What If You Aren't The Hot Company?

10 years ago, I always believed if you build a good company, there will be an investor who's interested in what you're doing. I don't know that I believe that in this environment. I think you could build a very interesting company that is not touching AI, not touching defense or energy deep tech, and there might actually not be anybody who has money and conviction to fund the company.

It's the week of August 17th. 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 good reads that caught our team's attention over the past week. We're also back in the AngelList studio right in Jackson Square. AngelList builds software for investors to back world-changing startups, and we're so lucky we've got them in the portfolio and neighbors down the street. For our first good read this week, we are looking at a recent post on LinkedIn from Matt Turk from FirstMark. He shares pretty bluntly that in startup land right now, you're either an AI-native rocket ship or you're basically left for dead, regardless of how good your company actually is. The rocket ship path sounds exciting until you zoom in and realize it means being in a permanent fundraising mode at ever higher and scarier valuations, locked in a constant death march with competitors for customers and sacrificing gross margins along the way. Turk notes this dynamic has been building for a while, but feels like it just escalated another notch. There's a lot of chatter in the comments section, from full support to his post to calling out specific industries that don't fall into either bucket. What rang true was that this is a phenomenon everyone is seeing in today's market. Last week, we talked about how the lack of Series A investors filling in the gap for companies that used to fit their traditional scope. So this feels somewhat connected.

Yeah.

Some in the comments actually pushed back on the left for dead framing in the comments with this. Quote, left for dead by hypey VCs. Sure, but you could still be a solid company with good fundamentals, having a balanced life, and paying your small team well. This sounds super appealing in theory, but how does it actually play out in practice for a founder trying to decide if that's even an option for the company?

Yeah, I feel like this is this week's theme, which is sort of with all the concentration happening in venture and all of the attention. being paid to these mega rounds and hype AI companies. If you're not one of them, it's sort of like, well, who cares about what I'm doing?

Yeah.

And I was talking to one of our teammates this week, how do you advise your portfolio companies in a world where it's this binary? You're either this heat-seeking missile.

Yeah.

Or people are coming after you because they want to give you money, or it's like nobody cares.

Yeah.

And I think so much of venture was built not in a binary world, but, oh, there's this gradient. There's companies that are super interesting, companies that are kind of interesting, companies that are a little interesting. And your fundraising mileage may vary based on where you are. And now it feels like it is very binary. It's either you are on meme, on trend of the moment with good metrics and everybody runs to give you money, or you're just not. And I think that comment is right. And that only pertains to like hypey VCs.

Right.

But hypey VCs have a lot of the investment capital. So if you need capital for your business and you're really off trend, it's a really hard time to raise.

And if you're a founder and you're offered that opportunity to continue to raise, I think it's a pretty hard thing to actually turn it down, especially if it's coming to you in the droves that it is, especially for the rounds that I can think of where you jump quickly from thinking you're gonna do a $3 million round to like a $9 million round just because the interest is there. So it's easier said than done.

Yeah.

And then for the other flip of the coin, I feel like, I mean, you wrote this piece a while ago, like getting off the VC train.

Yeah.

My question is, is that a choice? Like, do you, when do you get to exercise that? How do you not, I don't know, view it as not a sign of failure, but a sign of like slowed progress? Because I think previously that wasn't the way, like you would have a landing spot. Getting off the VC train wasn't necessarily something that you had to decide between. So how do you think through that?

Like my friend this weekend was like, we live in this weird panopticon where everybody stares at these big fundraising milestones and these numbers. And he's like, the only solution is to look away. But that's like easier said than done, particularly if you live in San Francisco and you're building something in AI, there are many, many good companies that raise all the time, and they raise all the time not because they need the money, but because people want to give it to them.

Yep.

And they want to give it to them because they think those are the companies that matter. So to some extent, it's kind of hard to look away from the panopticon if you're in San Francisco or if you're in one of these white-hot venture markets and to not view it as a failure. And I tell people, look, if you get profitable and you can control your own destiny, you can frame it as a choice. It might not actually be a choice, but at least you can frame it as a choice. I'm very curious to see what happens. We have a bunch of companies in our portfolio that are not of the moment that are executing really well and don't need venture capital. And many of those founders seem very happy to not have to participate in the popularity contest that is sort of chasing these ever-high valuations. And I'm very curious to see how those businesses turn out.

To your last comment of folks who can reach profitability and basically grow on their own accords, that was another that somebody had of you can strive for something like 8 to 10% margins for years instead of chasing a hot valuation. And the argument that this person said was that slower growth is the trade-off for nobody being able to pull out the rug from under you. Even if you execute that path well, I guess, what are the trade-offs that you give up by pursuing that?

I think right now there are very few downside stories. Right now, everyone who raises money Either you don't hear about them raise again or they raise again at a higher valuation. So the apparent cost, everyone's like, theoretically you're closing off options and this is hard. And I'm like, yes, there will be a moment of reckoning where suddenly people realize, wow, we overpaid for a bunch of this stuff. That will become the problem of the people running those companies. Actually not the problem of the people who funded those companies.

Yeah.

People who funded those companies will stay on the board, will dutifully show up, But their minds will be elsewhere. They'll be focused on physical AI or whatever the next hot thing is. But the founders who are running those companies will have to find a way to work this out. And if you don't believe me, go talk to some of the people who raised 2021 mega rounds who are still running their companies at really high valuations, who still feel an obligation to turn those companies into something of value.

Yeah.

That is not easy.

Yeah.

But I think it's hard to not do that when the only narrative is, well, things just only go up.

Yeah. And I think in today's market, if you're one of the companies that has raised mega rounds, you definitely face maybe different issues. I don't find them to be money issues.

That's right.

Heightened levels of scrutiny. Like, I could list you 4 or 5 companies over the past 2 months where that is the case.

Yeah.

But it's not like they're gonna flare out and burn through $20 million in 5 months. And honestly, if they did, I bet there'd be a line of people waiting to invest. But the problems that exist for them are ones that they're going to have to reckon through in the future. I don't know if necessarily from investors they think about those issues when they jump into these rounds.

I think if you're an investor, for many people, like your attention span for the company is unfortunately correlated with progress. Yeah. And if you think about it, if you're a partner at a big venture fund, you do a hot deal. If the hot deal works out, you stay on the board. If the hot deal doesn't work out, you stay on the board, but maybe you bring in your associate to learn how board works.

And by work out, Charles, what do you— what does that mean to you?

Just has another round with a markup or I think if you feel like this is a company that you want to be associated with for financial or career reasons, like this is a company that's going to be of consequence and will matter, then you, you stick with it.

Mm-hmm.

And if not, you're like, well, we have an obligation, but my time is valuable. My time could be spent chasing the next hot company. Maybe I bring in my associate. My associate gets to learn how to be a board member on this company that isn't doing well. Partners and investors have far more flexibility to move on in many cases than founders do. Not that founders don't, Find replacements and bring— oftentimes that's a longer, harder slog for the founder than it is for the investor.

Yeah, it goes back to, I guess, the next, the last piece that we will talk about it. For investors, this is a very different game than it is for founders. And so playing in big rounds means a very different thing than it does. Well, our next good read this week is from Vinny Luria, founding partner at Golden Gate Ventures, titled The Worst Person to Introduce You to a VC. The core argument is that one of the worst people to introduce you to a new investor is a VC who has already passed on your company. The reason is not about access at all. It's about signaling. When an investor makes an introduction, the first thing the receiving investor asks is why? What do they know that I don't? And what decision have they already made? A VC who passed carries their reasons with them, and those reasons become the frame through which the next investor sees your company before you even had a conversation. Benny's core reframe is that access is not the scarce resource in fundraising. credible signal is.

Yeah.

And the best introduction often comes not from another investor, but from a founder that the VC has already backed. One of the callouts of the piece that I liked the most was his note that, quote, a warm intro can sometimes make you colder. Not every introduction is created equally.

Yeah.

And he even said a warm introduction from the wrong person can be worse than no introduction at all. Charles, what in your mind could be a wrong person from your standpoint? We welcome a really large amount of cold inbound when it comes through. But we've been talking about what makes introductions more compelling in this environment than previous ones. So wanted your opinion there.

I do think people, and Vinny mentioned that, he is like, look, if an existing investor invests, introduced me to one of their own portfolio companies, they're doing their job and I understand it. But I also don't expect that person to necessarily be objective. And I think that's important. I think for a long time people were like, well, founders are neutral. I'm like, well, founders aren't always neutral. A lot of founders I know are like, oh, I'm introducing to this other founder I know. I put $5,000 into their round as an angel. So I think you really have to do your work to figure out in what context is this person making the intro. And I think there's this idea that you can find the perfect signal. I've just generally found the best intros for me are from people who actually understand what we're trying to do as a firm and who get our model. It's funny, when this post came out, I was like, wait, doesn't everybody know that you shouldn't get an intro? I was like, oh no, Every 5 to 10 years we get a new crop of founders who haven't heard that lesson. And I had somebody this weekend email me a company. They're like, I met this company, it wasn't that interesting to me, but I'm passing it on to you. And I'm like, why?

You're like, what do you think of me?

Why? And I think that person was trying to be helpful to that founder.

Yeah.

I will sometimes tell people, I'm passing on your company, but do you know who you should go talk to? You should go talk to person X. But I shouldn't make the intro because I already made a decision. You should find the best path you have into person X because I think they'll be interested in what you're doing. And that's probably the ideal way to do it. But I don't know, I always go back and look at our performance. Some of the best companies we've invested in have come from very weak connections.

Yeah.

It's funny, I tell all of our portfolio company founders, I don't expect you to do any work on these intros. If somebody wants to get in touch with me and you know the person, Just make the intro. I'm not secretly grading you behind the scenes. But if you're like, this person is my best friend, this person worked at our company, this person is one of the smart— if you have something positive to say, by all means do it. But I don't expect you to take the pitch meeting and give me a memo before I take the meeting. Just make the intro.

Yeah. I've recently been getting a lot of folks who, and I'm curious to get your perspective on it, junior partners or principals at their firms They'll send me a deal and they'll say like, I wasn't able to get this through, but I'm gonna do my own angel check into it. I'm gonna invest. And there's multiple ways that I can evaluate that. Mm-hmm. I always think about in the context of knowing where they work, of like, yeah, thinking about your fund size.

Yeah.

I understand why this didn't work. Like I have one deal that I did previously where like, I know the fund size of the folks who've referred it to me. They're like, I need this to be much, much, much, much, much bigger outcome. I have no doubt that it's gonna be a $2 to $3 billion outcome, but my fund is $10 billion. I can't do that. And I'd have to eat every single round. I want somebody to do this though. And I was like, okay, that makes sense. Yeah. I don't know how often to interpret it though, when it's somebody who's still building their angel check portfolio and passing it on to me, because I do have the ability to write smaller checks just because of our fund size. Yeah. I still haven't figured out how to grapple with that. And I think the answer is it's investor by investor evaluation. I'm not running an angel check. I'm not like running an angel portfolio.

Right.

So it's very different. I think for angels, we've said this, Yeah. If you're an angel, I think when you invest, you should assume you're not getting that money back. Like, I think you should be happy to just know that you're part of the journey. That's very different than being an institutional VC. Totally.

Also, I realize I do have good friends in Series A who are like, I like this company. It's too early. I don't know this person well enough to stretch and make an exception. So I'm sending it to you.

I like those.

I like those. Those are totally fine. I think the harder is when it's a peer, when it's another seed fund who's just like, I met this team. They were great. We didn't invest. You should meet them. I'm like, well, if they were so great, you You do it. So I, I don't make those intros. Mm-hmm. And sometimes founders will ask me, I'll just tell 'em, this isn't gonna help you. And let me tell you why. Yeah.

I actually wish that that was the more transparent thing we did, which was, I do know that person. I can't extend that intro. You need to find another way in. And this is kind of the reasoning why there is signal attached to it. Even if I'm not putting it in the note that I feel a specific way, it's just how people interpret it.

Yeah. It's funny too. Like I had someone who asked me for an LP intro and they're like, what do you think? I'm like, I know that person, but I think you'd have a better intro if you found someone who's in their portfolio, like a fund manager they've already said yes to. And I was like, I can make the intro for you, but I don't think I'm the strongest path for you.

So it's the same for jobs too. We had a previous intern who asked for an intro and I was like, I could totally make that intro for you. I know that you have somebody in your network. I can know them by name who's a stronger intro. And you You don't wanna hit this person from all different sides if you wanna be strategic about it. So the, the math of it all and the art of it doesn't change all too much. Nope. Well, our last piece is a Substack essay titled To Be or to Do by Michelle Vohls, and it uses military legend John Boyd as the lens to examine what Silicon Valley is actually rewarding right now. Boyd was arguably the most impactful figure in modern aerial warfare, someone who never made general because he refused to play the status game. Posing the question, are you working to be someone important versus do something important? Michelle applies the fork directly to the current startup market.

Mm-hmm.

Where the incentive structure has shifted towards rewarding the performance of building over the building itself. The biggest round, the highest valuation, the most visible presence across media. She introduces the kamikaze round, a term coined by Trey Stephens, where the oversized check that was supposed to buy options ends up buying obligations and closing off your exits. We just talked about this. The piece is not an argument against big outcomes, but an argument that discipline is how you get the biggest ones, pointing to Palantir, Anduril, and SpaceX as proof that unglamorous early work is what eventually makes the marketing credible. The to-be or to-do framing feels like it applies equally to investors. Where do you see the investor equivalent of chasing status? over substance playing out in the market right now?

I think we're in a giant status game right now, and I think it's because of this gigantic feedback loop that we're in right now. It feels like we're in some weird AI supercycle, so it feels like the best thing to do is to invest only in AI companies. Every quarter, it seems like the thing to invest in in AI is some new— like right now is Harness. It'll be something else next quarter. to be front edge on the hot thing because growth rounds are compounding. You can get into companies very late and still get very, very, very good multiples on what are relatively low-risk assets. And then you can go tell everybody that you're an investor in that company. Anytime I tell people we've made an investment in somebody that isn't an AI company, they're always like, why would you do that? Because I think this founder is really talented. I think they're solving an important problem. I think they're going to build a consequential company. But all of the incentives right now, whether it's LinkedIn shares or Twitter follows or TikTok, all of the incentives right now are to chase attention and status.

Yeah.

And I was reading a post that was a follow-up to the Fia stuff, and it was really about like, we've so glamorized being a founder or being an investor that the cult of personality, the lists, all of the metadata And all the meta media created around it. It's funny, I remember when my dad once told me, once you have a 24-hour sports network like ESPN, you need to talk about sports all day long. And I feel like venture and AI and tech have gotten to a place where the media cycle is so hungry, there always has to be something to talk about.

Yeah.

So I don't know, I think it's very hard right now too to be independent. If you want to be a founder who's independent, you've got to find VCs who want to do things that aren't of the moment. But those people also have to have raised money from people. who also want them doing things that aren't of the moment. And that's a 2-hop, low conditional probability event.

And a today problem, if you're an investor, is always thinking about upstream funding risk. That's a today problem, way more today than it was years ago. I used to be like, you'll figure it out and you've got 2 to 3 years to figure it out and somebody will be there. Again, all the conversations we've had before, If you're in kind of like an off-market, off-thesis category, my question is you could have something working, but I don't know who's actually gonna be around.

Yeah.

To fund you, even if it does. It doesn't make me move away from those spaces within specific categories. That's where I've found really tight circle of super talented people. But it does incorporate new things into my diligence process as to like, even from an investor standpoint, how can I be helpful to you when we reach that point? Like, who do I know on the venture debt side? Who do I know like on a credit side? Like, these are very different things that we have to do 5, 10 years ago?

10 years ago, I always believed if you build a good company, there will be an investor who's interested in what you're doing. I don't know that I believe that in this environment. I think you could build a very interesting company that is not touching AI, not touching defense or energy deep tech, and there might actually not be anybody who has money and conviction to fund the company.

Yeah. What do you think about— there is a specific threshold that people were saying of a specific growth rate of like 100x or something. The chances of you continuing that success are quite high. That's something that I feel like has happened over the past 2 years. Like, what do you think about that?

Well, we've also gotten to this weird world where conditional on getting to $1 billion, my assumption is you will become a $10 billion company.

Yes, that was it. Yeah.

And if you become a $10 billion company, my conditional expectation is you'll become at least a $20 to $50 billion company.

Like, there are very few fallen stars in that cohort.

And I think just money right now is consolidating around perceived winners unless you're born at $1 billion, which some people are. Getting to there means you probably are directionally doing something right. And right now you can really compound it. I look at Higgs, I look at all these rounds that get announced of companies that are tripling in under a year at growth stage. That's normally the domain of seed investors, not of growth investors.

Yeah.

So also right now there's so many incentives to just say, just jump on the ships that have already sailed, get on the things that are working, stick with them. You don't need to show courage, bravery, go off the beaten track. Like the beaten track is doing quite well right now.

Do you feel like you have to play into that game, though? To a point. Is that wrong to say that?

I think setting the slider at zero would be very hard.

Yes.

Unless you're just like, it's all my own money.

I'm evergreen. I can do whatever I want.

I don't care.

Yeah.

Or I have a set of LPs who backed me specifically because I'm like anti-hype or non-consensus. Or I think the more compelling thing is I think I found the next thing already. Yeah. And I'm already there and other people aren't. Whatever comes after AI and physical AI, I'm already there. And I'm making those investments now before anybody else realizes that these are the companies that matter.

Mm-hmm. Well, we are all out of time. Thank you, Charles. Thank you, AngelList, for loaning out their studio. We'll get to do this again next week. Thank you to our listeners for jumping in as well. Please like and subscribe, and we will talk with you all next week. Thank you. Bye.

Bye.