VCs Only Fund Trillion Dollar Ideas Now | Funded Teams With No Plan | How to Be Legible to Capital

I think if you're a founder who's been out of the market for 2 years, I don't have a good analogy, but it's like you've been living in a cave. I told my friend, it's kind of like the first episode of season 2 in Silo. She like gets out of the silo and she gets past the VR field and then she sees this like wasteland and you're like, oh, it actually was as bad out here as they said it was. And I really do think that that's the experience I see is happening for a lot of founders whose priors on the market aren't correct.

It's the week of September 7th. Welcome to The Learning Corner, a Precursor Ventures podcast. Welcome to The Learning Corner by Precursor. I'm Mia Farnham, 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. Our first piece this week comes from Ethan Kurzweil, co-founder and managing partner at Chemistry, titled Go Big or Go Broke: The Middle Ground Is Gone. He opens with the pink elephant thought experiment—the idea that once you're told not to picture something, you can't help but see it—and argues that the venture industry is stuck on its own version: the trillion-dollar startup that no one can unsee. Now that we know a trilicorn is buildable on a venture timeline, capital at every stage is concentrating into the biggest possible swings, and the most ambitious founders have learned that the more aspirational they sound, the more funding they attract. The catch is that the biggest winners of every era rarely started out looking that big. Ethan's worry is that the pedestrian double or triple has become a relic and that progress in out-of-favor sectors like SaaS, consumer, and commerce turns linear, gated on a stubborn few tinkering outside the spotlight. His advice to founders is to pick a pole. If you are out of favor, make sure your business and your psyche can survive there longer than you think. And if you're a consensus needle mover, that is not a train you can get off to rest. Wanted to pause here for your thoughts on the piece first, Charles, since it was a, it was a good one.

I feel like I've given various versions of this feedback to our portfolio companies. It's varied from sort of nobody cares, that's the only problem with your business, to it's binary. There's, I told someone today, there are haves and have-nots, and if you're not sure which one you are, you're a have-not. And I think it is true. I think people are holding 2 things in their brain at the same time. One, the cursor SpaceX, and soon probably to be Anthropic and OpenAI, are outcomes that are so extraordinary that they like reset your brain. Well, if that's possible, why play for anything less? And I'm like, okay, we've seen this 3 times now. Does 3 times mean that it's the new goal? Or does 3 times mean you've really seen through 3 once in a career, once in a lifetime companies in a very short timeframe? What I do know is most people are just like, I can't unsee it. And so I've told a handful of companies that's like, yeah, you have like a very high probability of being a billion-dollar company, but a 0% chance of being a $10 billion company. And nobody's going to fund that. They're like, what do you mean? I'm like, a billion dollars is a big outcome for you, for a fund of our size, for just about everybody, except for people who are managing gigantic pools of capital. For them, it's just not a needle-moving outcome. And they are in the needle-moving outcome business. And so I think as those funds remain large or even potentially get larger, the scale of interesting outcomes is only going to get bigger. I think we have a lot of very, very large private companies, whether that's a Base10 or a Harvey or all these companies that are worth well more than $10 billion as private companies, still with, in my opinion, probably a fair amount of work to do and no immediate plans to go public. I think if you're a founder who's been out of the market for 2 years, I don't have a good analogy, but it's like you've been living in a cave. You come outta the cave. I've told my friend, it's kind of like the first episode of season 2 in Silo. She like gets out of the silo and she gets past the VR field and then she sees this like wasteland and you're like, oh, it actually was as bad out here as they said it was. And I really do think that that's the experience I see is happening for a lot of founders whose priors on the market aren't current.

I had a whole strategy meeting with one of our founders heading into fundraising in the next couple of weeks. And you of course go down the list of different funds you wanna reach out to, what tier they fit in. And the conversation has changed so much since the last time they went out.

Yeah.

Of maybe 2 years ago, I could totally see that person being interested. Let's just put out the soft connect and we'll see where they fall. Now I could firmly say there's a large portion of that list that I would say, I wouldn't waste your time or your energy there. I think our time is best spent elsewhere. And I think that's created a whole new dynamic of like, there used to be a lot more conversation for seed, and there still is, of, of who's leading your seed or the next round and what that means to the audience. Now, if a large portion of those more buzzy firms are only corralling around specific things, who kind of gets to signal something positive for the things that are a little bit out of favor, or do people just not care, is the question mark. And if that's the case, then I'm sort of like, okay, let's talk about fundraising from a perspective of like, who can we get around the table to just supply the capital and make this journey less painful for you? And then we have to talk about things in the long run. It's such a new and different journey.

I think the other thing that's hard is I have friends who used to be specialists, and those specialist firms have strategies that will not get them into SpaceX, OpenAI, or Anthropic. And most of them have concluded a strategy that doesn't get me into a trilacorn is not a venture strategy I wanna execute. Yeah. So this is the other thing founders have been like, well, what about this person? They invest in my category. I'm like, they used to, now they don't. Now they're an AI infrastructure and physical AI investor. And they're like, but how? And I'm like, Because that's where the money is and they'd like to remain employed as venture capitalists. And I, I, I think there's one other wrinkle, which is we have some really great high-performing companies that are in sectors that are not in favor. And those companies just continue to execute. And their job and our job is to stay alive and stay in business long enough for people to eventually care. And I think the one good thing is there are lots of industries where AI infrastructure is not the most important business problem. And then those categories, M&A markets are good. Those companies still feel pressure to acquire things to grow. And it's very possible. I told someone for the first time ever, kind of changed my tune on when we should get strategic investors involved in companies. I'm like, it's not so bad to get them involved earlier if financial investors are really not a realistic option.

Yeah.

As is the theme of our pod for the last year. Every week I feel like things are different than the week before.

Some of the biggest names that we know in tech today just weren't the original ideas that they came to market as, and that was part of venture. That was like a beautiful aspect of what people were drawn to the space on. Now I think it's very clear that you have to come to the market with a massive idea. That's what people are calling for, and you have to stick to it, which is very different. My question is, do you think this is the new era of venture? If we give you tons of money, You have to commit to this idea and make it come to life, and you have to present it as such. We don't need you to start so niche, or are we just in the bubble? Because we always have talked about on the pod how venture capital as an asset class is maturing, and so therefore are the ways that we think about what we seed for first institutional rounds. Does that look completely different because there's so much capital in the market? And if that's the case, how does that negatively impact the industry and sway founders into building specific archetypes of companies because that's what they know will? create the most signal and support.

Yeah. I think in a previous episode, we talked about Yoni's post, What Capital Wants. I think these 2 things are related ideas. One is, I think most founders are smart and they'll say like, what is the market rewarding in funding? Oh, it's a very specific type of company. If I want to fundraise, I should build one of those because raising money there will be much easier. I think it creates a lot of distortion. I also think something we don't talk about enough is in many cases, if a VC firm gives you Or invest, we won't say give, invest $100 million in your company. They don't want you 6 months later to be like, oh, here's $99.5 million back. We couldn't figure it out. You're now, in my mind, stuck with the responsibility of finding a business that is worthy of the scale of the capital that you've raised, even if it's not the original idea. So you've raised that $1 billion. Great. Oh, the thing we were doing didn't work. Wonderful. You have $99.5 million to find something.

Yeah.

That is a multi-billion dollar outcome. Have at it. And the, the sad thing is the VC will move on. They'll be like, oh, that company lost their way. They've got a lot of money. Uh, they better figure it out. I'm gonna go find the next company where I'm as enthusiastic about their prospects as I was when I made that investment. And the founder is left there to work it out.

So, and it takes a long time to burn $100 million.

Super long time.

Too. So, and I would assume the investors who seeded that, they'll, Be long promoted to partner years later. Or gone. Or gone and gone and onto the next. Our next piece is a nice bridge from Ethan's, if the market is only funding the biggest possible swings. This next piece is what happens after the money lands. It's from David Kahn on his Substack titled, They Built the Team, They Raised the Money, Now What? David's observation is that the market's rational response to an uncertain era has been to invest in teams. Rather than ideas. Ideas change and teams stay the same. But every zig brings a zag, and the zag is a generation of well-funded startups, wonderful teams, big visions who don't actually know the steps to get there. And as one founder put it, I know what the destination is, but I'm trying to figure out the steps along the way. He traces how we got here: talent that's attracted to big problems and repelled by details, a venture ecosystem that has shifted to a call option mentality, The uncomfortable part is that these founders often have nobody to turn to because admitting that there's no plan would demoralize the team, investors they already brought on board. He also points out that most of the valuable AI companies of this era were not amorphous at all. Clay, Harvey, Cursor, and even Anthropic all started with very concrete problems, and OpenAI is really the only one that succeeded with the open-ended search formula. His closing distinction is the one that stuck out most. There's a big difference between big vision for the sake of big vision And big vision because I cannot live with myself if I don't solve it. How often are you seeing this exact shape right now?

I think this is the archetype for a lot of these, particularly if it's a very strong technical team and they're working on a technical area of AI. One, it might be the fact that only the people working at that company truly understand the nature of the technology and solution that needs to be built. And 2, I think right now, We're in this era where I think a lot of people, investors say this, they don't mean it, but I think they say it, which is like, oh, this is a really smart team. They're working on some esoteric problem. If this doesn't work, we can probably foist this team upon a model provider or some other large acquirer who will value the AI research talent and can put it to better use than that team could independently. And in every news cycle, there's always been this like, oh, well, we have a talented team. The worst case scenario is that We will get the TMac wired and get our money back. And that remains the floor until it isn't. And then when it isn't, suddenly you're like, oh, there's no market for these companies that aren't working. Oops. That changes the calculus for us in terms of how we have to think about this. And that is hard. That's a hard, that's a, that's a hard thing to deal with. So I guess the one thing I come back to is a long time ago, good friend of mine, founder of Collective, would always remind me, you know, capital has no insights. And we have founders in our portfolio who have a lot of money and they're like, what should I do? And I'm like, I don't know, but spending more money and hiring more people is probably not going to get you closer. The answer is probably to find the thing worth building or go solve the question that's, that you're stuck on. And that's where the answer lies is like in doing the work and figuring it out. I've met some people who've raised a lot of money and I talked to them privately. They're like, oh, I don't know what we're doing. We've been giving a lot of money to go after this problem. Step 1 is we have to sort of define what does it mean to like, quote unquote, go after this problem. We raised a bunch of money to work on the intersection of AI and molecular science. I'm like, what are you building? They're like, we don't know, but it's going to be at the intersection of those 2 things. And I'm like, that's, that's pretty crazy.

To play devil's advocate though, I agree with you. Like, capital doesn't equal insights or a good company. But if you're a founder and then you look over to the right and you just watched one of your competitors launch out of stealth, $100 million. Again, these are like unprecedented times. Yeah, yeah, yeah. This is new. How do you react to that? Because previously I'd be like, yeah, capital doesn't equal insight. A certain amount doesn't equal insight, but buys you time, buys you distribution. In this, in this stage, it depends on what you're building, buys you compute. These are all things that I think you have to weigh differently.

And I, I think like the other thing is it used to be fine, our competitor raised a little bit of money, For the next 12 months, there's going to be this fog of war where nobody knows who's winning, but they raised last. But when companies are raising like $100, $300, $500 million, it changes the calculus because those companies, it feels like a long time for the fog of war to clear. And I think that's one of the things that's changed with the kingmaking. It used to be like, oh, that company got a $10 million seed round. Everybody else had $2 million. That company has a head start and a resource lead, but they too will have to fundraise. And 2 years. Now it's like, oh, that company got $100 million. They're not gonna have to, they're not gonna have to fundraise anytime soon. They might choose to because things are going well, but they won't have to, which means the fog of war around their fundraise can persist far longer. And that's just a different world.

One of the points of the piece was that for a lot of these teams that are super talented but have no clear idea of where to chart down first, they have no comfortable place to go from a cap table perspective to share those feelings. Is that an investor's responsibility to create that environment, especially in a deal that looks like that? And if so, what's the line? Where is your stance on that? And I'm talking, I guess, specifically for big rounds that look like the ones that we've been talking about, not the first-time founder, the traditional pre-seed looking round.

I think that's a conversation where as a founder, you gotta go find founder friends. And that's something I think you wanna talk about peer to peer. Well, I would love it if someone came to me and said, I'm terrified that I raised too much money and I don't know what to do with it. I'd be like, well, you've already raised it.

So I appreciate you being open and honest.

But this is a problem you bought, so we can work on it together. But like, it's a problem you bought, you signed up for it when you made the decision to raise this money.

Our last piece this week is from Nikunj Kothari, partner at FPV Ventures, titled Being Legible to Capital. And it's essentially a brain dump for founders raising this fall as we somehow are officially post-Labor Day. His starting point is that this is the most consensus market he's seen in a while. So most VCs aren't doing independent work. They're reading off signals off of you and comparing notes. And the founders who are winning are the ones who are the most legible. From there, he gets really tactical. You wanna figure out who at the firm actually has leverage, get a warm intro to the decision makers, ideally through a founder they've already backed. That's something we've talked about on the pod. And be careful with the numbers you say out loud for round sizes and valuation, because if you announce a larger raise that you have to backtrack, it seeds a lot of doubt and you really can't take it back. Some of the counterintuitive bits are some of my favorites. He said VCs don't want a quote unquote deal. A price that's too good just raises questions. No established lead will take under 10%, and never compare your terms to what a competitor got because it's the single best way to tank a round. He also flags how much hiring great people helps, and that your traction slide should always show the current month. Old numbers smell like stale goods. His closer is a good reminder that even this market gets it wrong, and all it takes is one yes. There's a lot of really specific tactical advice here: the two-week timeline, 10% floor. Are there anything specific in here or things that he hasn't listed that you? believe could sabotage a fundraise or things that matter far more than others?

I think you have to know, this sounds really mean, but I don't mean it. I think you have to know how much money the market thinks you can handle. And I've met some founders where I'm just like, this is a repeat founder who's been successful before. People will trust this person with money, or this is a hot YC company. Maybe you have questions about the founder, but because it's a hot YC company, you know, they're going to raise a lot of money. And I think you have to just understand the dynamics of your own fundraise. How much momentum do you really have? How much leverage do you have? And like, if you have it and you want to max on it, go for it. Extract as much as you can, just knowing that like the people you're extracting from, they feel it too. And if things go sideways, that, that conversation can be hard. And if you don't have a ton of momentum or leverage, you shouldn't act out of weakness, but you should also acknowledge that like, hey, not having that experience. And while there is room to negotiate, we still need to get a deal done. And I do agree, like most people don't want to get a deal. Like venture is not like bargain basement investing. And I think sometimes people say, well, this YC company raised at these terms. I'm like, well, it's because it's YC. And they're like, what do you mean? I was like, well, YC companies operate with different rules than non-YC companies. And that's just the thing. We could argue whether it should be a thing. It doesn't matter. The thing, you know, pegging your hopes and expectations on someone whose circumstances are different than yours is a good recipe for disappointment. I also think right now in this environment, There's a gigantic premium on storytelling and narrative. Everyone's like, oh, we have this traction. I was like, most companies don't have so much traction that the traction will be the lead story. And I was like, and candidly, most investors are still feeling their way through AI. So to the extent that they invest, it's usually not because of like the ARR data or something like that. It's usually like, oh, this person told me a story about the future that feels like the most likely version of the future that will exist. And so I'm going to invest in this company. 'Cause I believe this person. And I think there's some people, I, I, I spent 30 minutes today with somebody where I was just like, the narrative doesn't work. Like the things you're telling me about this, this category and your product, it doesn't hang together in an interesting and exciting way. And we have to fix that. And if you can't fix that, I think you're gonna have a hard time raising money.

It goes into my last question here, but to weave the 3 pieces together that we talked about this week, they're all circling the same idea from different angles. If you had to give one piece of advice to a founder who is not in a hot, favorable sector and is raising this fall, What would it be?

I think most people right now seem to have a pretty firm vision of who they want to fund from a profile and background standpoint. And if you look like that person, regardless of the firm, it's great. You could be a repeat founder who had success in consumer before and is now doing something in consumer AI and people go, oh, this person knows consumer. You could be someone that that VC's known for a long time and they're giving you money out of like the depth of the relationship. You could be coming out of a Big model provider. I think most people have a pretty narrow set of archetypes that now feel fundable. And part of this is just not what do I like, but what do I think other people like me will like? And so I think there's a lot of that happening right now. And if you don't fit that pattern, it's pretty tough, pretty tough to fundraise.

Well, we are all out of time today. Thank you, Charles, for stopping in. Thank you to all of our listeners for hopping in as well. Please like and subscribe, and we'll talk with you all next week. Thank you. Bye.