Episode #20: AgTech and VC, Signs of a Failing Company, What The Heck Does Pre-Seed Even Mean?

I think the beauty of investing in at the people and idea stage is a lot of it is picking the right people. And if you pick the right people and idea, you will learn a lot along the way and you'll mostly learn good lessons because they'll be successful it's.

The week of February 16th. Welcome to the Learning Corner, a Precursor Ventures podcast.

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 attention over the past week. Topic number one is an essay by Sarah Nolit from Tenacious Ventures, where she acknowledges that ag tech has been historically viewed as a sector that doesn't work for venture capital, but pushes back on that narrative, asking whether investors are simply approaching it with the wrong mindset. Throughout the essay she highlights a few key issues. AgTech doesn't fit the typical VC timeline, so the industry has longer adoption cycles and requires patience that a lot of funds just don't have. Customers have very different incentives. Incentives farmers aren't purely optimizing for profit. They manage risk in a way that doesn't always align with a rapid tech adoption. And in many ag tech startups fail because they're applying SaaS style expectations to a sector that doesn't operate like software. So think vertical farming. Nolan suggests that instead of writing ag tech off as uninvestable, investors should actually rethink how they structure deals, measure success, and engage with the sector. So Sarah makes a really strong case that agtech isn't necessarily broken, it just doesn't conform to the standard VC playbook. So Charles, do you think there's an opportunity for more specialized capital in agtech similar to I don't know. I was thinking about biotech. Pharma investors have evolved their own unique models.

Yeah, I read this and I was like this sounds like most enterprise software to me. And you know we've got a handful of agtech companies in the portfolio, whether that's agvent or bountiful. And there were certain parts of this essay that resonated with me. I do think think the buying behavior of this customer is different, but I think it's the same every time we've had a fintech that wants to sell the big banks, I've been like, hey, selling the big banks or credit unions, it's hard. They're slow, they're big enterprises, they don't buy the way you want them to. And one of the things I've learned that I do think makes agtech maybe slightly unique is it does feel like it's a sector where the buyer wants to really feel like you get their problem. And I think it is one of the ones that's kind of harder to waltz in. If you think any venture sector that ends in tech, biotech, fintech, prop tech, they all have their own idiosyncrasies that you have to understand if you're going to get into them. In my experience, investing in agtech companies has largely been positive. But I do agree with her. The timeline for adoption can be slower because a lot of these folks have adopted digital technology to varying degrees. For me, the big reminder is that before you write off a sector, I think it's worthwhile to at least think about what are the dynamics at play here and what would it take to be successful. And I found the flip side of agtech buyers being slow to adopt is once you convince them and win them over, they're pretty good customers. And I just think, particularly with one of our portfolio companies, there have been a, a few crucial moments where the CEO had to make some important strategy decisions. And I think reflexively, as a VC investor, I had one answer and before I gave him that answer, I said, let's just talk about like, what do your customers actually want? And it did turn out that the right answer for that business was the opposite of the advice that most VCs were giving him. And the business he built was sort of at odds with what conventional wisdom was at the time. And it turned out to be a very good decision. I always love reading pieces like this because it's a reminder that if you're going to invest in a subsector, you should make sure you understand the subsector's dynamics. I don't think any category, maybe one or two, are truly uninvestable under, under any circumstance.

It's interesting that vertical farming became one of the first areas that investors love to flock to because I think the models felt familiar, dumb, cash in, wait for it to grow, et cetera, et cetera. I think to your exact point, that's where we got it wrong. We didn't really understand the end customer, the issues with supply chain, the long horizons for actually how to optimize that model in a way that made sense. And so then not AgTech's fault. They took a beating of investors writing it off because saw a specific area within that sector that didn't work in a traditional venture model.

And I think the other thing I've come to really appreciate is the intersection of markets can be really complicated. So I think some of the vertical farming, it was like ag tech plus robotics, two markets that operate very differently on different timelines and require different skills coming together. I think that was always going to be hard.

One thing, I guess that's been running in my brain just because my prior background was life sciences and health care and more biotech. I've found that it is difficult for funds who maybe take one or two bets into an area that requires such deep research or deep thinking into the area and a long horizon to understand it. How do you make it work when you're making one or two bets within a space like ag Tech that you have to have a lot of conviction and patience for?

I think the freedom in making, call it 80 to 100 investments per fund is that I don't think I would do 80 to 100 of anything, if any one theme. You know, we've done some things in electric vehicles goals that started with one investment and I was like, oh, I now know more than I did before. Not enough to be dangerous, but more than I did before. And I think the beauty of investing in at the people and idea stages, a lot of it is picking the right people. And if you pick the right people and idea, you will learn a lot along the way and you'll mostly learn good lessons because they'll be successful. And if you don't, I think the hard thing is always, hey, did I pick the wrong team or is this a category that's inherently flawed? A few years ago I was like, oh, digital health is too hard for startups or wellness fitness is too hard for. I would say two years ago everyone's like, consumer fintech is over and I guess it's back now. I think investors fall in and out of love with these categories, usually based on their most recent experience.

How should you as a founder within a space like agtech evaluate the right types of people to bring on your cap table who can understand the types of pills you need to swallow in order to make a strong bet and feel confident about this investment?

I think there's a real argument for having some specialists at the table and I think this is even more true in regulated industries. So if you're doing fintech or something in bio or digital health, where there's a regulatory component component and there are things you simply should know that you are or not allowed to do, I think having minimum one of those people around the table is great. I think there's diminishing returns to having like three specialists around the table. I think as a founder, the most important thing is finding an investor who generally trusts your judgment but knows when to push you to think harder about a problem. And one of the nice things about being a noob in some of these categories is when someone says, well, we're going to do this thing, you're like, why? And like, what do you mean why? I'm like, I don't know anything. What's explained to me, this is not Socratic. I'm genuinely interested in understanding how you reach that conclusion. And I find that's one of the things I enjoy most about being a generalist, is that it's this license to just ask a lot of why questions out of a place of really actually wanting to know the answer.

Moving on to our next topic. Jason Lemkin has seen thousands of startups over the years, and in a recent piece titled 9 Signs a Startup Isn't Going to Make it, he outlines the key red flags that suggest a company is heading for failure. A few notable signs included being too slow to hire VPs and create a strong leadership layer, being just too slow in general, a lack of deeper understanding of the competitive landscape, and surprises that maybe you just don't foresee. So when this article came out, I know you mentioned that you've seen all nine signs. Funny enough, I'm sure any investor would have claimed that they screened for all of these in diligence. So how do you think we as investors miss sensing these signs earlier on, if it's even possible to sense? And has it ever become easier to suss out any specific sign?

Sometimes I read things, I'm like, ooh, that's a little too close. Wow. Jason has identified a lot of the behaviors to just. It's funny, I realize I have been trying to build scaffolding at our firm to identify these things, and I've been working my way backwards from when they show up. As you know, we have this thing we do about six months after we invest, where we take inventory of the company and like, what have we learned? And I've found the most important thing at six months is product velocity. In that slideshow, a lot of it boils down to speed, and not just speed, but like velocity. Are you moving quickly in the right direction? Not a lot of dimensions, but a lot of it comes down to speed. And I found the companies in our portfolio where product velocity is good at six months are generally successful and on track. And the reason I typically try to take this snapshot at six months is if you do it after your first check in with the company, you might get a false signal. And if you wait to a year at Pre seed, it's probably too late to do anything about it, but it's six months. You can evaluate the company and you can change your plan as a VC for how you want to advise and manage this investment. And so I started looking at the companies that weren't fast and I was like, well, what are, what are some of the characteristics? And one of the big ones I started noticing is people who have previous startup experience, not necessarily as the founder, but having been in a zero to one or very small startup, I think your sense of pacing and urgency is just better. You have some sense of, well, what can a startup get done in a day and what does good and speed feel like? And I found that people who didn't have that experience, some of them were able to naturally acclimate because they were just naturally aggressive, urgent people. But a lot of people were just sort of like, well, what am I supposed to get done today? And I'd have people who'd, you know, they would tell me, me, well, this is going to take a quarter to implement this feature or do this thing. And I'm like a quarter? That sounds like a two week sprint to me. Not I go, well, we got a plan, we do the research. And I was like, oh, the more we talk about this, the more I'm learning about how you think about speed and process and this is simply too slow. And one thing I found that doesn't work is telling people just go faster doesn't mean anything because in most cases they think they're moving as fast as they can and they think they're working hard. And so I think when you tell people go faster, I found a lot of startup founders, natural, defensive, immediate response to that is, well, working really hard. And I'm like, that wasn't what I said. I didn't say work harder, I said go faster. And it's funny. Me, you know, I bring people out on these field trips and this was the big unlock for me. We've had some founders not in the Bay Area. And I'm like, this person doesn't have a good speed meter. And I've brought those folks out to the Bay Area and had them work out of our office and meet founders here and invariably they come back and go, oh, that's what I'm supposed to be doing. Oh, we had no idea people were doing that, that they were working in that way. They were working that quickly. Oh, we, we. I was like, yeah, you thought you were at the maximum, but you were at some weird local maximum. Velocity is so important both in the product side, but as Jason highlights too, on the org side. Building up the org, hiring the right people, starting to scale.

I also think hiring on third party vendors, if that's the support you need, and then also knowing very quickly when to stop using them. If it's Amazon growth teams that you're bringing on or a third party group to boost up any sort of increase in sales, if it's not working, move on. You have to kiss a lot of frogs. And the longer that you wait with something that's not working, it's just drag on the amount of money that you're spending and you're not seeing the output that you need to.

And Mia, the thing you just said is the lesson that a lot of people have to learn. I always tell them, like, something that isn't working isn't going to magically start working at a startup. You have to actually fix it. Well, we're not really happy with our growth team, but we're going to give them one more month. I'm like, why? You just told me you're not happy. There are lots of other agencies you could go hire. If you're not happy with these people, why would we give them another month? And it's not usually so much about the money, it's about the time. I think as this nature of round nomenclature gets more confusing, I think increasingly most investors are like, tell me how much money you had, show me where you were at time zero and show me where you are today. Those are the data points I kind of need to figure out, is this a good company?

There are other signs here that Jason mentioned, like manipulation, sociopathic behavior. And I know we're trying a precursor to try and capture some of the intangibles earlier. How have you been able to access that angle at the earliest stages?

It's very hard because the sociopathic, manipulative people are generally quite charming and pleasant.

Good at fundraising.

They're good at fundraising. They're also good at telling you exactly what you want to hear. And oftentimes you think, wow, these people are really on it. They've got great answers to all of my questions. But then you're like, oh, but it wasn't true. It was what I wanted to hear, but it wasn't true. I've had a few situations where we've had people that I would put in that bucket and when Every time it becomes apparent that's what we're dealing with, I'm like, if I'd really had my antenna up, there were signs. Oftentimes the signs are there's a couple of really good people who leave and you're like, wow, that person was great. They leave. And the CEO, I didn't want him anyway. Or you're like, really? Or the person who leaves doesn't really want to get into the nature of why they left. And you get clues. And I think earlier in my venture career I always sided with the CEO. And then if you had a few situations where I was like, that's the right thing to do in every case, except when the CEO might be intentionally, unintentionally up to something, it's hard to know when you're in one of those situations. And having been in a few now, I sort of trust my instincts. If I feel like this might be one of those, I'm like, well, let's investigate it and make sure it isn't.

And also to acknowledge the reality that every startup is high pressure. To claim that there is not going to be a level of that in every situation is tough. So it's trying to discern what's the level of normal, reasonable pressure that exists in startups to keep things going versus what's truly just blatant toxicity that bleeds out. Getting close to people who are VPs, their first junior hires that they made after the seed going into the A. If those people come in, come out pretty quickly, those people are really essential to making sure that the team is on track. If those people churn in and out, it's a sign or at least something to look into.

And it's delicate. I don't think most CEOs want their investors or board members interrogating their staff. There's a right way to do this. But I think what you said is spot on, which is figuring out, well, who are some of the culture carriers, who are some of the people who ought to have a pulse on what's happening at the company. I think when you lose those people you're always like, oh something. Even if it's for a better opportunity or for you. I was like, oh, we lost something there.

Our last topic of the day is more of a question posed by our friend Peter Walker from the Carta Insights team around what actually is a precede around. Through a mix of extra exercises, the Carta team filtered in on the non priced rounds that occurred on their platform and it ended up with the pre seeds Taking the form of Safe rounds from 500k to 2.4 million. So, Peter asked the LinkedIn community basically, was what they found right? And does that sound like the correct description of precede grounds? So the question was a post on LinkedIn that received quickly 130 comments. So naturally, that's where I spend time scrolling to see everyone's different takes and perspectives, yours included. What is it actually say about the world of early stage investing that there was so much chatter around what precede actually is and what the nomenclature means in our ecosystem?

I think two years ago I told one of our LPs, round names are meaningless. And they were like, what do you mean? They go, well, when founders can choose what they mean, they don't mean anything anymore. And if we had a strict definition, this would be very easy because whenever LPs ask me, hey, what's happening with seed round valuations? I'm like, well, which seed rounds are you talking about? Are you talking about the normal ones that are like 2 to 3 million dollars? Are talking about the kind of mango jumbo ones that are 4 to 5? Or are you talking about the ones that people who leave OpenAI and start brand new comp? Like, which ones are you talking about? And I tend to think about it differently, which is within those buckets, the dynamics are really different. So, you know, we talk about 3. Institutional seed, celebrity seed, pre seed. I think of those as three different things. And I've always felt like a pre seed round is a small amount of money designed to help a company figure out if the thing they're building is worth building, building. And for most ideas, you can accomplish that on one and a half million dollars or less. And you know, when I was at Encore a long time ago, people used to raise bridge rounds. And then everyone said, no, no, no, no, no, don't call it a bridge. Bridge has like a bad connotation. That's where the seed extension came from. People were like, bridge sounds bad. This is not a bridge. This is merely a seat extension. Because if you called it a bridge, you were kind of failing the IQ test.

It's continued enthusiasm.

That's right.

Extension of the excitement that we've had.

And then everyone's like, well, seed extension. Well, now that means bridge. So now we're going to call it a seed two. And then we had post seed. And we keep creating these things with the hope that the new name removes the ick of what it really is, which is a company that needs an interim financing in between rounds. Where I started the firm pre seed was pretty pure, mostly because there weren't that many people doing it and there was no strategy around the precede and like what you call it. And now I routinely meet companies like, we raised a $5 million pre seed. I'm sor. Sorry. Calling a $5 million round a pre seed doesn't lower my expectations of what you should have gotten accomplished. It's funny, now that seed round people, this is the largest seed round raised in the state of Montana. I'm like, great. It sounds more like a series A to me than the seed round, but if that helps. The thing that it's made hard is a lot of the arguments I try to make to LPs about why pre seed is a good category to invest in. It's that you're capturing good ideas earlier and that, like, some of those companies will graduate to seed and you will see kind of like a conversion and you can measure how good we are at picking these ideas. But now that, like, what a pre seed is is blurry and what a seed blurry like that conversion math has become really hard to understand. So now I'm just like, the. The point of precede is to capture good ideas early period. And as Hunter Walk would say, seed as a process. Most of our companies are going to raise multiple rounds. So even when I do investor intros now, I've just stopped saying they're raising a seed. I'm like, they're raising $3 million. I don't know what to call it. They're raising 3 million bucks. Here's where they are. I hope you're interested in the company. The end.

I don't even know the ins and outs of how other investors think about their benchmark. If you say pre seed, they'll say, this is a really big one. So just tell me how much they're raising and then we'll move on from there. Last question. Who think benefits the most by having this clarification? Is it us as investors or founders? I think a lot about right now in AI investing land, I think honestly, investors need the clarification because founders kind of control and run that market dynamic. Right now. If they're like, I want to raise a $6 million seed, people will write that check and they will call it a $6 million seed.

I've concluded that a seed round is any round that a seed investor invests. And like, this is my new conclusion, which is that a lot of people are like, hey, I have a seed fund. Anything we do is seed because I said so. Whether it's a 15, $20 million seed round. One group who I think at least is intellectually honest about this is Ed and Elliot at boldstart. They're just like, we invest in inception, we invest at the very beginning. Sometimes the very beginning looks like 500 on 5. Sometimes the beginning looks like 20 on 200. But we want to be there at the beginning. And this is sort of the thing I think about the most for our model. I have a similar mindset to them, which is my goal. No one can really be first the first round because First Round brilliantly owned that by naming the firm First Round Capital. But I think to me precede rounds about what needs to be proved. And we don't do a lot of the deep tech, hard tech, climate tech stuff that either needs or has the ability to raise $20 million out of the gate. I think that's my new working definition. Is that a seed route is anything that a seed fund invests in.

Yeah, it's whatever people want to call it, basically.

That's right.

We are all out of time for today. Thank you, Charles, for stopping by. Thank you to our listeners. Please like and subscribe and we'll talk.

To you all next week.

Thank you.