VCs Are Rewriting The Rules On Portfolio Conflicts

I think the not enough traction piece is just an easy pass excuse for early stage investors. It just means that you're not interested in a deal. You have a pre seed company that we've invested in, they hit great milestones. They were maybe too early for other investors to come in, they get to the seed, they hit all the benchmarks that they were supposed to, and then they're like, I actually need more. And I'm like, there's something about the deal. Just be honest. You don't love the team, you don't love the business, you don't like the market. That's all fine, but at least be transparent because I'm not going to waste their time pedaling around it's the week of January 19th. Welcome to the Learning Corner of 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 attention over the past week. Our first topic of the week is TechCrunch's article from Connie Loises about Sequoia's decision to invest in Anthropic, a move that's raising eyebrows because it breaks with traditional VC norms around backing competitors. So Sequoia already has stakes in both OpenAI and XAI, and now they're joining a GIC led round that could see Anthropic raise $25 billion or more at a $350 billion valuation. Sequoia has a history of taking conflict seriously, so this feels like a real departure, especially coming on the heels of major leadership changes at the firm. And it's all happening as Anthropic is reportedly gearing up for an IPO that could come as soon as this year. We talked about this happening in the beginning of the summer actually, and you wrote a P around it, so wanted to ask you if there's any surprises that you felt like you saw from your perspective.

No, I feel like we're in this new era of venture, and maybe it's not that new, but we're in this era of this weird combination of extremely large mega funds and really concentrated. You know, the guys at Vintage had this better articulation than I could have had concentration squared. We have these really big venture funds that only want to compete over 10 or 15 really high conviction assets, and if you're a big venture fund north of we'll say $2 billion, you have to be in the most consequential companies and if you're adhering to some conflicts policy that probably has like a really strong moral or business justification and missing out on the companies that will generate the returns that will keep you in business. I think most venture firms are going to opt for the returns. And I think this will become even a bigger issue as companies stay private longer. I mean, the other thing that used to save people with conflicts policies is you're like, oh, eventually the company that's creating the conflict will go public and we can get rid of the shares. It'll get so big that, like, we won't have any influence. And when companies saying private longer, it's harder to find these off ramps, especially if you're a majority owner. If you're a significant shareholder, not majority. Most venture firms aren't. But if you're a significant shareholder and you're on the board, I think it's going to get complicated. And I think firms are going to think harder and harder about in what cases will we have conflicts. And one of my friends told me something interesting. Who works at a big fund, he said, we worry more not about our own ability to manage conflicts, but we worry that a founder and a company that we should see that sees us in one of these companies, that that founder will opt out of even pitching us because of their perception of conflict. And we might not even get the chance to explain how we'll manage it. So I think we're in many ways in venture. I feel like we've said this a lot. We're in a new era and I'm very curious to see how this all plays out. But I think there will be other cases in categories that have multiple winners, all of which are of venture scale, that you'll see this, this phenomenon happen.

Again, on the founder point, you mentioned actually in the substack you wrote in July that you're curious how founders will respond to this bigger shift on portfolio conflicts, as in, do founders feel comfortable to have somebody join the cap table when they that they've invested in a competitor, but for a round of this size, I guess if we're talking specifically about anthropic, but we can go more generally also just on portfolio conflict. Do you think anthropic is really in a position to push back or care at all, or does the scale of capital they're raising change the calculus entirely from their perspective?

I mean, I think what we don't know is, and I think the only people who know this are Anthropic and Sequoia. What internal guardrails, if Any. You can think of a lot of ways to manage this. If you're anthropic, you're like, hey, we're not going to tell you about our product strategy, but we'll give you the bare minimum financial reporting information you need, and we expect you to keep that private. You know, we want a separate team of people. I'd imagine they've already solved some of this with OpenAI and Grok, just out of necessity. But I think increasingly companies are going to say, well, if this is going to be our new operating model, we already have ways to limit access to information through information rights and who's on the board and who gets access to information. And companies just might have to be more thoughtful about how do we segment which of our investors get what. But that's like, overhead that creates no value for the company. And I, you know, if I were an investor in that company, I'd be like, I don't want management spending time on this. This is not value add.

And I was thinking too, from the founder's perspective, if you had your choice of investors, why would you go to somebody who, you know, has competitors? But then you kind of see the pool for folks who can move capital at that pace. I mean, they're investing alongside gic. Yeah, that number is smaller and smaller. So if you're raising a $25 billion round, there's only so many venture funds who can participate. So if that person has raised their hand to do it, you're kind of like, all right, like, I'll take your capital if that's what I'm looking for.

And if you're like a sovereign wealth fund, if you're, if you're adia, you're probably not thinking, I'm going to get on the board of Anthropic and make all of these changes, you're like, no, I want to put a lot of money to work, and I want to know that the fiduciaries are going to take good care of my money. And maybe I need some oversight. But you're probably not looking for operational insights on what comes after the Opus 4.5 model. That's like, probably not your focus.

That's actually a good point. So I guess if you're a sovereign and you're jumping into these traditionally venture investments, and this is not the first time you're doing it, but maybe you're doing it more and more because the round sizes are such you can finally participate.

Yeah.

I would assume that you would maybe lean on your traditional venture partners to have the thumb on the pulse of how things are going. But if things happen how you described, if maybe they don't allow specific information rights to those folks because they have competitors, like who is. Who is watching? I guess.

Yeah. I mean, the question is like, if you're going to write a check of this size with the conflict, what's the minimum amount? Look, I think there's information rights that you're legally entitled to and then there's the cloak and dagger way that you can get access to information you're not supposed to have your hands on in Silicon Valley. And I would like to think if you're Sequoia, if you're like, well, if we don't get it in the front door, and we should, of course, I assume that they did it above board. There are enough people in and around the anthropic ecosystem that I'm sure there's something that Sequoia really needed to know. They have someone in their network who could find a way to make sure that they were sure. I thought the crazy thing was like when you had, remember Uber and Lyft are like, well, this company in this country is at Uber and this company. I think we're going to end up with a lot more overlap because it couldn't that OpenAI and Anthropic end up being the two big private winners and all that. It's not guaranteed. But if that's the case and you're a big venture fund, you kind of do want to be in both. You want to capture all of the opportunity because if you're Sequoia, you're like, I'm being compared against Founders Fund and other and Menlo now and other funds that are in these names. And if we're not in them, we have to find equivalent assets that are going to generate the same return. I don't know what those companies are at the moment.

Well, I think it'll be the first of many articles published in the same theme to come. Moving on to our next topic, we're looking at a LinkedIn post from Andres Cano where he is declaring that precede as we know it is dead, at least in Latam. His core argument is that the market has completely redefined what pre seed means without telling founders. So back in 2021, 2022, pre seed was team plus idea. And these days you need what he says, 300k in ARR and proven unit economics just to get a meeting scheduled. He breaks founders into these three tiers. The top 1% are unicorn builders who can still raise on reputation alone. The next 9% are proven operators. So people who've scaled companies to 10 million in ARR and they can still raise pre traction pattern recognition but the remaining 90% he says they need what used to be seed level traction just to raise a pre seed round. His advice to that 90% is pretty clear. Stop fundraising, start building to 300k ARR and bootstrap as long as possible to prove your unit economics work. I agree that the bar has never been higher for pre seed fundraising, especially if you're not building the typical AI startup that every VC wants to see right now, which is incredibly discouraging. But I do think what's missing from Andres Take is that location matters enormously here. He's specifically talking about latam and I'd imagine founders building outside of SF and New York City are experiencing similar dynamics. Maybe not as quite extreme. So Charles, what's your perspective on how much geography is actually driving these dynamics?

Yeah, I mean when we talked about this as a team, there's like another lens. It's also the market you're in. And you know there's a market you and I both have invested in cpg which has similar dynamics. And I think anytime you're in a category where capital is scarce, capital sets the rules. And if I think about our US CPG companies, there are not that many people who are willing to do very early CPG investments. And so those people can say hey, I only want to invest in companies that have gotten somehow by hooker crook to 5 million in sales before we take a meeting. And you're like, well that seems unreasonable. You're like, but who else is going to fund them if I don't? You're like, I know the other three people who will write this check. We're all going to hold out for the same thing. That's the market. And I think in LATAM you see the same thing. There was a boom of precede funds in the beginning of this decade. Now I'd say some of those funds were very successful and have grown and scaled and others have gone away. And I think you've gotten back to the pre 2020level of activity where there are relatively few people who will write pre seed checks in latam. And so I think they've decided, hey, we're just going to raise the bar because again, unless a bunch of US venture funds flood latam again, they kind of rule the roost. And so the thing I've always thought that's funny is I see this in I don't mean this in a bad way but like second tier venture cities too. People are like we hold these companies as high bar. I'm like great. So you end up creating these companies that are just not interesting on venturescale. They do, you know, they bootstrap, they get to some arbitrary amount of ARR. It takes them three years to get to 100k in ARR. And you're like how is this company ever going to matter given the way that venture math works? And the answer is it doesn't. You constrain the ambition of these companies by forcing them to do things that are inappropriate too early and the end product you get is not interesting to anybody else. And you get this like vicious cycle where the second tier markets create companies that can't raise so they bootstrap and they become uninvestable and then they go to raise and everyone's like well congrats on getting 250, 300k or it's a great accomplishment, I don't care because I'm focused on this other company over here that has no revenue but has like this hugely ambitious plan and is building something big and that's the business that VCs are in. And so I've always found this advice weird because we have a bunch of seed companies that are between 250 and 500k in ARR when they raise. And so I understand. It's funny, I think what he said is probably true of that environment and that makes me feel bad for the state of Latam precede going to your.

Comment of things that are kind of inappropriate for pre seed stage. Like I would go out on a limb and say if you're in a second tier market that's more difficult to attract VC attention and you're profitable at pre seed I would say that's, that's not going to move the needle at all in the conversations. I don't think having that unit economic means all that much from a venture scale perspective which again I understand it's like inverse of But I'm running a good business and I would say for most investors running a good business or profitable business certainly isn't something that I need as a metric at all for you to hit. In the first years we just had.

Yesterday, I won't name the company but a company that we use a lot at Precursor came by their management and product team came by and spent an hour with us and we talked about them and they are like very profitable. And as a customer of that company I feel great. I'M like this thing is not going to go away.

Right.

It's a core part of our workflow and infrastructure and that team has such clarity around what they're trying to build. I think they will eventually have a huge outcome, but it will be on their terms and on their timing.

Yeah. And that's the other thing that I think is the pro of running a good business. And I think about our CPG folks, I think about the benchmark. When you used to go out and raise a series A for a CPG company like four years ago, if you did it at 10 million in ARR, you're great. You could raise around with a wonderful term sheet. Now I would say it's like 1520, which is crazy. Yeah. To go out for most CPG companies. Now there are exceptions of course for like celeb round kind of like CPG companies but I'm hearing that that is what investors are looking for. And so while you have to kind of figure out more creat ways to find capital, you're able to focus on parts of the business that allow you to be more sustaining in the long term. But I do feel for these companies who are both out of market or out of, you know, industry focus for the majority. The one thing that I do think about this piece that comes to me is I think the not enough traction piece is just like an easy pass excuse for early stage investors. It just means that you're not interested in a deal because I, I have literally done that where you have a pre seed company that we've invested in, they hit great milestones, they were maybe too early for other investors to come in. They get to seed, they hit all the benchmarks that they were supposed to and then they're like I actually need more. And I'm like, you don't. There's something about the deal, you don't like it, that's fine. Just be honest. And I think that's what I would ask more investors is again, there are some things that you just won't say to founders in the past email but to me at least you don't love the team, you don't love the business, you don't like the market, that's all fine but at least be transparent because I'm not going to waste their time pedaling around.

This weekend I was emailing with one of our portfolio coming founders and he sent me this past email and he said can you believe this? And someone I know just said, said I'm just not interested in this category. And the founder was like, so offended. I'm like, that's one of the most honest past emails. You can't help the fact that he's just not interested. He's just not that into you. He just doesn't care. And he's like, I have this great business. And I'm like, there's nothing wrong with your business other than that person doesn't like it. Yeah, two things can be true. You can have a great business and they can be uninterested. I read that and I was just kind of like, you can't argue with that. The person's like, I just don't find this that interesting.

Yeah, and no amount of me advocating for you is actually going to change their mind. I've learned it's not going to be me sitting on the phone with them for 30 minutes to get them excited about the industry. Their focus is completely rerouted. Well, our last topic is a substack post written by Lawrence Tang about leaving Amazon for a startup and regretting that decision. Shortly after joining, Lawrence had put in a handful of years at Amazon, and while he felt comfortable, he was also frustrated by the slow pace, the bureaucracy, and the sense that they weren't on the cutting edge. After getting an opportunity to join a growing startup, he accepted immediately and moved his entire life across the country to sf. He explains that the startup environment was the complete opposite of Amazon. It was square, crappy and high energy. But Lawrence says the biggest difference was the need to approach the job like a mission, a complete departure from how most people talk about approaching big tech roles. This shift was admittedly difficult for Lawrence, and three weeks in, the founders asked him point blank if he felt motivated and connected to the work, and it really was impossible for him to lie at that moment. He replied no, and was told to pack up his things and finish out his time there that day. His reflection is pretty honest. Maybe he should have done a work trial first to see if he actually clicked with the team in the mission. But his biggest takeaway is that startups require a level of dedication that goes beyond just being smart and eager for something new. You have to be all in on the mission, and he wasn't. While he's still processing the regret and bitterness, he also acknowledges it was transformative. It takes a lot of courage and humility to write a substack with as much transparency as he did, but it shares the same tone as so many conversations I have with friends who are always eager to explore what's on the other side and considering new opportunities. I Wanted to pause for your thoughts here first Charles, because I know you face these exploratory conversations a lot. Lot with folks joining our portfolio as early hires.

I meet a lot of big company people who romanticize startup life. They're like, it's going to be all of the things that I like about my current job and none of the things I hate. So it's going to be fun and exciting and it's going to be less bureaucracy and smart people. And then they get there and they're like, oh my God, everything is broken. I have to fix everything. I'm like, no, no, no, that's just going to stay broken. It's broken but functional. This thing is on fire. So we're going to focus on the it's on fire thing. Well, we got to build this thing to scale actually we need to. Things ship on Monday. And I find a lot of people struggle with two things. One, the tolerance of things that are imperfect but functional in the name of speed, which would get you in a lot of trouble in a lot of big companies. And also I think a lot of people have this notion that like, oh, I'm going to like work way harder. I'm like, hey, I worked at a big company, I have friends work there. You spend a lot of time if you work at an Alphabet. But the problem is a lot of the time you spend is on internal matters. Oh, I'm trying to get headcount approval to ship this feature. So I've got to go work the system internally to get the wreck and the bill it and then. And you. Those, none of those things aren't important. But that's a skill set that doesn't apply in a five person startup. That's like not, that's not the game. The other thing I realized when I was at Google one day I was doing email late and my boss was like, what are you doing? I'm trying to get these emails out. He's like, well the person you're emailing isn't working. So whether you send this email now or you send it in the morning, like, like nothing is going to happen because the other end of this chain is offline. And when you're in a five person startup, if everybody in the company stays in the office till 10 o' clock and works together, you can actually solve problems and make progress. And that compounds after day after day. Which means if you'd rather go play tennis at 6pm or whatever time. I forget what time you said you want to go play tennis. That's going to be an affront to the people who are like, don't you understand that our big advantage is that we are small and tight knit and that if we all make the commitment to be here together. As much as I have criticisms over some of the 996 stuff and there's a practical reality to it which is if you're a small team and everybody shows up and works, you can actually move the ball after dinner time before bedtime time every day in a way you cannot at a big company.

And you can't hide at a startup the same way that you can hide at a large company. And I think there's also this unspoken truth about moving from a big company and say you've spent multiple years there. So I have friends who've spent more than 10 years at a large company and you move over to the startup side and you realize that there's two things that are true. One, the work environment has shifted completely since you've been out and you've just been at one company alone, alone. And the jobs and what's important are. I remember my first couple weeks at attention craze. I came from consulting so everything was all about proposing options as opposed to moving the ball. And I remember like Mia and Alex were like oh can you like set up us some options for three PLs that we could decide? And I was like sure, just tell us which one we should go. And I was like amazing. I remember my first deliverable also that's not a thing in early stage startups also was like a slide with seven different options that they could pick. And me and Alex are like I definitely didn't want seven options. I just wanted to tell me what was the one. Oh, I had no idea that was the. That's the biggest value add you can add is just creating less decision burden on people and just have them drive, drive, drive. One thing that I have been thinking about recently is some of my friends who are wanting to leave to go to something different, who are from big tech companies. I think when they're ready to go to something way more risky, they argue that if it doesn't work out and say I don't love this job, this startup job in two, three years I'll just come back to Google, come back to meta insert whatever big tech companies company. Given where the market is today and how priorities and strategic planning is shifting, do you think that that boomerang is, is available anymore?

I wouldn't. I certainly wouldn't. I think for a long time that was available Maybe once for people. I mean, you can't just keep leaving and coming back. I think that was in an era where tech jobs were largely secure, layoffs were like, episodic and driven mostly by macro. And now we're in a world where tech feels more to me like finance and that there's just some annual rebalancing based on which business units are up. So, you know, Gemini needs more people. So we're going to shed people in some other department in the same way that at a bank you're like, well, sales and trading is up this year, so we're going to hire some more trading people and banking is down. So we're going to let. You're like, well, if you just kept it flat the whole time, you probably would have ended up in the same place. And I think it's not clear to me that I think tech jobs used to be safe. And the challenge now is I tell people like, well, nothing is safe. Used to be like, hey, if you need to downshift a little bit, go to a big tech company, you'll work hard. But if you're not focused on it, on becoming an L, whatever or an E, what, whatever leveling system, these companies, if you're not focused on that, you can work hard, you can make a good living and like, you'll be fine. And now I'm just like, those jobs are. Aren't really safe.

Also say not to discourage folks to go and explore a startup. I would just say to follow, I guess what Lawrence is kind of saying throughout the piece, which is like, really diligence the team, really be obsessive over the mission and say, like, is this what I want to be working day in, day out on? Because that is certainly the schedule you'll be operating on. And the one thing I'll say is I always tell my friends when they're thinking about making career pivots that feel really large for them. It's a seasons of life conversation for yourself. What season of life are you in? You can always rotate out, but is this the right season for you to be making the change, or should you spend a couple more in the seat that you're in?

It's funny, Mia. Like, I interview a lot of people for our portfolio and one of the things I'll often ask people is, what other things are you considering? I'll never forget I met somebody who was interviewing with one of our fintech companies when it was like, sub 10 people. And he's like, I'm looking at this company and SVB be and I was like, as somebody who doesn't know you that well, it's impossible that you are equally interested in both of those things.

Yeah, you're just looking for a new job.

Yeah, I was like, I was like, but like one of these things. And I found for a lot of candidates there's this gap between the aspirational version of themselves that wants to be in a startup and wants the risk and wants the adventure and the realistic view of them, which is like, I have a mortgage or I have a family or I'm not in a place where I can like take this amount of risk. And I'm like, you have to reconcile those things, those two. And sometimes I'll meet candidates and just like, you need to get clear with yourself about what you want. If you want to go to svb, like, that's fine. I'm not judging you for making that choice. That very well might be the right choice for you in your life. But these two things are. There's a conflict here between like if someone tells me, hey, I'm looking at five startup jobs, I'm like, cool, you're, you're ready to go join. You still might be wrong, but you are focused on joining a startup. I found that question for me is like very illuminating when I ask people because usually I get a sense of like, what are they actually, actually considering? And sometimes I'm like, wow. The thing I'm talking about is the outlier. I talked to somebody last week who's looking at like, I won't Name the companies, 3 or 4 very late stage B2B SaaS/ Infrastructure companies and then a startup. And I'm like, well, it seems like most of your energy is over there. Maybe that's really where you want to be. Maybe this is just like an outlier, a tire kicking thing. Maybe you should investigate why you're spending 90% of your interview cycles on companies that are four stages later than this one.

The last thing I will say too is especially for folks who are leaving big companies who have never worked anywhere else, I just had this conversation with somebody, I said, there's only really one time you can leave that company. And that story is so easy to tell somebody of like, I've worked at McKinsey, I've worked at BCG, I've worked at JPM for the last 10 years. You don't need an explanation. Once you leave and you start going down the super, super early stage path, you have to get ready to bring people up to speed on what your company does, what your role is, what space it is, and that's different. So I would say, like, think really, really deeply about are you you interested in this role? Because it sounds great. Versus are you ready for what it all means? Well, we are all out of time today. Thank you, Charles, for stopping in. Thank you to our listeners and subscribers. Please share with friends and we will talk with you all next week. Thank you. Bye bye.