Viral Growth ≠ Lasting Traction

We now have this narrative channel which is X company got to Y amount of millions of dollars in Z amount of time. I'm sick of seeing these charts which like we're the fastest company to get to 1 million in ARR. We did it in 32 hours and the last company did it in 36 hours. It's great to get out of the gates. I don't want to dampen people's enthusiasm for early momentum, but I also want to remind them it's early momentum.

It's the week of November 10th. Welcome to the Learning Corner, a Precursor Ventures PODC.

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 piece is a LinkedIn post by our friend Ben Choi from Next Legacy. That was a very brief but very direct statement on stage at the most recent Kaufman Fellows Summit in London. Ben said, quote, VC is hard if your performance doesn't get you, your partners will. I know Ben rarely posts, so was excited to see this one and I know everyone else was as well. Wanted to get your thoughts on everything first and then have a couple questions of my own.

Yeah, I I think it's very rare for Ben to post. I wish he would post more often. Second, I think it's rare that LPs post things that are spicy or at least make me sit up and say, wow, that's like a very honest and very true thing that you don't hear that often. You hear lots of anodyne things about portfolio construction and reserve ratios, the mechanics. But I thought this one was really important because this is a conversation I've been having with a lot of people who are contemplating the future of their participation in the venture industry. And it could be should I stay at my fund and is this a good home for me? In other cases the issue is, am I good enough at this job to keep going? In other cases it's like, hey, is my firm going to be around independent of whether I want to be in or should stay in venture? And I just think it's been interesting to have an LP because I think a lot of the conversations I have with people though, that is the truth. There are some cases where if your performance isn't good, you're not going to stay in the industry. And in some cases the politics inside of some of these firms, if you don't manage them correctly, you're not going to stay at that firm. I really wish more LPs would share wisdom and insights like this because I think it's helpful for people to remember how this business works. And the most important thing was the first thing you said, which is VC is hard. Sometimes people forget this is a very hard business. It's really hard to make money over time in venture. Very few people do it. And it's a hard business. And I think think we're going to go through another wave of continued exits from the industry. And I think it's just a reminder that it's a hard business to get into and it's even a harder business to stay in. It's funny, I have a friend who's a partner at a big law firm and it's the same thing. He's like, everybody wants to make partner, but once you make partner, you have to stay partner. And staying partner in some cases is harder than making partner because you've got a seat that other people want and you've got to produce and perform at a level that allows you to stay in that seat. And I've certainly seen people where they've gotten pushed out and maybe it wasn't a performance issue, maybe it was someone just didn't like their deals, or maybe there was a new leader at the firm and that new leader and that person were at odds with each other and that person's descendants meant that the other person had to leave. We're also going through a fair amount of that in the industry too. I think some of that is personality clash, but some of it's like you have new leadership at some of these places. Those leadership teams or leaders want different people in different seats and want a different balance of who does what. It happens.

It's not fun though when you make partner in any fund firm. It's not a permanent thing, but I think people mostly think of it as like the almighty ever glowing position and maybe assumes that once you're a partner in a true partnership, everyone's working together and we've all decided to buy in on this relationship. So it's an interesting also call out to just know that from a even junior perspective, looking around at your fund and being like, would I want to stay in business with all the people around me and pay into it every year as well?

And I think this is part of what makes generational transition at these firms so hard is you can be at a place where like, I've been very happy here under such and such leadership or under such and such regime or under this era. It was fun to be a venture capitalist from 2017 to 2021 things went up. It was great. Less fun 21 through 23 and I think there are going to be people who are going to wake up or look up and say, hey, am I as enthusiastic or as excited about my role here as I was before? And for some people the answer will be no. This is no longer as exciting or interesting to me because like, the job has changed, the people I work with, the kind of companies I invest in, the way that the markets work well.

Our next topic was a piece written by Stefano Bernardi from Unruly Capital titled Should you'd build a concentrated fund. He challenges the prevailing belief among many LPAs that outperforming in venture demands an extremely concentrated portfolio and heavy follow on investment in the winners. Despite the appeal of the great picker myth, the idea that some GPs have this magical touch or insider access leading to an unusually high unicorn hit rate, the evidence shows that broad diversification has consistently outperformed such concentrated bets. Stefano points out that top investors don't get there by finding mythical outliers, but by taking more shots and widening their exposure. It's not really clairvoyance, it's more simply showing up often and increasing the surface area for luck and power outcomes. Obviously we agree with this thought process as we don't run a concentrated fund strategy as well. But what aspects of this piece do you think Stephano outlined really well from your perspective?

Of course, like 1100 people sent me this post. They're like, did you see this post? Of course I saw this post and I think it's a very good articulation for something I believe deeply, which is at the very earliest stages. It's really, really important to have enough surface area to find good companies. And there are people like Manu Kumar who I think are incredibly good at concentrated pre seed. They can pick one or two companies a year at a really early stage and be very successful. I don't think most people can do that. You know, I've told the people at SV angel this before. Like SV angel was a big inspiration for me at Precursor and I remember once upon a time a friend of mine who worked at SV angel said hey, we're investors in Airbnb and a bunch of Twitter and 999 companies you've never heard of of. And I think the truth is you build your reputation and brand as a venture firm on being in the best companies. Nobody ever asks how much of OpenAI did you purchase in the seed round. The answer is, you're a seed investor in OpenAI. And it's funny because this is the week where there was like a big piece on screen doors. I've had a lot of people ask me, hey, what do you think about emerging managers? I've read this article a million times and I've learned two things about LPs. One, most of them have a very fixed mindset view of what works for portfolio construction. And earlier in my venture career, me, I got really frustrated. I was like, why don't these people, people see the light? I can show them all the data in the world and some of them don't want to change their thinking. But there's an important part in Stefano's piece where he talks about something that I think fund managers often Forget, which is LPs have a portfolio construction too. And if you're an LP and you're like, hey, my goal is to build a, you know, I'm going to invest in 10 funds, but my performance is a derivative of the performance of those 10 funds. If each of those 10 funds owns a little bit in a hundred companies each, I'm going to end up with this unwieldy and very diluted ownership and my portfolio, even though the individual math for each of those funds might work fine versus if I invest in 10 concentrated funds, I'm going to end up with 300 companies. But each of those managers is going to own enough of that company that when I roll that up, because remember, like, we're thinking at the fund level, like, oh, how do I make my fund work? You think of those funds as individual portfolio companies. They've got to own enough of the winners of their portfolio fund managers winners for the math to work. And I've had a few LPs have been like, there's nothing wrong with what you're doing at Precursor other than I'm trying to solve the problem you're solving in a very different way. And you doing a hundred companies per fund doesn't actually help me construct a 300 company portfolio because in a sense, you're taking up three slots and you're taking up three slots with less ownership than I would get from three concentrated managers. And the other thing is, every time I look at the spreadsheet for a concentrated fund, I'm always like, this gives you the illusion that the person doesn't have to be that good at picking because they're going to own so much of these companies in theory, like, oh, as long as they get one Good. One, I'm like, first of all, they probably won't get the ownership they're telling you. And two, picking still matters. And the thing I've Learned from walking LPs through less concentrated portfolio constructions is it forces you to confront your belief about that person's skill at selection. Because you're like, if this person's only going to buy 3 to 5% of these companies, not 10 to 15, I have to really believe they're going to find great companies. Otherwise there's no hope. And I would imagine it's a lot easier to go into an IC meeting at a fund of funds and just say, hey, this person's going to buy ownership like everybody else. It's a concentrated model like everybody else. And so structurally, this person has all the things they need to succeed versus hey, I'm bringing in this person who's going to invest in 100 companies. But don't worry, five of them are going to be amazing. The latter's a harder sell. So I think people should continue to write these pieces. People should continue to argue about this. But I would encourage fund managers to also think about these arguments from the perspective of the lp.

Do you think part of the problem is that concentrated funds are just far more common within fund of fund managers? And so maybe the mechanism is there needs to be more truly non concentrated funds that are there. But I guess the kicker is like they also all have to be, they have to be good. We can't have like a bunch of non concentrated funds running around there that are all bad. That doesn't help the issue either.

It doesn't. I mean part of the challenge is there's only a few LPs like Virtus being the most noteworthy that truly deeply believe in power law expressed over these 80 to 100 company funds. Virtus might be the only LP who consistently shows up for funds with that strategy. There are other people who like it, but Firtis loves it and believes it deeply. So it's hard to raise money for these. There's also a chicken and egg problem because there's a ton of LPs I've met who are like, I don't believe that these funds work. I'm like, well how many of them have you funded? They're like, none. And I'm like, well why not find out? You know that concentrated doesn't always work. And one LP told me something that, and they told me, I was like, that makes sense. He goes, but you know what, when a concentrated fund doesn't work out it's the manager, not the model. Because we know that concentrated funds work and perform. So if somebody runs a concentrated strategy and they execute it well, where we can bas isolate the variable, it's either the vintage year or the manager or both. But you could have the same confidence about less concentrated strategies. If you would invest in them, you would quickly realize and I tell RLPS all the time, it's like if we are going to invest in 80 to 100 companies per fund, if we don't get a couple of good ones, I don't expect you to hire me again as a manager. 80 to 100 is a lot of n. There better be some good companies in there.

One of the biggest takeaways from the piece was that follow ons are incredibly difficult to get right and increase the size of the outcome required to make a difference for the fund. The more you re up. How possible is it for a fund to completely avoid follow ons altogether though? I think that's something that we always talk about.

We've had a year long conversation about this internally. My view is if you do it, you'd have to agree to do it 100% of the time because I think as soon as people realize that you are willing to do follow ons then the decision to not participate is a signal. But if you're like we literally never do them no matter how good the company and if people really believed that that was the case, I think you could pull it off. The alternative is to do what we do, which is like you just keep a really high bar for follow ons and some people won't get money in the follow on. And will that be a signal? Some people in the market, yes. But I'd rather worry more about making the right decisions for our fund. And the flip side is we sometimes do things that are risky. We do bridges and extensions where it's not clear the company's going to succeed. But I do those because I think they're going to work out. And one thing I've seen is, you know, we get in at such low entry prices and series A's have gotten so expensive sometimes the ratio of pre seed to series a can be 10 to 1 and you don't know 10x more about that company than you do, but it's 10x more expensive. And so I've always felt like the best thing to do as a small early stage fund is truly to get into as many great companies as you can as early as you can, buy as much upfront as possible and don't worry as much about follow ons.

Well, our final piece is a TechCrunch article by Marina Temkin recapping an interview with Cluli CEO Roy Lee Cluley went live in April this year with rage Bait marketing to grab thousands of eyeballs on the company and tool claiming to be used to, quote, cheat on everything. They made headlines when its ARR jumped from 3 million to 7 million in just one week, with Roy claiming every single person who has a meeting or interview is testing this out. But in a more reflective tone, Roy recently acknowledged that brand virality alone isn't enough to sustain long term growth. Looking back, he admitted they may have launched too early and shared a key lesson. Quote what I've learned is you never share revenue numbers. If you're doing well, nobody talks about it. But if you're doing poorly, that's all anyone will focus on. They have now acknowledged to be pivoting to be the space's best AI note taker. A crowded space to jump into, to say the least. I don't have much to say about Cluli specifically because I'm not an investor, but I remember when the 7 million-ARR number came out and so many founders I know were thinking I'm so behind what I'm I not doing correct. And it is a good reminder that as a founder you really can't let these kinds of headlines cloud your focus too much or you really do risk losing sight of what truly matters in the early days but wanted thoughts from your end too.

MIA this is one of those moments where like I really started to appreciate how compressed the information cycle is in venture these days. Because I went to a board meeting that week and the CEO was like we gotta get some cluly action going on in this company. We've gotta like shake up our marketing. Do you see what those guys were able to achieve? And I told the CEO, I was like why don't we take a beat? Because we don't actually know what's on the other side. What we know is they succeeded and all these think pieces Attention is the only thing that matters now. The ability to capture people's attention is the only thing that matters. It's the only everyone is so hungry for remote attention is the new and I'm like guys, or maybe, just maybe they did a fantastic job with launch marketing and now they have to back it up. And I had a lot of companies who were just like we were doing something similar to Cooley. Maybe we should have been more aggressive in our Marketing and messaging or maybe. And I was just kind of like, guys, we still don't know if this is going to work. And I, the thing I struggle with the most right now is I feel like nobody has patience. And I think this connects with the like, triple, triple, double, double is not enough. You have to go to 10 million in ARR in two hours or your company sucks. That's just not normal. And we, we, we don't talk enough about what happens on the other side of these stories. And I think it takes a lot of courage to say what Roy said and to admit the truth, which was like, hey, I made, I made a miscalculation. We did a great job on launch marketing. We shouldn't have talked about revenue and that the energy and attention we attracted at launch, the answer is like, it didn't persist. And so I feel like lately I've been trying to spend more of my time encouraging startups to not chase whatever thing it is that they read on X or heard about. This company did this, should he be in that category? I'm like, but don't you want to at least wait a month and figure out if they're as excited about the thing that you are excited about as they were yesterday? And I think it's so hard. And I think it's a, it's a reflection of the impact that AI is having on pace. And I think everybody is like so afraid of falling behind, so afraid of not taking advantage of some new hack or viral growth loop or distribution opportunity. And I think honestly, investors are too. It's like throw money at something that's working. If it stops working, you lose your money, but if it keeps working, you're great. And I think everything right now is operating at a speed that's faster than people can think and process. I don't think it's healthy.

I think part of the reason why patience is so difficult is because not only do people grow so quickly, like quotation marks right now in this AI era, but also there are so many channels to share that information publicly. The moment you have a thought you can share. And it's distributed immediately to millions of people. Before we had everyone pushing this in like LinkedIn and through Instagram through X. Did it feel like people were able to be a little bit more laser focused, or do you feel like this information would come through secret tunnels of venture and find its way to founders eventually, but maybe just not as fast, but it still was impactful?

I think it's exactly what he said. I think the rate of information diffusion was slower. Also, I think we now have this narrative channel, for lack of a better word, which is X company got to Y amount of millions of dollars in Z amount of time. And I, I'm sick of seeing these charts which like we're the fastest company to get to 1 million in ARR. We did it in 32 hours and the last company did it in 36 hours and they show you the, you know what, it turned the steep and and I'm like it's great to get out of the gates. I don't want to dampen people's enthusiasm for early momentum, but I also want to remind them it's early momentum.

Well, we are all out of time today. Thank you, Charles, for stopping in. Thank you for our listeners for popping in as well. Please like and subscribe and we will talk with you all next week. Thank you. Bye bye.