure these conversations are happening constantly. It sounds like it was probably not so easy even for you. Tell us a little bit about the process.

I think if you zoom out, we're a pre seed and seed fund. We're investing at the very beginning of company formation, which means we're probably going to have the longest hold period relative to other investors. So historically, when we fundraised, most LPs have understood that long hold periods are both a feature and a bug of seed stage funds. That was fine. I think in a world where venture liquidity was coming back every couple of years pretty strongly, LPs could rationalize their patience by just saying, hey, when we get the money, we get it in large amounts and you know, the juice is worth the squeeze when it comes to the hold period. And kind of when we first started talking to LPs in our kind of pre marketing period, it was before svb, it was before all the interest rate stuff had happened. And it was before many of the other changes that have happened in the broader landscape for venture had really played out. And a lot of LPs I've met who before had been like, hey, you're an early stage fund. We understand for a fund like yours, DPI or cash back isn't going to come for seven or eight years. The tone was very different. The tone was like, hey, seven or eight years feels like a really long time. All of a sudden I'm like, well, it's always been seven or eight years and a couple of things that happened. And I'm very sympathetic to the plight of LPs. A lot of them simply haven't gotten very much money back from their venture holdings. There's been some volatility in their public holdings which doesn't feel great. And I think a lot of LPs I've talked to are just reassessing venture as an asset class and saying, do I want to play here? Given that the time to liquidity feels long, it feels uncertain, and there are other things I could invest in that have a different return profile. And I kind of get it to some extent. We had a great period of time where a lot of cash went back to folks at the beginning of this decade and it's been pretty quiet since. So that I would say was like a new phenomenon. LPs kind of like reassessing whether the timetable makes sense. As one of my favorite LPs told me, he's like, VC fund managers are going to have to think as much about IRR as they do about cash on cash returns. And for a lot of the history for smaller funds, you could make the argument that, yes, it takes longer to get your money back, but it's worth it based on what you get with the multiples. And so I found a lot more LPs who said, okay, let's assume it still takes 12 or 15 years for your best companies to fully mature. What are you going to do to provide me with liquidity in the interim? Because the idea of waiting 12 or 15 years to get money back doesn't really work for me. And I think that's when I started thinking a lot more about how are we going to address secondary liquidity as a smaller fund and how do we make sure that we're good partners to our LPs.

That's really interesting. I mean, obviously a lot of people are having to spend much more time on that same math and looking at secondaries. So tell us what you're doing and I guess maybe how systematic you're being about this whole process.

Yeah, I think the whole secondary selling thing exists on a spectrum. I can tell you. We've focused on what I call the most friendly end of the spectrum, which is selling shares to a new buyer who's leading the round or is a significant investor in the round who wants to acquire more shares with the company's blessing. So this isn't going off and finding, you know, rogue brokers or listing the shares on some exchange. These are what I call, like, the friendliest of friendly transactions. And in some cases, we're selling alongside the founders themselves. So it's pretty hard to tell an investor you can't sell when the founder himself or herself is also getting some personal liquidity. And we've done that a couple times. And this all started, Connie, because One of the LPs I talked to in the context of our fund 5 had asked me to run an analysis and look at what would have happened with our previous funds if we'd sold all of our shares at series A, if we'd sold them all at series B, and if we'd sold them all at Series C. And we just did it more as the thought, you know, with all the caveats, it's not practical to do this. And he was just curious about the math impact. And we looked at selling everything at the A, it doesn't work because whatever you save by selling the companies at the A from the ones that die before the B and C, it's dwarfed by the compounding effect and power law of staying in your best companies. You sell at the B and you actually, for us with the way our math worked, you could have a north of 3x fund if you sold everything at the B. And I'm like, well that's pretty good. Yeah, but I also wouldn't want to sell everything at the B because you're still giving up the future upside. And we ran that out through the C and the D and it turned out that the big aha for me was selling at Series B a little bit is probably very prudent for a couple of reasons. One, we're usually up a pretty strong multiple given that we're typically getting in at mid single digit prices. So selling at the B, you're normally up tens of X's on your money. Second, selling a portion gives us a chance to give some money back because usually for us, Series B is five to seven years after we've invested. So it's a chance to provide some interim liquidity. And candidly, there were some things that we held onto in the 2020 and 2021 period where had we been more focused on selling, both we and our LPs would have been happier with that decision.

That's great. Yeah. I mean, a lot can go wrong after it turns out Series B companies get over their skis. New entrants enter the picture. So are you waiting to get a green light from founders or are you approaching them opportunistically about selling?

We had one situation where the founder came to me and said, you've been in this company just as long as I have. I've been reading all these articles about how you need liquidity. I'm okay with you selling into this round and I have a lead investor who wants to buy more. So we've had three opportunities to sell in three separate situations. We sold in two and in one we did not. In all three cases, the founders were completely on board and or proactively reached out to me and said, as part of this round we're going to have secondary. Is this something you're interested in and.

Did you sell out your entire position in those companies or the majority position?

In no case did we sell the majority or all of it. It's this weird irony, Connie. As you can imagine, the companies where there's the most secondary interest is also the set of companies where I have the greatest expectations for the future. That's the funny thing about venture. If we sell out of one of these companies, buying back into it later is really difficult. We try to think about 20 to 25% at the B as the base case.

Charles, it's interesting that this conversation dovetails with a conversation we had recently with Hans Severance of Industry Ventures, in which he said many VC firms need to get a little bit more sort of thorough about exploring all of their liquidity options. It seems like VC is becoming much more institutionalized. In your essay, your excellent essay, what Does It Mean to be a Venture Capitalist? You talked about how VC has become institutionalized, but it sounds also from your essay that it's lost something. There's a focus on metrics driven analysis, and yet you say taste is where the magic is in this business and you worry that you're losing the ability to invest in weird and wonderful new ideas will lead you to miss out on great companies. Can you expand on that a little bit?

You know, I've been a venture capitalist off and on since 2000 when I started my career at In Q Tel and then Uncork and Precursor. And I feel like when I first got into venture it did feel more like an artisan business. And I think that's for a couple of reasons. One, we didn't have as many data oriented people in the business who were looking at trends and looking at historicals and building databases of private company performance information and using that to build these fancy analytical charts. But also people's views about what could succeed weren't as hard coded and people, honestly, Alex, weren't trying to invest as much money. And if I fast forward to today, I look at the world and say venture firms are trying to put much more money to work in an average year than we used to. I think that's objectively a fact. Second, computers, data and analysis have become much bigger part of the job even before AI. So now people have a sense of like, well, what is best in class top decile SaaS, month over month growth rates look like. A lot of firms could tell you that at any point in time what they're seeing on the market. And I think what's really happened is people are trying to put more money to work. And I think the easiest way to do that is to become algorithmic in the way that you deploy capital. You can just say we're looking for companies in these categories with founders from these schools, with these academic backgrounds who worked at these companies. And when you find them, just do them because on average they're going to be good. And what's missing is the ability to meet somebody who doesn't fit that pattern and spend time on it. And I don't mean this as a criticism, but if your goal is to invest large amounts of money in seed. I'd argue the only way you can do that is you've got to have some pre existing algorithm that describes what you're looking for. And the more money you have to put to work, the greater the probability that the investments you make will conform to the algorithm. Otherwise you just can't do it. And if I look at a lot of the best investments we've made at Precursor, they don't fit an algo. There were things that were weird about the market, there were things that were maybe atypical about the founder or his or her background or the team composition. And it's kind of like if you were going to hire people just off of like a resume screener tool, you're going to miss people who maybe have really relevant experiences that the algorithm doesn't catch. So I worry that as we scale up dollars here, the number of people who have the taste, time and attention to meet people that don't fit these algorithmic screens, it's going to be bad for our business.

Can you give a few examples of these weird and wonderful companies that metrics driven analysis would have missed?

Yeah, I mean I can give you a couple of examples. One of our best performing companies is a company called Carat which originally started off focused on fertility benefits. But you know, the CEO was a first time venture backed founder, had come out of a biz dev background, so not engineering or product, had worked at a startup but hadn't been a startup founder before, was not in digital health and has built a truly remarkable company. But if you met the CEO Tammy of this company, she's an incredible person, she's super compelling. But I'm not sure that someone who said well we're looking for people who'd worked at One of these 10 digital health companies who have experience in this category. It wouldn't have clicked on any of those metrics. So that's, that's one that I think about a lot. Another one that I think about a lot and it's a company that has done super well for us. We invested in a company called Rad AI in their seed round and I had invested in the CEO Dr. Gerson and his co founder Jeff. I invested in their previous company which was doing this battery charging startup, think like cell phone batteries on demand type of startup. Yeah. And it didn't work out but I got to know Dr. Really well and he'd done YC and he came back to me and said we're going to do this AI based radiology company but this was seven years ago, before ChatGPT, before LLMs, before all of this stuff. And that has turned out to be one of the better companies that we've invested in. But it's someone whose last company didn't work. One of the two founders knew something about radiology and there wasn't a lot of belief at the time that machine learning and AI could solve the problems in radiology that they were solving. And probably for me, the most satisfying one of all is Bobby Baby, because Laura. At the time when I met her, Laura Modi was a solo founder building in a regulated industry in infant formula, which most VCs had zero background or experience or success investing in. And she had not manufactured or made an FDA certified product in her previous career. And most people are like, ooh, regulated industry, single founder, no previous experience in the domain, like, not something most people are looking. Most people don't have a screen looking for that.

What would we add to the algorithm to capture some of this?

What's always drawn me to Pre Seed, Alex, is the upside of people who haven't done it before. And I would argue that the venture business has become incredibly efficient at backing repeat founders. Which is not to say that repeat founders have an easy time raising money. I would argue they have a much easier time than the average person because they have a lot of the hallmarks. And I think what's fun about Pre Seed is trying to meet people who haven't done this stuff before, size them up and try to find that small cohort of people who have what I call a ton of latent managerial talent. I think everybody here is a ways away from their sort of individual contributor jobs. But I'm sure all of us have worked with people where you're like, wow, this person has so much more capacity and capability than what they're being allowed to do in this job. I wonder what they'll do when someone really unleashes it. And that's what I'm always looking for, which is people who haven't done it before, but where, when you meet them and spend time with them, you're like, oh, you have everything other than the opportunity. Someone just needs to put you in that chair.

I love that as a through line. My ongoing concern, and we talked to so many investors about this, is there was just so many companies funded. So many, so many. And it's just really hard to see how they all come together. You might have seen, we talked to Elad about rolling up some companies. I mean, what are you thinking about? Just as an industry observer as well as an active investor. How things evolve from here.

Connie, I think about this a lot. I think for the 10 or 15 most popular companies at any point in time. So if you think about all of the Elon companies you add in rippling stripe. To me those are like quasi public companies already. We don't need a solution for that. The secondary markets, you can buy and sell in those companies. Well, if you can find a seller, you can transact in those companies as if they're public. That's a solved problem. I do think we will see more companies going public again. I'm not sure when, but there will be some uptick. The two things I'm really interested in one are I'm seeing more companies catch the eye of private equity. I'm seeing this even within our portfolio and it's a very specific profile of company. It tends to be a company that's profitable or nearly profitable and they're growing more like 40 to 75% a year, not like 300% a year. And we're finding people who are interested in becoming buyers of those companies. Now the scale at which those outcomes are happening, you're always going to have the Vistas and Thoma Bravos coming in and buying some of the more mature stuff. But I'm starting to see that happen for companies as early as 10 million in ARR. And I think we're going to need someone to step in because if the biggest venture funds in our industry kind of only care about $25 billion outcomes, I mean if you just do the math, if you have a $5 billion fund and you want to return the whole fund on a single deal, you need a $25 billion outcome.

So interesting. Well, do you want to spin up yet another firm? I mean Hans kind of does some of this.

Yeah.

And Scott Irwin.

Oh, Scott Irwin. Oh yeah, yeah, yeah. So look, I think you're going to see more private equity type innovations coming to venture roll ups are one strategy. I think another one is going to be people who buy and hold these companies and maybe we'll start to see people who just buy and sell venture companies and operate them using private equity playbooks. It's funny you think Vista's 100 billion under management I believe now.

Geez, really?

Yeah. But if you look at where they started, Vista and Thoma Bravo's software biopractices were not that large. Now they've scaled as software has scaled and I'm very curious to see who's going to come in and deal with this as you mentioned this kind of middle market of companies that are between 10 and 150, $200 million in ARR, which are probably too small to go public, but are probably pretty interesting businesses in there. And I have a feeling someone, it won't be me, but there will be somebody who I think figures out a really interesting fund structure. Because, you know, Connie, there used to be a bunch of $500 million funds that could make money on those kind of deals. And I think every event I've gone to lately has kind of talked about this whole barbell effect where there's a clear business model for really big funds. There's a very clear business model for very small funds. And the business model for funds in the middle I think is probably under more pressure than it's ever been, which isn't to say it doesn't work. I just think there's more questions for funds of that size.

Absolutely. Well, this ripple effect will take a while, but I'm also, of course, watching what's happening with the Trump administration in Harvard and wondering how that could impact this industry.

Ultimate oh, I think this is a huge. When you talk about what are the things that GPS talk about behind closed doors over beers when no one's listening. Remember, Connie, for most of the last 20 years, the most highly coveted LPs for most venture funds were private university endowments. Yeah, they've had the longest standing commitment in many cases to our asset class. They're highly selective, they're highly prestigious, and they're large, so they can grow with you. And suddenly that's all got overturned. And I've talked to a few of them and I ask them, like, what's life like? And they go, well, on the one hand, we're worried about what the endowment tax will mean for our business model as private university endowments. So that's a headwind. Second, with some of the research funding cuts, some of them are saying we're worried that the university might look to the endowment as a way to plug the gap, to continue to fund important research. And like, oh, and by the way, we're not getting much in the way back in terms of liquidity. And I was like, well, other than that, Mrs. Lincoln, how was the plight? And I'm like, super sympathetic. I don't know how you can't be sympathetic or empathetic to their plight. And many of these folks are like, we've never believed more in the power of venture and we've never felt more hesitant about making 10 to 15 year.

Illiquid commitments I know VCs sort of like to say we don't adjust based on what's happening externally, especially at their early stage. We try to maintain our pacing. But I would say if I was a fund manager right now, I would be really cautious about every check I write, knowing that it could be even harder two years from now to raise another fund.

I think the shift we're in is, I don't want to say permanent. We're going to live with this world for the next three to five years. Specifically, I think LPs are going to have a higher bar set of expectations for DPI in the early to mid part of funds. Most of the really sophisticated LPs I know are like, look, we don't want to bang you guys in the head so hard with this DPI language that you start selling 100% of your best companies at the A. Because when it's all said and done, that's not really what we want. We want to increase your sensitivity to our liquidity needs. And remember, even within my LP base, I have a mix of family offices, institutions, individuals, endowments. They all have a different timeline and perspective on when they need money back.

And are they buying secondary investments directly as well?

Some of them are buying secondary investments in companies that are interesting. Some of them are selling secondary positions at the LP level in funds that they're in. One thing I think that people don't always appreciate is it's not as if my LPs have a monolithic view of what we should do in terms of generating liquidity. We have some who are like, hey, I'd like as much money back as soon as possible, even if that's a suboptimal outcome in the long term. And I know that I'm leaving money on the table. We have others who are just like, I would prefer you hold everything to maturity because that's what's going to maximize my returns. And as the gp, you have to take all of this as input and come up with a plan that makes sense for your fund.

I so appreciate your being candid about conversations that are happening behind closed doors because it's so hard for people to feel confident enough to be open about the real problems facing this asset class. I'm wondering what else is top of mind for you right now. I mean, it just seems like there's a lot of headwinds, to use your word.

Well, yeah, it's funny. One of the best parts about being the board chair of the NVCA for a year was getting the chance to not just look at the venture business through the lens of a little tiny venture fund like mine, but being able to look top down and say like let's look across the whole industry. We're going through a cycle of dollar consolidation that tends to happen in semi mature financial markets. Like you have it in hedge funds, you have it in private equity, you have it in buyout. And I just look at how many of the dollars are going to the biggest venture funds. I wonder what that means longer term for small venture funds. Because if you think about it, it's one thing to take your limited due diligence resources and spend them looking at a large venture fund from General Catalyst or Index or Lightspeed or Andreessen or Sequoia, you're going to probably write a. Well, you're going to write a large check. We won't say how large large is, but it could be anywhere from 5 to $100 million. If you spend a lot of your diligence resources getting to know a smaller seed fund, you might spend an equivalent amount of work to write a check that's one tenth the size. And I think historically the reason to do that has been you got significant outperformance. And I wonder as those dollars continue to consolidate and concentrate in the bigger firms, what does that mean for the attention that will be paid to smaller firms even if the performance is objectively superior in many cases?

I think that venture does really well in periods where people are expecting the worst. And I just think there's such a value in having a sort of a contrarian position in the market. You know, as a smaller fund you're not investing in just in these silos of AI and defense. As you pointed out in your article, you're spreading your bets in different areas where other folks are not investing and your providing good signals to institutional investors. I think there is a lot of value in that kind of investing.

And Alex, the thing I think about the most is I started Talking to my LPs about this a year and a half ago that like ventures kind of pulling apart their barbelling, whatever you want to describe it as, there is a world for the biggest funds and I think for the biggest funds the challenge is if you're going to continue to grow Aum, what does it mean to be a vc? I think it's really cool personally to see people running these experiments where hey, we're going to buy a hospital if you're General Catalyst or we're going to try roll ups or if you're coming back to General Catalyst again, because they're doing a lot of innovation here. We're going to put together something that's effectively a lending facility to allow people to finance customer acquisition, spend. These are not things that have historically been associated with the world of venture capital. They're certainly part of finance. I was talking to a friend of mine, I was like, well, I guess venture capital is now fully part of finance. And I think for most of my career venture has felt like a part of finance, but also apart from finance, if that makes sense.

An art, not a science.

Yeah. An art, not. That's better said, Alex. An art, not a science. And I think as the amount of money that's coming into our category has grown, ventures beginning to look more like other elements of finance, particularly private equity and buyout, and less distinct. And I think that comes with a whole lot of different implications for who we are and how we talk about the work we do. Because it's a lot easier to talk about venture as a differentiated thing when the nature of the work and the nature of the business feels really separate and distinct from those other asset classes. And I think a lot about what's it going to mean when venture feels a lot more like some of these other sub asset classes of finance.

One thing, Charles, I do wonder about, of course, AI. I'm just wondering how that impacts the companies that you're working with. The constant question is, how much can AI really help these companies scale? It seems like a lot, which is great. Of course that means more companies can scale faster, which means, I don't know, we could run into the same problem of.

I, you know, I think probably one of the hardest things I've had to do in the last year is explain to people that I am not quite as enthusiastic about the short term. I'll be very specific when I say the short term prospects for AI powered businesses.

Yeah.

Which is very different than my enthusiasm about the long term transformative power of AI. And the last time I felt like this was the Internet in 1999, which was like you could see all of these use cases that were amazing. They just didn't work. And when I say they didn't work, there was some combination of human behavior, technological adoption, technological progress and kind of like rewiring of the way the world works. That had to happen for the Internet to work. Like I was telling my friend, I buy groceries online all the time now. I just buy them from Instacart. I don't buy them from Webvan. That's not like Shade on webvan. It's just like webvan did the best they could with the technology that was available at the time. And Connie, I have two companies in my portfolio that, you know, we have 275 active companies, so it's big. I have one company that is absolutely convinced that software powered salespeople are the future of the business. And I have another company that's absolutely convinced that like they should be abolished and they sell competing companies with, but they're also living in the same world and they're selling to similar customers. And so I've learned a long time ago that if you tell founders a metric, that metric will become the goal. And people talk to me a lot and say, wow, look at this, like really rapid growth in revenue. And I'm like, well, in some cases this is real. And in some cases I've talked to companies who said, oh, we've bought every product in that category. So the fact that that company's name is on everybody's logo slide, it's real. And I think if I put myself in the shoes of a venture backed or Even a Fortune 500 CEO, the one thing I wouldn't want to go to my board and say is we're not spending any time or money trying to apply AI to solve our company's business problems. You'd probably get fired.

Right.

So we'll see what happens when some of that spend gets scrutinized a bit more and people know a little bit more about ROI. But I wouldn't be surprised if in 5 years you look back and say, wow, some of these companies were totally onto something. It was just a bit too early.

Yeah, interesting. I guess. Just generally speaking, does it feel any more collaborative to you or kind of the same Again, just considering that you're all kind of facing some of these challenges together in real time.

I think among the smaller seed funds, it feels collaborative again. And I think it's partially because seed fund sizes have sort of stopped getting much larger. And I think everybody's kind of found their footing also. It just takes more money and time to get companies from zero to one nowadays.

Right.

So if you're going to do that as an early stage investor, you have to have good relationships with people, other people in the ecosystem.

Well, Charles, I hope that we see you in person in the not too distant future.

I will make the trip for you, Connie.

The Strictly VC Download podcast is hosted by TechCrunch Editor in Chief Connie Loizos and me, Alex Gove of Strictly vc. Strictly VC Download is produced by Maggie Nye. With editing assistance by Teresa Lanconsolo and Kel, thanks for listening. We'll see you back here next week.