What If It Does Work Out? Breaking Down VC Optimism, Seed Math & AI Investing Trends

Everyone's like 90% of startups fail. Well, these are all things that if you internalize them, you would never get out of bed as a founder. But oh well, statistically I'm going to fail. Statistically, these things are going to go wrong. The question's well, what if everything goes right?

It's the week of June 9th. 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 Goodread that caught our team's attention over the past week. Our first piece is a thoughtful essay from Colin and Joshua Wallace that explores the trap of focusing too much on downside scenarios. This is often common among type A personalities, founders and investors trained to spot risk. They reflect on a personal turning point when they challenge their worst case planning with a simple question. What if everything works out beautifully? It's a call for balanced thinking, not to abandon risk management, but to make space for positive visualization and conviction. For founders, that can mean reconnecting with their original vision. For investors, it could be modeling best case outcomes with as much rigor as the worst in work and life. The essay reminds us the future holds uncertainty in both directions, but why don't we plan with optimism too? So in diligence we're wired as investors to stress test basically everything that could go wrong. So like what if TAM isn't big enough? What if the go to market fails? What if tariffs disrupt the supply chain? How do you make space in your process to also model what radical success could look like? Almost to meet in the middle with where founders minds need to lie, which is typically that their vision is always going to succeed.

Oh boy. It's funny, my first venture job, my first person I worked for was I was like we'll just start with what if they're right? What if everything goes right? And I think it's really easy to go to the negative this is going to go wrong. And I don't know, I always feel like when I'm doing due diligence or trying to get to know a company I'm like, okay, what do they believe the world's going to look like in the future if they're right? Is this a big company? And most of the investments I end up making it's because I have a shared optimism with them about what the future looks like. And look, as we say all the time for precede companies, they all look pretty terrible. There's like, usually no product, there's a bunch of unproven assumptions. The answer is, what could go wrong? Everything. And so if you are so focused on the things that could go wrong, you'd almost never make a preceded investment is my guess. So I don't know. I think it's a good reminder to people that the business, yes, everyone's like, 90% of startups fail. I'm like, well, these are all things that if you internalize them, you would never get out of bed as a founder. You'd be like, oh, well, statistically I'm going to fail. Statistically, these things are going to go wrong. The question's like, well, what if everything goes right? And the funny thing is the diligence memo is like, ooh, that's a good question to ask, but it's actually not.

Right now. Do you think founders today are still as good at articulating their what if it all works out vision? Or has the current climate created a more cautious storytelling? Or is there just like a clear unknown that they're unabashedly acknowledging?

One thing I thought about after I read Colin's article is I've worked with some people who are just fantastic storytellers and their ability to infect you with their vision for the world. I went to the limitless launch event with Dan and Dan, like, told a very aggressive, compelling, and at times both frightening and interesting vision of the future. But I watch right from that presentation being like, I think he's mostly right. I think this is where the world is headed and like now the only question is what company or set of companies are going to get us to this version of the future? And I feel like this is the most important part of a pre seed pitch is can you convince me that a, you're right about where the future is going and when it goes the way that you think it will, when everything goes right, that you're going to win, it's going to mean something material for a company. Occasionally people will pitch me on ideas and I'm like, I agree with you, but if you're right, actually the thing you're doing isn't the most important. The more important thing to be is X or the more important thing to be is Y. And you've articulated an important vision of the future, but not one where the outcome is you building an interesting, enduring company.

Right? And with founders who are building an AI, that future state is so uncertain. So what gets you comfortable there? Or do you just not talk about it and you just want to hope that what they're building in the short term actually has value.

I tend to think more like the short term doesn't matter. What's the end state of the problem? They're like, we have a portfolio company we know in common. Like they've told me what they think the end state of their category looks like and I'm like, I largely agree with you. Now the question is, is there a good business to be built in that version of the end state of your category and will you win it? But I tend to just try to think there's so much noise in AI and things are moving so fast there. There are some like natural endpoints to these experiments. I'm like, well if we get to that endpoint, if we get to the endpoint where such and such process can be run autonomously with very little human input, what is a good looking business that benefits from that trend look like?

Well, next topic. Hadley Harris from Eniac posted on X How Seed Math was Broken with potential answers to the question why do VCs keep piling into seed? Bill Gurley replied to the post around the broken math behind modern seed investing, especially for mega funds deploying 5 to 10 billion dollars annually. Bill argues that for large funds, seed investing is no longer about returns, its optionality to find the next billion dollar deployment target. Founders may unknowingly become collateral damage in this model, as mega funds optimize for outlier bets and view seed as a lottery ticket. The thread raises hard questions about alignment incentives and whether early stage capital today truly supports long term founder success. I've heard a few different points of view on whether founders should care at all if they are considered essentially one of the many different options in a larger fund's portfolio. At what inflection points do you think a founder could or should be most likely to care, if at all?

I think it depends on what your expectation is. I think for a long time a big part of the CDVC promise was you're going to get my time and attention, I'm going to care about your company, I'm going to spend time with you. There's a tier of founders who are like, oh, I don't want that.

Right.

I want the money and I essentially want to be left alone. Not because I don't like you, but because I think I know what I'm doing and I will reach out to you as I need you. And some of these people are repeat founders. Some of these are first time founders who are very capable. Some of them are first time founders who maybe have more confidence in their ability to operate independently than is warranted. But for whatever reason, if your primary value prop and pitch is money plus a bundle of time and advice, if you're like, I don't want your time and advice, that's actually not an attractive bundle. The single vector here is money works. I also think there's more nuance. Having talked to people at multi stage funds about how they think about seed. I think you should always, I think every episode I talk about motivated reasoning.

It's okay.

I think when you're a seed investor where the only thing you do is seed, you have a lot of motivations to discredit the motives and intentions of a multi stage firm that participates in seed and to say they're just doing spray and pray they don't care about you. Whenever I talk to my friends at big multi stage funds, they're like, look, we're trying to solve for a couple of problems. One is how do we have enough intel on what's happening in the market to get a sense of the landscape? Because remember, they're going to make most of their money in series A and series B. But if you put yourself on the seeds of a multi stage firm, you don't want to have to figure out some new category. When the hot company shows up in your inbox and you have two days to make a decision, you want to say, oh, you're doing agentic workflows for insurance during our seed program. Because remember, the seed program is not just about the investments you make, it's about the friends you made along the way. So you know, if you're open for business in seed, you're going to meet a ton of companies. You're like, oh wow, we met 10 interesting agentic insurance companies at seed, so you've got a little bit more of a landscape. Also, if you're a big multi stage fund, you also don't want the pick please Instagram problem where you decide early on to place a bet on a company and even if your conflicts policy says we'll invest in anything, the founder of that other company might say, oh, they're in my competitor, I don't even want to pitch them because if they don't make me an offer, they're going to obviously forward all my materials on to my competitor. And so there's a real risk that by being too aggressive in seed you actually block yourself out of the companies that you really want to be in at A and B. And I think if you're a big multi Stage fund. You can't afford to not be in seed even if 50% of your motivation is data gathering and R and D and 50% of it is like you actually think you can make money investing in these companies, but the presence of those firms, you know, as my old boss said, it's really hard when someone makes your job their hobby. And I think if you're like, hey, I'm a seed firm, I have valuation and round size parameters that are pretty important to make, which is I think the original genesis of how these posts. There are parameters that make sense if you're a dedicated seed fund and there are parameters that make sense if you're a multi stage fund where seed is part of a strategy. And I don't have to think, I know that the multi stage firm's presence is pushing up valuations because seed entry price is not what they're optimizing for. They're optimizing for total dollars put to work over the life of a winning company, most of which will be A, B, C and D dollars, not seed dollars. So why, if you're one of these firms, what the seed entry prices doesn't really matter to you, right?

And a $100 million seed fund at a mega fund is like a drop in the bucket. And so they're willing to kind of place it across companies that are above the line to make sure there's exposure there to double down. That's the idea.

Because if you want to write this notion that, oh, I'm a small seed fund, I'm going to get into these hot companies and then I'm going to double down, I'm like, no, you're not.

Can't.

You can't. Because the whole point of the seed program for the multi stage firm is to position them to write a very sizable check in the A and the B. And if that company performs as expected, it's going to be very hard for you to do that. So I, I struggle with the price doesn't matter at seed crowd. I think it does matter within bands. Look, if you're in a chime under 100, you're probably happy. You're happier if you're in under 10 than you are if you got it at 50. But you're still probably happy either way.

Actually, let's double click into that because I think we've been talking about that internally. I think we're going to see a backlog of companies going public that maybe a majority of investors will make money. But then there are some who entered in above the price that it went public on and we've talked about how it's not completely a bad thing. Can you expand on that a little bit more?

Yeah, I think there's this article like all these IPOs are down rounds. I'm like, so what? Like, who cares? Yes. The public markets have a different valuation on this company than the private markets do. It happened to Dropbox, it happened to Uber. It happened to a lot of companies where there was a moment in time where the private markets were more enthusiastic. And I don't think you judge the success of a company by the way that it trades on the first tick of an ipo. I think you have to look at, you know, there were times when people thought Facebook wouldn't figure out mobile and Facebook just got whacked as a stock. And it turns out not only did Facebook figure out mobile, they dominated mobile. And so I don't know, I think this notion that. Well, because Chime is going out at a price less than its last public. Yeah. If you paid that price, you're probably not psyched.

Yep.

Because you're going to be underwater at the day of ipo. But if you're going to hold the stock for some period of time, it might not matter.

Right. There's still a write out period of that.

Totally.

Our Last piece is Omni's Q1 2025 Venture Beacon. Shout out to one of our friends, Zolika, listener of our podcast and contributor to the Port. The report reveals a cooling and recalibrating venture landscape. Here are a few key themes that bubble to the top. Deal sizes experience broad based compression, 7.5% to 31% reductions across most stages. AI continues to dominate investment themes, capturing 30% of early stage activity and 60% of late stage capital deployment. Round dynamics reflect a shift towards supporting existing portfolio companies with the number of extension and follow on rounds rising. One alarming theme is the growing prominence of investor protection mechanisms, higher liquidation preferences, multiples above 1x and pay to play provisions. These themes overlap with a lot of what we've observed and discussed in our recent episodes. So more general question, what are your thoughts on what the combination of these shifts and what they mean for venture?

I think it says a lot about what's happening across the industry. I think at Seed and I've been in a bunch of these conversations lately, they've been fascinating. There is this question about what do we do with all of the companies that aren't yet Series A ready? Do we continue to extend and support them to see if we can get them to grow to the place where they're interesting to the Series A investors or is that throwing good money after bad? There is no consensus as far as I can tell. I think everybody thinks their portfolio companies are great and should get bridges and extensions and everyone else's problem. I don't see how that's possible but I think there's a little bit of that vibe in the air. So that's not surprising me that there are more bridges. It's harder to get an A done than just about any time in my career. And I think it's interesting for a while I was like wow, all of the energy is these gigantic LLM mega rounds and maybe we're taking a little bit of a pause on those for a while. And so it's good to see that it's not all the activity isn't just big chunky. I mean there's that one period of time where it was like databricks OpenAI anthropic like all huge sums of money going to three or four companies and I do think the pay to play and liquidation preference I think that is continued cleanup from 2021 of companies that made that money stret we've had a couple in our portfolio of companies. They, they made it through SVB, they made it through 2022 and they made it through the interest rate cycle and V1 of tariffs and they finally got money. The new money was like the old cap table doesn't work. We're pushing the reset button and as an investor you've got to decide if that's something you want to be a part of. Not easy.

I think it was last week we talked about Peter Walker's data on bridges and a low graduation rate to Series A but it seems like everyone continues to do them. Do you think it will actually end up going away ever or is there just a. I guess it ties back to our first topic of is there some lingering optimism that eventually they'll turn it around? We're not quite ready to shut it down. There's probably a lingering conversation. I don't want this to shut down while my fund is raising. There's so many conversation topics there. But what's your thought?

Like you I have a certain amount of cynicism Otis but seriously, I do think quitting on companies is hard and especially if the founders are working hard and look, I think there's a set of seed investors who believe the current graduation rates are an overcorrection and an over tightening and we are going to return to an era of higher graduation. So if you can take these companies through the trough, when we get back to 40 or 50% graduation, these companies will find a home. I'm deeply dismissive of that argument. I think we are in a world where a smaller percentage of companies will graduate because of math, because we've created many more pre seed and seed stage companies in search of Series A rounds, and we have not created a similar amount of Series A capital to fund those rounds. So there's an imbalance. And then the way for the imbalance to get solved is we either need fewer seed companies. Not going to happen.

Right.

Or you need lower graduation because there's only a finite pool of capital available to do those A's. So I think it will take years of sustained graduation. And in the meantime, people will continue to support those companies, some out of a belief that they're good companies, some out of cynicism or desire not to have them fail at an inopportune time, whether it's a fundraiser or something else. And eventually we'll adjust. And by the time we adjust, the world will change again.

One last question, one really interesting takeaway that I read here has been a shift in what stage megadeals have been occurring across, largely tied to AI over the last five years. Megadeals have started happening earlier in the company lifecycle, with approximately 60% of megadeals in 2023 and 2024 happening at or before the Series C. My question is, what does that amount of money raised so much earlier than a founder had anticipated? What does that do to the success roadmap of their company, if it affects it at all?

I always worry that I've never met a founder who's like, my intention is to waste 30 million of this $60 million. But I think injecting large amounts of money into companies that have had modest amounts of money, it's really hard. It's really hard to stay disciplined. It's really hard to put that money to good use. It's really hard to not have that infusion of cash, Change your culture, change who you hire, change the projects you take on. But I think the biggest venture firms have more money than ever, are more incentivized to find outliers. And so if you think about it, I think this is just the torrent of cash that's been raised coming downhill. And you're like, well, look, if I can find the outlier at the B, that's better than waiting till the D. Yeah. And if you're like, well, I need the outliers. So what if I pick five companies in five different spaces that I think are the winners and I anoint them all at the B. Even if I go three out of five, I don't need to go five out of five. Two or three out of five. It probably works for my fun Mac.

Yep. So we will see. We are all out of time today. Thank you Charles. So glad we get to do this in person together and thank you to our listeners. Please like and subscribe and we'll talk with you all next week. Thank you.

Bye.

This is hard and especially if the founders are working hard. And look, I think there's a set of seed investors who believe the current graduation rates are an over correction and an over tightening and we are going to return to an era of higher graduation. So if you can take these companies through the trough when we get back to 40 or 50% graduation, these companies will find a home. I'm deeply dismissive of that argument. I think we are in a world where a smaller percentage of companies will graduate because of math, because we've created many more pre seed and seed stage companies in search of Series A rounds and we've not created a similar amount of Series A capital to fund those rounds. So there's an imbalance. The only way for the imbalance to get solved is we either need fewer seed companies. Not going to happen.

Right.

Or you need lower graduation because there's only a finite pool of capital available to do those A's. So I think it will take years of sustained graduation and in the meantime, people will continue to support those companies, some out of a belief that they're good companies, some out of cynicism or a desire not to have them fail at an inopportune time, whether it's a fundraiser or something else. And eventually we'll adjust and by the time we adjust, the world will change again.

One last question, one really interesting takeaway that I read here has been a shift in what stage megadeals have been occurring across largely tied to AI over the last five years. Megadeals have started happening earlier in the company lifecycle with approximately 60% of megadeals in 2023 and 2024 happening at or before. See, and my question is what does that amount of money raised so much earlier than a founder had anticipated? What does that do to the success roadmap of their company, if it affects it at all?

I always worry that I've never met a founder who's like my intention is to waste 30 million of this $60 million. But I think injecting large amounts of money into companies that have had modest amounts of money, it's really hard. It's really hard to stay disciplined. It's really hard to put that money to good use. It's really hard to not have that infusion of cash. Change your cult, change who you hire, Change the projects you take on. But I think the biggest venture firms have more money than ever, are more incentivized to find outliers. And so if you think about it, I think this is just the torrent of cash that's been raised coming downhill. And you're like, well, look, if I can find the outlier at the B, that's better than waiting till the D. Yep. And if you're like, well, I need the outliers, so what if I pick five companies in five different spaces that I think are the winners and I anoint them all at the B? Even if I go 3 out of 5, I need to go 5 out of 5. 2 or 3 out of 5. It probably works for my fun Mac.

Yep. So we will see. We are all out of time today. Thank you, Charles. So glad we get to do this in person together. And thank you to our listeners. Please like and subscribe and we'll talk with you all next week. Thank you.

Bye Bye.