Is Seed Venture Capital Broken?

Fundamentally don't believe that all of the alpha in this business is going to come from people who are well positioned because they did something previously or because they happen to have a drink of water at OpenAI or a cup of coffee at Anthropic. In my venture career, many of the best companies I've met have been started by people who are talented but not obvious.

He ends the piece with a quote, hope is not a strategy. CBCs are staring extinction in the eye and we will all have to evolve or die.

Running a venture fund is a three part job. It is obviously an investing job job. It's also a fundraising job and managing relationships with LPs. It's also running a small professional services firm.

A lot of that fund manager growth has to do more with understanding the back of office and operational complexities that exist with running a firm. Complexities that don't weigh nearly as much when you're not running the fund yourself.

I think there is no world in which 100% of the good companies come from outside of the realm of like the known attributes that to me it's impossible that none of the alpha adventure. I think it's equally unlikely that 100% of the alpha comes from the known obvious stuff and the question is, well, what's the ratio?

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 attention over the past week. Our first feature is a recent episode from the emerging LP podcast called Super Clusters, where the host David Zo featured previous guests he had hosted in earlier episodes for an interactive Q and A with GPS calling in the LP guests for this episode were all three investors from the Fund of Funds firm Screen Door, Lisa, Collie, Lane Johnson and Jamie Rhode. In fact, it was the first time they've been on a podcast together and the episode was filled with great insights for certainly emerging managers, but I would say for all fund managers more broadly. One of the discussions on the episode was around the fact that certainly for emerging funds, LPs need to spot investors who can grow into that fund manager role, which requires different skill sets and strategies altogether. A lot of that fund manager growth has to do more with understanding the back of office and operational complexities that exist with running a firm. Complexities that don't weigh nearly as much when you're not running the fund yourself. So Charles, as you've gone from Fund 1 to Fund 5, how much of the job has evolved from the original venture capital role that you loved and once had. And how have you been able to communicate the ability to be a fund manager to LPs in your earlier funds when you raised them?

No, it's pretty funny. So, you know, I've been on the investment committee for Screen Doors for quite some time. Obviously I'm a big fan of the work that that team's doing. One of the things someone told me in the beginning that I've really adopted and I try to tell every emerging manager I meet is a lot of people say I want to start a venture fund because I love investing. And I'm like, great, if you really, really love investing, you should actually not start a venture fund. You should go invest on somebody else's platform so you can spend 100% of your time writing checks and finding founders. Running a venture fund is a three part job. It is obviously an investing job. It's also a fundraising job and managing relationships with LPs. It's also running a small professional services firm. You know, we have 14 full time people at Precursor and we have payroll in multiple states, we have taxes, we have benefits, we have one on ones, we have reviews. It's like running a small law firm or a consultancy or something like that. And time is not free or fungible. And what I tell people is if you really want to build a firm that is going to pull you away from the job of just finding portfolio companies and writing checks, and the more architecture you put into your firm, the more of your time you will spend on firm and fund management and the less time you will spend purely investing. And for many of my peers, there comes a point in time where the firm is so large that you can no longer both invest and manage the firm. You have to sort of choose one. And I don't know, I like investing, so I'm glad I have a team that gives me plenty of space to still do that. And a lot of times when I'm interviewing people on behalf of Screen Door, what I'm trying to figure out is have they intuitively realize and accept that like part of their time will be spent on things other than the thing that probably got them super excited. And it's kind of in some ways Mia, like when we meet first time founders and I'm like, well, this person's never been a CEO. I know they want to be a CEO because they want to be in charge, but do they realize that being a CEO has all of these other duties that come along with it. And this person has never done these things in many ways. I evaluate fund managers in the same way I evaluate first time founders. Does this person have a general awareness of what they have to do? And has this person built the support system of people who are more experienced or who have some know how who can help them when they get stuck? And I don't know, I think Screen Door does a good job of doing that for first time or emerging fund managers. I'd like to think at least we do a good job helping first time founders build the scaffolding they need to be successful. But I've also met a lot of people coming out of 2020 and 2021 who are like, you know, what I really liked doing was investing. I started a fund because I thought it would be a better way to invest. And it turns out that the amount of time I spent fundraising and fund managing and k1ing and auditing was not that great. And I want to go back to a mostly get to invest even if it means I'm not in charge.

Like owning your own angel check portfolio and running your own fund are completely different concepts, totally different. One thing that's interesting, I feel like within my peer network is when folks jump into venture for the first time. I think people are surprised with the lack of people management skills fund managers have from fund to fund. How often do those questions come in from a diligence perspective as a gp? And I'll also ask you how important is that to actually consider if you're going out to raise a fund, do you want to manage people? Because that's, that's actually a lot of I feel like you're day now.

I used to joke about this, but I believe it's true. There's, I think a lot of people who get into venture because they're burned out or tired of people management. And you know, a venture firm can scale AUM much faster than an operating company can without scaling headcount. And so I've met a lot of people who are like my goal is to be not just a solo GP but a solo capitalist. I don't want anybody at the firm other than me. And some people have been able to scale to to great heights with that model with very lean teams. I think about Oren, I think about Elad, I think about Josh Buckley. Those are people who've been able to scale with very lean teams. Whereas the things that we do here require people. So I was like, well the only way I can build the version of precursors that I Want is with people. And that means I have to be interested in and at least decent at managing people. And I often ask fund managers, when they're pitching screen door, what's your vision for the team? Who's around the table and fund and fund. 3. Now the funny thing is for most of precursor, it was me and one or two other people. It was in fact very small. And then one day I woke up and I was like, well, if we're going to do all of these things right, if we want to be a good partner to our LPs, if you want to be a good partner to the founders, be back. And if I want to have like sanity, I actually need a lot more leverage at the firm. And so I've met a few people who've outlined strategies that I'm just sort of like, well, that's a strategy that requires you to hire people. How interested are you in managing people? And if it's a multi partner partnership, not everybody in the partnership has to be interested in people management. And I think that's why a lot of venture funds have gone to this like CEO model where there is somebody who's kind of responsible for running the place who says, I will take on the responsibility of people management performance management, coordinating all of the like unsexy stuff like tax and audit and closing out the quarter and getting the LP letter out. These are all things you have to do and somebody has to own them. Yeah.

Lisa said, as an lp, it's really important to be constantly questioning and refining their specific sourcing mechanism.

Civic example, one of my screen door mentees has a very specific operating background where she has a very unique knowledge set around a very. I don't want to say who it is, so I'm being a little obtuse. Has a very specific operating background that is quite rare, especially in the technical domain. And people seek her out because she has this really unique skill set when it comes to go to market for technical teams. Now the funny thing about operating experience is there's a half life to that stuff. And what I always tell fund managers is the story that you use to get your fund off the ground and differentiate yourself will probably not be the way you talk about the firm two funds from now. So you should just know if whatever it is, like, oh, we're an AI, we're an AI focused fund, maybe five years ago, seven years ago, that was unique. Now every fund is an AI fund, so that can't be your story. But you do need a launch hook because there's so many venture funds out there. If you don't have a way to stand out from the beginning, you never get the right to get to fund three and fund four. Yeah.

The person that you're thinking of, would they be someone that every type of LP would look at her background and be like, wonderful, let me write a check into that. Or is she from a pocket that you feel like you'd have to unearth?

She comes from more of an operator pocket. What I've noticed is I think most sophisticated LPs know how to evaluate spin out managers. If you're leaving Greycroft or Greylock or some gray name for, leave one of those. Like, I think LPs know how to diligence people who've been VCs on a platform that they know. And by the way, they don't diligence these firms the same way they know how to diligence people who've been very successful angels and who want to become institutional. I think most LPs know how to diligence operators who have a high profile. I think where they struggle is if you're not in one of those buckets, it gets way harder. And I think a lot of it, the playbook for a spin out manager is you look at what they did at their firm and you call all the people who are at that firm and try to figure out if that person's any good. The angel. You look at the angel track record and you figure out, okay, well, how much of this angel track record will translate to institutional. That they scale up the check and, and all those things. And the famous operator. You're basically trying to figure out how famous is this person and does this person have enough gravity to attract really great founders in whatever domain they're starting their firm. And if you're not one of those, if you're, hey, I was a consultant or if I was a podcaster like Harry Stebbins or a blogger. In many cases LPs don't have the same playbooks for underwriting those people. So it's harder.

I was recently talking to a founder who asked what the largest differences in relationship are between the venture capitalist to founder relationship and then the LP to GP relationship. I have some in my mind, but I was going to ask you first.

I. One of the big things is the time cycle. I talked to one of our largest LPs last week. By the time precursors, all said and done, I'll probably have worked with this person for 25 years. 25 years. I joked with them. I was Like I met you before I had a kid and my kid might be married by the time we stop working together. It's a really long term relationship. And it's different because even the best founders I work with, if I'm lucky, I work with them for 10 or 12 years on a single company. And because we're so early, it's really more like I work closely with them for two or three years and then in a less intense way over eight or nine years. And the other thing I'll say is a lot of the performance that happens in venture happens late, where I think for startups, yeah, you can hear these things about Sigma 5 years, nothing happened. But for the most part, most startups, if it doesn't work for you in the first two or three years, you don't really get the right to keep going with that specific company. And that's also where I find this LP thing is different. Our returns are backloaded. The majority of the money we're going to give to our LPs is going to be after we've been working together for at least a decade because the Firm's already been 10 years years old and things are still compounding. And so I think it creates a different type of relationship when I know I'm going to be in conversation with these people for 10 to 20 years. But a lot of it's also the same. They're evaluating my performance, they have feedback for me about how I can do a better job for them. And in the same way that sometimes you have an investor who doesn't do every single round that you raise, I have LPs who like, hey, we have to sit this fund out for various reasons. And I think it's a good practice to just learn. How do you stay in relationship with somebody for 10 or 15 years? You'll have your ups and downs and with your LPs depending what happens with the market, depending what happens with their firm. But you're kind of stuck together. It's kind of nice. It's sort of like you actually. It's very hard to divorce in this world. So in some ways you're just like, we're in this together for the next 15 to 20 years. We should figure out how to make this feel productive.

Equally as important to make sure that you're really thinking hard about the people that you bring in. It's a really good segue into the next topic. It's a recent piece written by Ariana, the founder of Half Days, a women's ski and outdoor apparel brand we've been lucky to support since their earliest days at Precursor. In the blog post, Ariana discusses the importance importance of choosing the right investors for your company, not just the first ones who show interest. While the founder journey can often feel like treading water in search of lifeboats, there are real consequences that we mentioned to jumping into a boat without understanding what comes with it. Sometimes it's an anchor that stalls your growth entirely. She walks through a handful of specific questions founders should ask themselves before accepting capital, questions that might seem unnecessary when you're searching for a lifeline, but can make all the difference in the long run. Her post was really digestible and to the point. One of the question Ariana poses to founders that I like the most was do they actually understand what I'm building? I think for founders this feels obvious, but you'd be very surprised what conversations are happening behind closed doors during investment committee meetings to get folks around the table to vote yes on the deal. How much of this can actually be controlled by founders from your perspective?

Oh my gosh, Mia like, first of all, I'm so glad that we are investors and a half days and I'm so glad that already picked us. There are so many times where I get these calls from investors who are looking at a company where we're an investor. Like, I really wish the company were doing X. I'm like, but they're not. I know, but I really wish that they would do X thing. I'm like, they're. They're not doing that. Like, hey, you should remember they're the CEO. They've made a decision about what they want to work on. And if you really want them to do thing X, you should find a company that's doing thing X. And the number of times I've had people, particularly in follow on investments, tell themselves the story that a company is going to do something that the investor thinks is interesting, that the founder has maybe a passing interest in exploring but not committed to has created no shortage of problems. Yeah, so that's one second, I would say at least once or twice a year I find myself in a situation where there's a very disruptive person on the cap table. And in some cases it was knowable or the person revealed themselves to be difficult during the negotiation. And the founder's like, how do I get rid of this person? I'm like, you can't, because if your company's doing well, they're not going to want to sell. If your company's doing poorly, there's no one to sell their shares too. So what I tell founders is you will have an easier time parting ways with your co founder than you will with somebody on your cap table. And so make sure that you pick people whose behavior in general, like I have somebody who put in a 25k check and essentially demands a weekly check in with the founder and I'm like, this is bad. That is too little money for too much access and it's driving the founder nuts trying to communicate to this person that hey, this weekly 30 minute check in isn't going to happen for the tune of 25k. It's not what we're doing here. And so I do think it's really important also when it comes down to strategy, you know, we have a post 6 month analysis thing we do here where one of the most important questions I ask myself is am I aligned with what the founder wants to build? Do we have the same vision for what the company should be working on and what success looks like? I have found it very difficult to to work with and support founders when we are at odds about what should be built. And that doesn't mean that I'm right, but when I'm at odds with folks, it's super hard.

Going back to that example that you had for the investor who wrote a check that's too little and gained too much access. I've seen that many times at different scales and I think for founders they assume that everyone sees it, everyone buy all the other investors and assume that those other people will come to their rescue and knock sense into that investor. But it usually actually doesn't happen as much as you would think. Can you walk through the logic on why?

Probably from your end, usually somebody has to sit down and have a conversation with somebody about what's happening. And the tricky thing is for a founder, this is a one off thing for you. If you're Ariana, you're like, I have this investor, they're on my cap table, I'm probably never going to see this person again on another company. Whereas as a VC we deal with repeat relationships. And so sometimes you're like, well this person's behavior or this person doesn't get it. Somebody has to take some of their relationship capital with that person and use it to maybe have a correct productive conversation. And those aren't fun. I had to have one of those with somebody earlier this year where I had to, in no uncertain terms tell them they were driving the CEO insane. And I hypothesized that it had to do with something that was actually unrelated to the company and completely related to an internal dynamic at their fund. And that was, in fact, the case. And it was an awkward conversation for the first 20 minutes. And then once we kind of broke through and got to the real issue, the person was unaware that they were showing up in this way. It's like, this is not you. You are better than this. But this is the impact you're having on the founder, and we need to solve this. This is, like, not okay. I was like, you're creating a gigantic detractor in this founder, and I don't think you want that either. The person was, on the one hand, like, it sucks that we're having this conversation. I'm glad that you had the courage to have it with me. I'm annoyed that the other people didn't have the courage to bring it up and that they sent you as the ambassador and, like, now we're fine. So it's just hard. And sometimes you're just like, I don't want to. I don't want to have that conversation with that person.

More people, management skills. If you needed more.

Last question here. Anything that you feel like founders should know about you or precursor that might not be as clear in those early meetings when you're evaluating the company.

Oh, that's a really good question. The one thing I will say is, generally speaking, I rarely go into a pitch meeting with a strong point of view about whether I'm going to say yes or no. And a lot of times, even in our team meetings, people are like, we never thought you'd be excited about that company. I'm like, well, me neither. I got excited in the meeting. And the thing I like about being a generalist is that my job is to get up to speed on new topics very quickly. And a lot of what I'm looking for is a spark in a meeting is like the most recent investment you and I worked on together. That founder, I think, has a unique spark for the problem that she's trying to solve. And I think if I see it, other potential employees will see it, customers will see it, other investors hopefully will see it. I don't. I don't go into most of these meetings with a strong point of view. I go into most of them with a genuine desire to learn from the founder about what they know about the.

Problem that I don't know, which is different. I think at most funds, there are complete categories that everyone knows not to touch, but they will still take the meeting. Our last topic is another great piece by Rob Go from NextView, who published the recent post titled A Crisis Moment for Seed vc. Rob argues seed investing isn't just experiencing a down cycle, but a structural shift driven by core forces, industry maturation that's squeezed profits for small funds, dominance of YC and me, funds that scoop up some of the best early founders, power law thinking becoming consensus. So capital floods into only the biggest bets and the AI wave, which is capital intensive, crowded and favors platforms, leaving most seed funds sidelined. He ends the piece with the quote, hope is not a strategy. Seed vcs are stirring extinction in the eye and we will all have to evolve or die. We've talked at length about these different scenarios, but Rob wrote probably one of the most direct pieces on the future of seed that I seen in a bit. Wanted to first see if you had.

Any initial reactions to the post other than violent agreement. I mean I told some people at our team this. I think a lot of times when I talk to people about the future of seed, the presumption is that well, seed will continue to exist. I'm like, well no, the venture ecosystem survived without seed firms for a very long time and there is no guarantee that any asset class or sub asset class will exist forever just because the people who are in it want it to do so. Seed emerged to solve this gap between starting a company and Series A at a time where not a lot of people had friends and family and there were good ideas being left on the cutting room floor. That was almost 20 years ago. Those conditions don't exist in the same way. So I always say like what problem are you trying to solve? If as a seed fund, if you're like hey, I'm trying to solve the problem of getting money to repeat founders or people who left really high profile companies who want to start from scratch, I'm like, I'm sorry, multi stage funds are also trying to solve that problem and they are more likely to solve it than you are on average is my guess. For a bunch of reasons. Their business model allows them to be way more flexible. So if that was your whole reason for being as a seed firm was to kind of arbitrage, obviously good people who needed somebody, like I don't think that arbitrage exists anymore. So I think the only reason for any venture firm to exist is that you're actually solving a problem for entrepreneurs. Now cynically some people would say some VC firms exist to solve capital allocation problems for limited partners. But I'm not going to be cynical today. I would say what you really need to do is you, you need to solve a problem. And I would say Ira Morati doesn't have a capital access problem. She raised $2 billion for a pre launch company. So if your whole theory is there are these people from OpenAI who need help and money, they don't. They're awash in capital. So I think for a long time, what started off as like a necessary arbitrage became a good business and nobody noticed. And seed stage entrepreneurs were raising capital from seed funds, and Series A mega funds were happy to let seed funds do their thing. And I think one day those folks woke up, well, we need to be in the seed business too, but not explicitly just to make money, but to see the best companies and to see them early enough to have a point of view about them. And I've always told people, you should be very nervous when somebody decides to make your job their hobby. And I tell our LPs all the time, I truly believe we deserve to exist because we are helping a pool of entrepreneurs who consistently struggle to raise capital. And if it ever becomes easy for the folks that we work with to raise money, I will question our right to exist. And I think there's not a lot of seed managers out there I meet who've really questioned. Again, going back to the beginning of our conversation with Screen Drawer, I always ask myself, the other question is like, well, what would happen in the ecosystem if this fund didn't exist? What ideas wouldn't get funded, who wouldn't get capital? And sometimes I'm just like, well, somebody else would pick it up. They're like other firms with a similar strategy. The irony though is the more unique and difficult the thing you're doing, the harder it is to get LPs excited about it. And I think that's part of one thing Rob and I think have both talked about and written about is this sort of like same ification of venture and where everybody has the same, same portfolio construction, the same strategy focused on the same type of entrepreneur in the same geographies. And anytime you try to deviate from that, you can find alpha. But you are making the process of raising money for your fund and storytelling much, much harder. And the question is, is that trade worth it? Because the difficulty in fundraising shows up today, the benefits of the strategy show up at some indeterminate point in the.

Future to give everyone a closer look as to how. To your earlier point, Charles, like, there's a sector of founders and companies that do not have a fundraising issue. Rob shared the CO2 chart showing that so far in 2025, 52% of venture capital dollars have concentrated into just 10 companies. Rob shared this to underscore his point on how consensus investments are absorbing most of the industry's attention in the face of a sluggish exit landscape which leads to widespread price insensitivity. He had a good quote that was investors may as well swing only for grand slams because it's not like the hit rate of home run outcomes is significantly higher. One counterpoint to that may be isn't it still possible for winners to emerge from the remaining 48% of deployed capital their companies? And if so, what caveats come into that?

I mean this is my whole argument to the LPs that I talk to, which is there's a slider. Some percentage of big outcomes in venture are going to come from consensus obvious people and in some cases those outcomes might be disconnected from capital from company success. It could just be that like hey, there's this pot of AI researchers who are really great and they never build anything and Meta comes and buys them for a gajillion dollars because they want the talent and that's a good investment even though it wasn't a good company prod. So we'll put those to the side. I think there is no world in which 100% of the good companies come from outside of the realm of like the known attributes that to me it's impossible that none of the alpha and venture I think it's equally unlikely that 100% of the alpha comes from the known obvious stuff and the question is well what's the ratio? If the ratio is 50:50 then seed is a great business because you're equally likely to find good companies outside of that core concentration Anointed few if it's 8020 towards the anointed then seeds a terrible business because you're working really really hard to pick up a small amount of alpha relative to the category and we should all quit and go home and just let the multi stage firms I just actually fundamentally don't believe that all of the alpha in this business is going to come from people who are well positioned because they did something previously or because they happen to have a drink of water at OpenAI or a cup of coffee at Anthropic. Like I don't think that that's. I don't think that's where all maybe that's. Maybe that's motivated reasoning, maybe it's self serving. In my venture career many of the best companies I've met have been started by people who are talented but not obvious.

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