VCs Are Cockroaches: Why Venture Funds Never Die

I also think there's this feedback loop in venture where a lot of people want to get into hard to access deals. And I think some of it is this competitive dynamic in our business where winning and getting access to stuff that's hard to get into is different than getting access to stuff that's good.

Our friend Rob Goh raised the question in one of his pieces, quote, is the best talent, irrespective of background, actually getting a shot versus the same kind of person getting the shot no matter what?

There are very few of our most successful companies in our portfolio that were started by repeat founders who had a big success first. We have some. We have some who had other companies before, but in most cases those companies were not of consequence.

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 ATT over the past week. Our first topic is a LinkedIn post from Micah Rosenblum at Founder Collective, who stated that VCs are like cockroaches. He's addressing the murmurs about VC funds merging and disappearing, with people asking will the VC market finally shrink? His cockroach comparison centers on how VCs are hard to kill and rarely merge. Even funds that shrink over time continue to endure. Part of this resilience stems from venture capital being a people business, which makes combining firms nearly impossible. Additionally, LPs often invest in the individual running the fund as much as the brand itself, so they're essentially signing on to a series of fund investments from the start. He concludes by questioning whether this current cycle will be different given that multi stage funds hold so much capital weight and could potentially tip the scales. However, the resilient cockroach nature of VCs might ensure the market remains unchanged. We've talked about the shifting nature of the fund manager market all the time, so wanted to pause and see if you had any new thoughts after reading this one.

Yeah, it's funny, I've been a VC off and on since the early 2000s and when the Internet bubble burst everyone's like, oh, you know, the industry's going to permanently contract. There's going to be far fewer VCs firms are going to go out of business. And to be clear, there were firms that disappeared and went out of business. That absolutely happened, but not to the degree that people thought. And the longer I am in this business, a couple things are true. 1 Once you raise a fund, you have A fee stream that lasts you essentially for the life of that fund could be 10 years, could be 12 years, could be 15 years. But you, you have a fee stream that can keep you in business even if you're unable to raise your next fund for a really long time in a way that few other businesses allow you to do. Second, I think the egos involved in this business oftentimes make it difficult to merge firms. And also I often question if you have one firm that couldn't raise money or was having challenges and another firm that was having challenges. Putting those two firms together is unlikely to produce a new winner. If you have a firm that's doing well and a firm that isn't doing well, the firm that's doing well is like, well, why would I want to acquire the assets of a. There's no real aqua hires in venture. Maybe occasionally. But like, like there are in startups, we're like, oh, this person has talent. Because in venture the output of your talent is the decision making and the companies you get into. And if that's not good, I'm not sure what you're really acquiring. And I think the other thing that's worth remembering is you can have a three person venture fund that fails where each of those people independently goes off and starts his or her own venture firm. So one venture firm that fails can actually create three brand new venture firms. So it's not like failure always reduces the number of firms the industry. Now look, we have seen some things that look a lot more like acquisitions in venture, which is a new thing, a newish thing. You know, back in the day there was the rumor that Klanner Perkins was trying to acquire social capital. And in the end they did get Moon to join them, but that was like a publicized thing. General Catalyst has bought two franchises and also brought on Yuri to lead early stage. So I just always ask myself, what are you really getting when you buy a venture firm? You're usually getting some combination of the management fee stream that that fund is entitled to in the future. Which if you're a big multi stage fund, that's a drop in the bucket that doesn't really matter and you're getting the portfolio. And so Mia, you know, when things started getting hard for emerging managers in 2022, I had some LPs who came to me and said, hey, do you think you're going to acquire or pick up any of these venture firms that maybe you're going to have a hard time raising? I'm like, so let me get this straight. The Same firms as you can easily keep in business by giving them money, I'm supposed to see fit to acquire them. Like that doesn't make any sense. Sense to me. So I don't know. It's very hard to end these things and it's very hard to combine them. And I think the real funny thing to me is that one venture firm can produce a number of net new firms as people peel off and spin out.

Well, that's something that I was going to have you run back because I think if you're a founder listening to this podcast and you just heard that blurb, you can have a completely failed venture fund spin out and have three new people raise potentially like over subscribed new funds. How does that even happen?

You know, I think limited partners have a very difficult job in trying to decide who to fund. And sometimes the real answer is you have a relationship with someone. And there are certainly circumstances where there are three, two or three people who are like in any relationship. They are good people, but they are not good together. And I have seen some venture breakups where the individual partners are good investors with their own strengths as investors. But in a partnership, maybe there was too much bad blood or too many things that happened or something had gone unsaid for too long where those two people can no longer work together. But that doesn't mean they're not both good investors. And so I think that's the thing that's important. And a lot of like what makes a good investor, I think is oftentimes LP perception. Sure, if you've returned a ton of money to LPs and DPI, that counts for something. But most venture capitalists haven't done that. They've got paper markups and they've got the strength of relationships and the strength of the brand that they're leaving. So I've certainly seen cases where LPs have told me, yeah, those two people are both great, they're just sort of no longer capable of working together. Or those three people can no longer work together. Whatever, whatever the combination of individuals in question might be.

One last question here, I guess. Is a bit of consolidation or fund sunsetting when it happens a good thing in venture? I feel like we've been talking about managers deciding to not raise subsequent funds and actually finding that to be really more of a sound choice based on personal circumstance.

I think it's necessary and healthy for the industry. Let me be clear. I don't feel good saying this. I don't want anybody who, who dreamt of being A venture capitalist to have that dream taken away from him or her. Because the truth is like, it's an amazing job and there really isn't, in my opinion, a really great next best job you could get once you've been a venture capitalist. It is kind of a peak job. But I think if you raise LP capital and, you know, you're not able to produce decent returns and you can't convince LPs through relationship charm, insight or intellect that they should give you another shot, going out of business is probably the right thing and that capital should go to somebody else who either has an established track record or who deserves a shot at their first time. But I also think because these fund relationships are so long, I'm sympathetic to LPs who are just like, it's really hard to tell somebody no. Now maybe in a new relationship it's not as hard. You've been an investor in the fund for one or two years and the, the most. Probably the. The one piece of feedback I remember from when I first got started, I had a really good, really well placed advisor who'd been a GP for a long time. I said, what advice do you have for me? He said, just make sure your first fund is really great. He's like, if your first fund is really great, it will buy you a lot of grace, it will buy you a lot of time and it'll open a lot of doors for you. If your first fund isn't great, it's actually very difficult to recover from that. And I didn't fully understand what he meant until till later because that, I.

Assume, felt obvious in the moment, but then going through it 10 years later, you're like, I can see how that would be a roadblock.

Someone who I was an. I was an intern for this guy and when I was in high school, this guy named Mark Willis, like, shout out Mark Willis. And I worked in his Smith Barney brokerage office when I was in high school. And when I was getting ready to go to college, I asked Mark for some advice and he said, get good grades. Which sounded like the most obvious advice. And I'm like, why, Isaac? If you get good grades, all the doors you'll want after college will be open to you. And it seemed so obvious and it was honestly super good advice.

Our next piece is from Emmanuel Mayberg at 404 Media, titled the Software Engineers Paid to Fix Vibe Coded Messes. This focuses on the ironic phenomenon of engineers making money by collaborating with teams who essentially Vibe Coded their projects to life and now need Assistance making them actually functional and polished. The projects range from fixing inconsistent UI UX design and poorly optimized code to restructuring color schemes and layouts. People across Fiverr are offering these services and making money by delivering this type of value for folks who want to build something fast and be more cost efficient in that last mile delivery by bringing in a person rather than spending more money on token spend. One of Emanuel's quotes was if the resulting software is so poor, you need to hire a human specialist software engineer to come in and rewrite the Vibe coded software. It defeats the entire purpose. Of course, engineers coming in to unwind and fix entirely botched non functional projects feels really ironic, but some folks would argue that Vibe coding allows more product minded individuals to get closer to an initial version of a project than ever before. Any thoughts on this?

And then the article itself I was joking. I was like, well there have been a bunch of people who said that the rise of AI would create a bunch of jobs and job types that we didn't know before. And here we go. It's very interesting to me to see like on balance, what does this mean? If you vibe code something and then you have to spend a bunch of time having professional developer clean it up, are you better off? Maybe. I mean I've had the experience where I've built some things myself in cursor or using cloud code where I'm like this is kind of clunky. I'm sure a professional software developer could write this more efficiently or make it run better. But I think this is sort of the natural again rubber meeting the road experience we're having right now with AI, which is people are like oh, I could vibe code something in 10 minutes. I'm like, you could, but it won't be perfect. And getting that fit and polish and usability right still, I think requires professional help in some cases. I don't think this is like a knock on Vibe coding. I think it just means that there are going to be cases where people build things that are beyond their ability or the system's ability to naturally fix and you're going to need professional talented people to come in. I'll be curious to see if at some point some of these Vibe fixers come in and just say you should just throw this thing away. Build you. Build you something that does the same thing for half the price it would take for me to fix your Frankenstein thing.

Yeah. And you as the product minded person are probably none the wiser of kind of being like, okay, I guess you're Right. It's like going to a car mechanic shop and I'm telling, like, this thing is broken. You're gonna have to.

Yeah.

When I think about Fiverr, I think a marketplace for commoditized talent, so you can get quick projects done through specialist support at a fraction of the price. So it's interesting that with Fiverr, I assume that maybe that cost could be quite low to bring a project across the line. But if you're thinking about it from the standpoint that the article is describing it, that extra 25% that the project needs to be taken and polished is probably the most important part of the entire build. There's an argument to be made that you should actually probably spend more on that than trying to cut costs there.

Or maybe the answer is, you Vibe code the prototype and you get a professional person to build a production version. And I also just wonder, will there be specialists who are like, oh, I'm a replit. Vibe coder, fixer specialist. Which is different than a lovable Vibe coder.

Oh, I bet.

Specialist. Because there'll be people who understand this is the nature of the mistakes that each of these platform tends to make, and here's how you undo them. You know, I've thought a lot, like, what does AI mean for Fiverr? And Fiverr has felt like one of these Fiverr slash upgrades felt like one of these platforms that was really susceptible to AI because a lot of the work that they were doing was labor arbitrage of people in other countries doing tasks for less money than they could be done onshore.

I was just talking to a founder actually today who Vibe coded a decent amount of the product and was curious if they should work with an engineer to build it out even more and get it closer to, like, a more polished V1 or bring it to market just so that they could start reaching customers first. And I think the correct answer or the way to go about it, or the one that we just talked about was, okay, well, what do you want the first interaction to look like between your customers and their product? And that's kind of up to you. Do you want them to kind of know that it's a work in progress and be okay with the fact that, let's be honest, it kind of looks like a ChatGPT wrapper? Or do you want it to feel something a little bit different and more personalized? If you want that second one, you're going to have to wait. And I think that's up to founders of deciding, are you going to be patient enough to build something that's a little bit more in line with what you hope to ship out long term.

And I think VC expectations now are that you should be able to vibe code something awesome already. And I think it's actually as someone who builds stuff, it's harder than one might think if you don't do it regularly once you add in any level of complexity.

Our last topic is a recent piece by Jacob Robbins at PitchBook titled why Serial Founders still have a Fundraising Edge over First Timers. Part of this has to do with the current market where investors are looking for safer bets and larger outcomes, which right now come in the form of repeat founders. PitchBook shared data showing that median pre seed and seed deal sizes continue to be much higher for serial founders, more than double compared to novice founders, with this gap continuing to grow across all stages but being the most prevalent in the earliest. From a valuation standpoint, that Difference is anywhere from 2 to 3x between serial entrepreneurs and first time founders. Our friend Rob Go raised the question in one of his pieces, quote, is the best talent, irrespective of background, actually getting a shot versus the same kind of person getting the shot no matter what? So obviously in a market where investors are eager to return capital, I'm not very surprised that this return to a safer founder profile is happening. The piece goes on to say that AI has magnified this trend where the startup costs to bring an AI concept to life are much higher and it becomes difficult to hand off a $20 million or so capital lump to a first time founder. Wanted to pause for your thoughts here. Just knowing you've seen it in so.

Many different cycles, I don't think anything I'll say will surprise you. When I read that subject line I was like, well, second time founders continue raising more capital because that's VC's preferences. Yeah, and it's so easy. And I almost shared this in the discord. My friend Narayan from Franklin park had this really interesting LinkedIn post about pedigree and he's like, well, maybe once upon a time like pedigree meant something, but how many people have now started companies on the Internet in the last 20 years? And what does being a repeat founder, how does that give you pedigree when the pool of people who have that pedigree has become quite so large versus someone who's left OpenAI, that's a much smaller pedigree pool. And I think I've learned two things. You know, I've talked to a lot of founders who've been angry. They're like, well VCs have this cynical preference for second time founders because you know, the memo writes itself if the company doesn't work out or people from fancy schools or fancy companies. It's easy to justify why you made the investment if it doesn't work out. And I don't think it's just that as you know me, like working with first time founders is kind of like Groundhog Day. You have the same experiences with different characters in different circumstances, but the same experiences over and over. And a lot of my peers are like, I don't want to do that anymore. I did that early in my career as a VC and now I basically want to work with people that are more mature and more experienced and who can handle more of the day to day, 0 to 1 with less input for me. And part of what they're paying for when they pay up for pedigree is they're paying up to be able to say I expect you to be able to handle more of this on your own without me. And for some people I think that's just at this stage of their career they would prefer to work with people like that. But you know, where do people think second time founders come from? So I really do worry that we have dramatically over rotated to second time founders or people who are who weren't even like the principal prime mover in a company but were adjacent to the right company, the right space and we're imbuing these people with darn near sainthood and we're ignoring the possibility that people with less experience have more talent. I think we're doing a big disservice.

To the industry and I always, I guess, wonder. I think it's funny with second time founders having such a large halo effect and of course a large portion of that is deserved. It's so incredible when you're able to accomplish something successful in the startup world, but to be able to, I don't know, have like lightning strike twice is crazy. And typically the founder goes off and starts sometimes something in a completely different industry. That's their second act. And it's funny that they get the same halo effect as being a second time founder in a completely different area with a completely different team in sometimes areas that they have no business entering into. I find that that happens a lot and folks are more willing to bet on that than a person who maybe has like a little bit more expertise, maybe not as much pedigree, but folks are really desperate to hold on to the fact that they've done this before. Driven the ship, albeit a completely different in a completely different market. That's just interesting to me.

You and I see that a lot in digital health. People who know nothing about health who are successful in some of their domain. I also think there's this feedback loop in venture where a lot of people want to get into hard to access deals. Many repeat founders have relationships with VCs which allow them to create more favorable deal dynamics, which create more deal heat, which makes the deal feel more competitive, which makes people want to get into it, which makes winning it and getting into it feel better whether the company is successful or not. And I think some of it is this competitive dynamic in our business where winning and getting access to stuff that's hard to get into is different than getting access to stuff that's good.

Yeah.

But in the moment, oftentimes the focus is like, ooh, that's competitive and hard to get into. I want to win and get into it even if it's maybe not a great investment.

Yeah. So much of it is just outward signaling of what looks good to other people. But I would say, I don't know. Looking at our own portfolio, how many of our best bets from our earlier funds are from repeat versus first time founders?

There are very few of our most successful companies in our portfolio that were started by repeat founders who had a big success first. We have some, we have some who had other companies before, but in most cases those companies were not of consequence.

I guess that's actually a good question. How do you weigh a second time founder who maybe their first act wasn't successful at all? How do you approach that and stand them up next to a first time founder?

I think the big thing I'm always trying to figure out is what did that now second time founder whose first company wasn't super successful, what did they learn or take away from that experience? And I tend to judge them by a higher standard. I expect them to know, assuming they raise venture for the last thing. I expect them to be more knowledgeable about fundraising. I expect them to be a better problem solver. I expect them to not get intimidated by how hard startups can be to build and scale. I frankly expect them to just be better than I would for a first time founder.

Last question. I mean our fund is, I would say 2/3 first time founders, 1/3 repeat. Would really love to hear how you've been able to see the strength and weaknesses of different profiles. Especially in, I feel like today's VC market where it's definitely split out into two buckets of the haves and the have nots. I find that it's very rare. We have these like middle, middle road folks.

I think the one thing I love about first time founders is oftentimes they, they don't have like a playbook from their last company that they followed. And oftentimes they don't have a playbook at all. They're like, oh, I'm just going to reason from first principles now. Sometimes that leads to waste and efficiency. Other times that leads to truly interesting breakthrough ideas that are so different than what other people would think of. And those people are just following their instincts. They're not trying to pattern match to a playbook. They're not trying to like follow something they read in a blog. They're just like, I don't know any better. So I'm just gonna follow my own instincts here. And I think it's kind of magical. We, we have a handful of companies where I think it was the lack of playbooks and the lack of sort of knowledge of what to do. I can honestly say the same thing is true of emerging managers starting their own funds. I've met some people who are really good investors precisely because they simply hadn't been indoctrinated into the things that other people have. And they have different beliefs about what good looks like and where to find companies and how to work with people. And so I think this is why, like every industry needs newcomer outsiders, because they just bring a different perspective.

Well, we are all out of time today. Thank you, Charles, for stopping in. Thank you to our folks for stopping and listening. Please like and subscribe and we will talk with you all next week. Thank you.

Bye.