Why Most VCs Run Funds But Few Build Lasting Firms

For me, it's really motivating to remember. You know, there's a bunch of people who are starting companies for the first time. Where do they go to get information about who they should talk to? I wake up every day saying my biggest fear is there's an amazing founder who's building an incredible company that's in our thesis, who simply doesn't know me and doesn't know anybody in our network. And what if we don't see that person purely because they don't know to ask?

It's the week of January 12th. 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 topic is an ex post written by David Haber titled Firm is Greater than Fund. Haber argues that most investors are running funds, but very few are running firms, and there's a critical difference. His core thesis is that funds become more fragile as they scale, getting caught up in deal chasing rather than building sustainable competitive advant. Haber believes firms are run like entrepreneurial ventures. They're constantly asking, what's our defensible moat? Rather than just what's our next deal? The firms invest heavily in technology and data infrastructure to create an edge. He calls them product companies. They build something that wins the market in ways that aren't obvious or easily replicated. Firms also benefit from decentralized decision making, which lets them move quickly, explore multiple directions simultaneously, and tap into diverse perspectives across the team. His closing point was if you want to build an institution that lasts a hundred years, you need to be building a firm, not just a fund. This echoes a lot of things we've talked about over the last year, especially as venture is growing up and the bar continues to raise in order to become a more lasting firm franchise so, wanted to pause here for your thoughts.

I think it's a good framing. I would also say there's a good counterpoint, which is I know some people who have no interest in building firms who are fantastic investors and are happy to build institutions that will not last a hundred years and that will not outlive the person who built them. And I think that's fine too. But I do think firms don't happen on accident, they only happen on purpose. And I think the part about the post that really resonated with me is if you're going to build a firm. And to me, a firm is something that will outlast its creator. I don't know if it has to be 100 years, but passed on, handed up. There's a lot of things, yes, technology is important, but so are people. You have to also have like a human capital people strategy for finding and depending on your point of view in this, finding and or developing not just investment talent, but all of the other talent that you need around a talented team of investors to build an institution that can function. It could be investor relations, it could be platform, it could be operations. There's just a lot of things that you need to build. And I think a great firm ends up like a great company having a culture and a philosophy and a set of business practices. For example, I would say Andreessen Horowitz and Sequoia are both firms that have been very successful, but they're not the same firm. The culture, the beliefs, the day to day practices for those firms are different. I could throw index in there. And so I do think this is something I didn't fully appreciate when I started Precursor. There's also a lot of LPs who want to hear a story that you have plans to build a firm, not just raise a couple of funds then ride off into the sunset. And I think part of it is that they like to underwrite things that are going to stick around for a while. Part of it I think is it just sounds better to say I'm building something that will be around forever. The the unfortunate truth is a lot of firms fail for a different reason than companies do. Yes, companies go out of business because the product that they built is no longer needed or they get out competed. But a lot of venture firms fail due to leadership transitions. They just can't get the people running the firm who are successful in one generation to replicate that success both in investing and in operating with other people. Lots of public companies are able to rep make this work. I'd say better on average than venture firms.

Are there specific roles that you look at Precursor right now that you didn't realize were going to be such critical cogs in the wheel if you went backwards in 2015 when you launched Finance?

Yeah, I mean 20% of precursor works in finance. I would have never appreciated how valuable. In retrospect, it's obvious because of our deal pacing finance was always going to be important, but not in the way that I appreciate now, which is it's not just oh, they get the wires out. It's a strategic role done right. Right. And I fully didn't appreciate that. Also I would say like having a really good team that can do operational support, whatever that means at your firm, it's not so much platform. Back to this firm versus fund thing. Getting your firm to operate at its highest capacity takes people who understand how the machine works on the inside and can operate and tune that machine while you're off investing.

Well, that's a good lean into my last question here. I mean they talk about platform a lot in the post and thinking about how these platform services are the product offerings and the resources that firms offer founders for hiring and marketing and scaling. And we've seen them grow across firms and funds over the last five years. Specifically while many funds have platforms. Now, Haber argues that when done well, these become great products that can create the moats. But I wanted to ask you if there's been any evolution of thought here on your side on platforms since you've been in venture. So like let's think the beginning to now.

I think there's two things I've observed. One is it doesn't this is maybe cynical. Other platforms actually deliver on value to founders after the investment. They tend to be a very effective marketing tool. When you were trying to win a deal or convince, you know, you tell them, hey, we've got all these talent people over here who are going to run all of your searches or help you do all this stuff. You don't actually know if that's going to happen. As a founder, the existence of those people cannot be denied. Their talent is usually unquestioned. But your ability as a founder to access them if you're part of someone's portfolio can vary. And I think the other thing, and I've just heard this from founders, not all platform teams are created the same. There are some firms whose platform teams have a really strong history of delivering value to founders. There are others where people say, hey, you know, their talent team is great, but their corp dev team needs work or their corp dev and like introductions team is great, but the talent and so I think it's a lot of your mileage may vary. You also can't raise like billions of dollars and have two people. There's maybe a few people on the planet Elon, a few people who can do that. But for the most part, if you're going to raise large sums of money to the tune of billions of dollars, I think LPs want to know, well, what are you going to do with all those fees? What are you building? What are you building that requires tens of Millions of dollars of investment and people think if you don't have an answer for that, I think it's harder to make the argument that you can raise these gigantic funds. It just doesn't make sense. Yeah. And plus your competition is going to go to market and say, we have this and they don't. Why would you take their money? They don't even have a talent partner. We've got 10.

Any questions, I guess that founders could ask investors when they are given this menu of options and things that are available to them post investment that can really suss out what's going to be actually a tangible resource they can actually access versus more of like a marketing tool. And I say this also knowing that when you're on the founder side, a lot of those questions you don't really think about because you're like, I'm just really more concerned about closing in the rest of this round. The rest of it, like, I don't really care. But if you were to ask those questions, what would they be? If you were in the founder's shoes.

I would go ask other founders in their portfolio. And it's interesting. I wouldn't ask the top founders because those founders may or may not even need those services. And I wouldn't ask the bottom performers because it's possible that those services are rationed in such a way that, that I try to find people who are kind of in the middle. And the two questions I'd ask are, how available was this team to you? Like, were you able to actually like get time with them? And then when you had time with them, how useful was it relative to something you could have hired on your own in the market? And depending on the founder, they may or may not have a good perspective on that. The last part of my last question, but those are the two things I'm always because if, if you could have hired an equivalent marketer or talent person on your own in the market, you don't. They don't need the platform team for the fun. Doesn't mean it's not useful. But like, you do need it. If they're delivering at a level that's hard to replicate in the market arm's length, that's really valuable.

I think it's a good segue into our next topic. It's a piece written by Sarah Guo titled Relevance Decays. In the piece, she argues that venture investing is uniquely time dependent. Staying relevant requires constant active market engagement and being in market. So meeting founders and debating incomplete ideas isn't just a sourcing Technique. It's truly the fundamental nature of the job. Inventure. This matters more than ever with AI companies that operate on radically compressed timelines. What used to take years to validate in SaaS can now shift dramatically in a month. You could be off and running in one day and then up in flames the next. The best investors look for invariances, so things that persist across technological shifts. But you can't outsource a lot of this learning through apprenticeship alone, which is something people say venture is really built upon. You really have to be in the driver's seat, experiencing it yourself. And this is why less experienced investors can still be exceptional. They reason from first principles rather than inherited pattern matching. Meanwhile, established investors can be complacent even as their track record stays really strong. And her warning to founders and LPs was don't just stick with the established names. And the closing line was, relevance must be earned continuously. And the more success you've had, the easier it is to believe you no longer have to. I know this article resonates because it's echoes a lot of the belief systems that we have at the fund, but why do you think investors forget about the importance of relevance over time?

It's interesting. I don't know why people forget it, but I understand how it happens. I think when you get in the business, you're hungry, you're aggressive, you want to win. And for some people, like, a little bit of winning dulls the edge. Because to stay on top in venture, you have to be really competitive. You have to be willing to do the same thing. You have to be willing to take that phone call at 10pm from that founder because you think it matters. You have to be willing to, like, jump on a plane to go meet some. There's all these things you have to do that are inconvenient. And I think once some people get successful, they're like, well, I want to be as successful as I am now, but I no longer want to continue doing the things that got me here. And the truth is you can do that for some period of time in venture. You can, you can ride off your network, you can ride off your previous wins, but it decays really quickly. And I was talking to somebody yesterday, goes, oh, I want to introduce you to this founder. They're in San Francisco, but they've never heard of you. And the person's like, I couldn't believe they've never heard of you. I'm like, I can. There's tons of people out there who, who don't know who Precursor is, who don't know who I am. And I wake up every day saying my biggest fear is there's an amazing founder who's building an incredible company that's in our thesis, who simply doesn't know me and doesn't know anybody in our network. And what if we don't see that person purely because they don't know to ask? And for me, it's really motivating to remember that, like, you know, there's a bunch of people who are starting companies for the first time. Where do they go to get information about who they should talk to? They go to the Internet, they go to their friends, they go to ChatGPT. So I think for me, that I find that a fun intellectual challenge to figure out how to stay relevant and how to stay top of mind for people. And it does take work. And I do have some friends who've opted for the like, hey, I'm going to just cash in on what I've gotten and I'm just gonna work my own network and the people that I find who find me. But that's, that's not how you win in the long. You know, I look at somebody like Josh Koppelman, who I think still works extremely hard and has been really successful and I think does a lot to keep first round top of mind for founders. Based on his success, he doesn't need to work this hard unless keeping first round capital top of mind in the ecosystem was important. And obviously it's important to him, which is why he works so hard.

And I think we always think about this relevancy piece in terms of just winning deals. But I think it, it has to extend for the rest of the job, which is stuff that we talked about in the last article. So supporting your founders after the investment, if you take yourself out of the market and don't talk to other founders or hear from other investors on what is working and what is not. It's difficult to provide that advice for founders who are building even after you wired the check so you could win the deal. But can you continue to uphold, like a strong reputation? And I'm sure there's a whole host of other people who are like, I only care about winning the deal. That's what an investor is. And so the other stuff is fluff, which I partially agree with as well. I guess from your perspective, are there any distractions or other things that you see Investors, maybe the ones who you mentioned more senior in their career, sometimes are confusing with relevance or deeming to be more important at that time.

I think relevance is this like perspective question. And I think if someone said, how relevant are you? I'd say I'm completely unqualified to answer that question. The only people who can answer that question are founders. And sometimes people are like, oh, I was on the Midas list, or oh, I was like written up in this investor focused blog or magazine, or oh, I was on like this VC focused putt. I think you have to have some level of humility and say, like, relevance is in the eye of the beholder. And you have to think like, if I'm relevant, how would that show up? That would show up with people sending me deals that would show up with founders in our portfolio thinking of us when they, when they or someone they know is starting a new company. There are signals of relevance that you can detect. But again, these things all take work. And so I don't know. I think there's some things in this business we really overthink too. And I think Sarah's point about young investors is the other one I think we overthink and I think we've gotten.

The point you had about the list is just like a funny feature of venture. I tell a lot of people that if there was a list of like top investors with brown hair, like I would be on it, I'm sure. And so would like 65 other people for no reason at all.

All these lists are dumb unless they're on them.

Our last piece is a substack by Michael Dempsey titled the Privilege of Belief, exploring how belief operates in investing, particularly around the long silence between making a decision and knowing if you're right. In early stage venture, you're not just working with incomplete data, you're often having no data at all. So he asks the question, where does real belief show up? So first, steadvast belief in thesis. That's its first point. So having a clear, articulated conviction so strong that you'll happily lose money on X until we eventually make money on X. Second, belief in asymmetry. Investing in areas of potential change when success creates outsized impact. While this leads to those classic venture return outcomes, this will obviously also lead to those things that fell apart. And this is actually where you can learn the most. Third, believe in people not just because they will always get it right, but because their judgment and intentions point in the right direction over the long term. He closes on the cost of the disbelief, noting that lacking belief shows up quietly in all kinds of damaging ways. And the through line of the piece is that you need to remain steadfast in your convictions, knowing that there will be ups and downs, but trusting the direction and the people you're backing is the most important thing. So we hear all the time that belief is everything in pre seed investing. But Charles, like what does that real belief look like and how do you know when to have it? I get this question a lot, especially from some of my growth stage friends.

Yeah, I always ask myself like, what, what's changed? And sometimes, well, nothing's changed. Then I'm like, well then why has my opinion changed? Then usually you're like, okay, something has changed. I just haven't put my finger on it. I think about this a lot in the context of our team. The truth is with the founders we back once you've made the investment, there's generally no take backs. They've got the money, they're going to do what they want to do. There have been some times where I've been like, wow, I was wrong in my assessment of this founder. I made a mistake, but there's really nothing I can do about it. They've got the money and now my job is to try to make this person as successful as I possibly can. And that's hard. That's hard sometimes when the person doesn't have it in them. In other cases I'm like, this person's exactly who I thought they are. And the market just doesn't understand either their product or doesn't understand them or the timing's not right. And then you have to ask yourself like in the context of this company, are all of the things that are necessary for success going to come together? And you know, we had a company in our portfolio that was like pioneering a bunch of ideas and remote work and they shut down like right before COVID not knowing that Covid was coming. And there are many, many things that that company intuited about where work was headed that are like totally how people work now. But at the time the idea that people wouldn't be in the office five days a week, it was hard for people to grasp. And that's a company where I was just like, I believe in those founders. They were directionally correct. But the circumstances didn't all come together. I think investing talent is a different kind of belief. It's, you know, we give all the principles here independent investment authority. And part of why I do that is, you know, in the beginning our LPs were like, this is nuts. You need to get in there and put your thumb on the scale and like tell These people whether the deals that they want to do are good or not. And I'm like, wow. Well, you're, you're presupposing that I have way more insight and predictive power than I believe I have. But second, I trust the people on our team that they have good taste and good judgment. And that belief is why I'm comfortable giving people on our team capital to invest without my say so. And I've told the if I ever felt like I didn't have that belief in somebody, I wouldn't give them a nickel. I would take the whole budget back because that's a fool's errand. It's also the reason why most of what I evaluate our team on is the quality of the thinking that went into the decision. Not did you get a markup from a Tier 1 VC fund? Because I really do think in sense this is part of why I think our industry gets itself in trouble. If all you're going to do is measure people on how quickly did you get a markup and by whom, the simple answer is just reverse engineer the test. Let me go try to figure out what it is that the people that my firm respects are going to want to do in 12 to 24 months and let me like pick those companies. And if you're a good guesser or picker, you'll get a good grade in the test, but you maybe won't invest in anything that turns out to be personally interesting or successful.

I agree. And then I will also say if I were to kind of carry that over to an investor founder relationship as well, like the belief in the founder, I've seen what it looks like when investors I think over involve themselves a little bit too much early on. And I think it's just because they believe that they have a stronger sense of what's going on and need to really be involved. And like I had a conversation with one of our founders yesterday and their pre launch and this past week a competitor launched out of nowhere and in a really nice flashy way and we'd had a good conversation about it and in no way did I feel like I had to be like, are you thinking about this with as much depth? Do you know what this means? And I know that there are lots of investors who would jump down the throat and really want to make sure, like, are you really thinking about this seriously? I think it just stems from I've known this person for now like over half a year about how passionate he feels about this industry. I'm not worried that he isn't thinking about this very thoughtfully. And I really liked his response of like, I'm excited that we have competition. This space, it's actually perfect. It makes me really fueled for what we're going to be offering. And again, that stems from a belief in person. So there's all these other immaterial things that you can always think as an investor that are important to bring up to a founder, but ultimately it has to stem from do you believe in them or not?

I have always thought the like, did you see this email that VC send? I'm like, there's nothing good that can come from that email. This is totally orthogonal, what you were talking about. Either the person has already seen it and they're like, of course I've seen this and I want that 35 seconds of my life back. Or if they haven't seen it, then you as an investor, like, how do you not know this? What are you doing? So I tell people, part of belief is also recognizing your own anxiety and not projecting it. And I find most times investors send the do you see this email? It's because they're nervous.

Yes, of course.

Finals already have enough problems to deal with. Why project your anxiety onto that person? Just let them be.

Well, I wish everyone else thought that way on every cap table. We are all out of time. Thank you, Charles, for stopping through. Thank you, our listeners and subscribers for popping in. We will talk with you all next week. Thank you.

Bye.