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With Scott Orn

A Startup Podcast by Kruze Consulting

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Scott Orn

Scott Orn, CFA

Charles Hudson explains the ins and outs of launching and managing a seed fund

Posted on: 03/13/2019

Charles Hudson

Charles Hudson

Managing Partner - Precursor Ventures

Charles Hudson of Precursor Ventures - Podcast Summary

Charles Hudson of Precursor Ventures goes over the challenges of raising a seed fund in today’s environment, then discusses how Precursor Ventures takes bets on up and coming founders in exciting industries.

Charles Hudson of Precursor Ventures - Podcast Transcript

Scott: Hey, it’s Scott at Founders and Friends Podcast and Kruze Consulting. Before we get to Charles Hudson’s awesome podcast here, quick shout out to BREX, our sponsor. BREX makes credit cards easy for startups. There’s no personal guarantee. It integrates into QuickBooks very easy which is saying something. Also, you can provision new credit cards very easily. It’s a really nice, easy solution, we recommend it. And if you go through the signup process on BREX and type in Kruze, K-R-U-Z-E, you get a discount. Check out BREX. And now to the podcast with Charles. Thanks. Welcome to Founders and Friends Podcast. This is Scott Orn at Kruze Consulting. And today my very special guest is Charles Hudson of Precursor. Welcome, Charles.
Charles: Thanks for having me.
Scott: We are the two coolest guys on Earth, we’re recording a podcast on New Year’s Eve. I was available, I was surprised you were available, but you are. Before we turn on the microphones we talked about you have a two year old, I have a one year old.
Charles: That’s right.
Scott: We’re in the same zone of life, so it’s fun. We’ve known each other for a long time. But for the audience, retrace your career and talk about how you started Precursor.
Charles: It’s been quite the journey getting Precursor off the ground. I won’t go all the way back to the beginning, but my first venture experience right out of college was I worked for In-Q-Tel, the CIA’s venture capital group which was really great experience, was my first exposure to venture right out of school. Worked on some really amazing companies. Really liked my time there. Ended up going back to business school. And coming out of business school really felt like I wanted some operating experience. So spent some time working at public companies like Google, worked for a handful of startups as well. And sort of made my way back into investing in 2010 at the very end of the year when I first started working with Jeff Clavier at Uncork Capital, formerly known as SoftTech, and really enjoyed my time either. When I joined them, it’s funny to think that ironically when I joined SoftTech Uncork it would have been a pre-seed fund today. We had a 15 million dollar fund that Jeff had raised that I came in and joined him at the very tail end of that as he was gearing up to raise fund 3 which was a 55 million dollar fund. Which probably would have been a small seed fund in today’s context. It’s funny to think about how much things change-
Scott: Dollars are bigger for sure.
Charles: They’ve gotten bigger. While I was there, we went from 15 million under management to probably 330 by the time I left and that was only in about 5 or 6 years.
Scott: Wow.
Charles: Yeah.
Scott: And I think he also, and you, defined the seed fund. Everyone kind of knew what that was. And then what I find so interesting about Precursor was you saw another opportunity to go earlier and to find that. Maybe talk about that a little bit.
Charles: I think the funny thing is in venture, I think everything old becomes new again. What I realized from working with Jeff is when he started SoftTech Uncork, it was him, Mike Maples, Ian [inaudible]. There was a very small crew of people that were doing this new kind of investing, this institutional seed thing. And I think if you look at the returns for that vintage of finds they’re going to be amazing because there were not a lot of people who had figured out that there was this institutional round between Friends and Family and Series A. And as the asset class expanded it got more competitive. But I’d still argue those funds are still among the top of their game for what they do.
Scott: And for people who don’t know, you used to almost just raise a Series A right way.
Charles: That’s right.
Scott: But I feel like that was, to build the middle value product was tougher to get going was tougher, so you needed a lot more capital to raise a series A. But that really kind of cut off the amount of people, or the type of people who could raise venture capital. Then the seed market developed, and now keep going here.
Charles: Yeah. I remember when I was first in venture, three on three was not an uncommon round to see. Ton of dilution, but you were in business, these were not a good time to be an investor. Not a good time-
Scott: 50% dilution, that’s crazy.
Charles: The big Aha for me at Precursor was … I was very happy at SoftTech, Jeff was great to me, we got great deal flow, I liked the founders we worked with. What I realized though is I really like writing checks that were 500 K and below. And as our fund got larger and larger, I think this is just across the board in the seed market, seed rounds, when I first started in 2010, if someone raised more than a million and a half dollars, it’s sort of like, “Wait a minute, that’s a lot of money for a seed stage company.” 750 to a million was kind of par for the course. Now it’s four million is maybe the upper bound of what we see. What I noticed is all of the people who had been really successful in the early 2007 to 2010 seed stage, that’s your Felicis, your Freestyle, Cowboy, Floodgate, all those firms, they’d gone from small funds to funds that were approaching 100 million dollars. And it just didn’t make sense to write a 250 or even a 500 K check for a fund of that size.
Scott: Can I ask you why you think they moved that market like that? Or moved upmarket in dollar size?
Charles: I think two things happened. And one, I can relate to this as someone who’s early in building up Precursor, it’s so hard to raise money in the beginning that when it becomes easier, I think the temptation is to grow your fund size. And for some people I think the intention was always to get to 100, it just takes a while to get there. That’s the size for the organizational characteristics. That’s what they needed. I also just think if people start offering you money, it’s not always easy to turn it down. You tell yourself a story that your strategy is elastic and what you do at 25 you can do also at 75 but just with a few tweaks. Also the returns are really good for those people. So it probably made them feel like we actually have demonstrated with are good stewards of capitals so we can handle more of it.
Scott: And they were probably walking a tightrope for a long time, in management fee and being able to hire people and what they could do. And you probably just get … I know because we walked a tightrope too for Bootstrap. You walk a tightrope for so long, like you said, having people offer you more money just makes a lot of things easier.
Charles: I also just think if your goal is to build something that feels like a real institutional organization with an office, with multiple partners, with support staff, that stuff all costs money, and I think entrepreneurs don’t always realize that a startup venture fund is basically a bootstrapped activity if you’re below 10 million dollars. You’re just to going to have enough in management fees to cover your operating costs and pay yourself.
Scott: Well I remember first talking to you when you were starting Precursor, and I was like how are you going to pay yourself. And not even, and I know you’re not the type of person who’s trying to pay themselves a lot. But just how do you pay a mortgage and that kind of stuff.
Charles: It’s really difficult in San Francisco if you want to start a venture fund from scratch, especially if you don’t have savings. Once I realized I was going to do Precursor, I started making plans to be able to go. But I tell everyone if you’re starting a venture fund, I would say save enough for two years and hope that you get done in a year. Maybe I’ll get-
Scott: Getting done in a year would be really good. That would be out of this world hitting a home run.
Charles: Yeah. Then by the way when you’re done if your first fund is … Just to do the math, if it’s 15 or 320 million bucks, even if it 10 or 15 million bucks, which is reasonable, you’re only going to have a quarter million dollars a year in management fee to cover everything.
Scott: Every. So any analyst, any computer and-
Charles: Office, travel.
Scott: Oh, travel, I don’t think about that. Yeah. Oh my god.
Charles: It adds up.
Scott: Yeah. Okay, I interrupted you. You saw what all those other, Cowboy, and Felicis and SoftTech and all those funds were doing and you smelled an opportunity basically.
Charles: Yeah. And look, I think the person who saw this way before I did was is Manu Kamar. I think he’s really the person who, when I think about inspirations for Precursor, Manu, when he did at K9 and what Michael Dearing has done at Harrison Metal, they’re both inspirations. I think Manu particularly in pre-seed because I think he was the first person I know to really recognize that there was this opportunity to go earlier to institutional seed firms, take a real risk but make a really strong institutional commitment to back people. And he’s done phenomenally well, and he’s going to do super well with Carta and a handful of other investments. When I think about on the pre-seed side, I think he doesn’t get enough credit because he’s not a self-promotional person. So I’ve got to promote him here.
Scott: Nice.
Charles: He really deserves a lot of credit for I think bringing awareness to the pre-seed category.
Scott: And Michael Dearing is actually … I met him once, or I met him twice. He’s amazing. I actually pitched him for something. But we actually send everyone that becomes an account manager at Kruze Consulting to his-
Charles: General Management?
Scott: Yeah, his General Management classes. And unequivocally people love it. And it’s amazing for us to be able to get people the exposure to like a mini MBA over a weekend is pretty incredible.
Charles: He’s an amazing teacher.
Scott: Yeah.
Charles: And he’s the person I go to quite often when I have sort of structural, what should I do questions about Precursor. Brad Felden and Michael Dearing are both people who have been super helpful.
Scott: That’s awesome. Those are two very good resources.
Charles: Yeah.
Scott: You saw what those two guys were doing, but you also probably could relate from the SoftTech. Maybe tell the audience what pre-seed is. I remember your initial, like when you were thinking of doing this pitch, but what is pre-seed?
Charles: The way I think about pre-seed is it’s really small rounds and small is a relative term. To me it’s a million dollars or less for someone who has significant things to prove about the model that they’re building. Like all startups, you start with a thesis. You get in market and you realize the world is different than what you thought. So when I started Precursor I was like well there’s probably a handful or entrepreneurs out there can’t raise that first million. It turns out that the pool of pre-seed companies is about 10X what I thought it would be. What I realized is there’s really two fundraising markets in venture for people who don’t have traction. There’s the, “I’m the repeat founder or I just spun out of Facebook, Google, Pinterest, whatever famous company. My old manager and my friends are going to give me a million dollars on an uncapped note or on a 10-“
Scott: Or more.
Charles: Or more.
Scott: Or a Series A, yeah.
Charles: Or a Series A. And fundraising, I’m raising on reputation and expectation. And those people had a fundamentally different journey.
Scott: And those were the people who always had access to capital-
Charles: Always.
Scott: … In the old days before seed and pre-seed.
Charles: Mm-hmm (affirmative).
Scott: That’s what I was talking about, they just raised the Series A.
Charles: That’s right.
Scott: But there was a very select few. You had to be kind of in the club. So that’s one segment in the market.
Charles: And I think that segment of the market is actually really well served. If you’re that person, it’s never easy. You’re going to have a very straightforward time raising capital. There’s this other large pool of people that I underestimated the size of that I would say are manager to director level people at either public or private companies. They’re just not famous. They’re not big on Twitter, they’re not people you’ve heard of, they don’t have previous liquidity, they’ve probably never done this before. But they’re super capable and very insightful about what they’re building. And those people often times aren’t connected to capital, they don’t know a lot about fundraising, they might have a friend or two who’s raised, but it’s their first time. And they really only need 500 K or a million to figure out if the thing they want to build is worth building and whether they can do it. And there isn’t really a great product for that person. The can’t get it from Angels because Angels will just say, “I love you, here’s 25 K. Come back and we’ll do this with 25-“
Scott: I can only write a 25 K check or whatever.
Charles: And one other thing-
Scott: The only thing I would say, if I can add, they are probably living a problem in a super hardcore way. Or they see something that’s maybe the famous person who spends a lot of time on Twitter building their brand isn’t really living. I always love those entrepreneurs because they come in … Well they usually get funding from you or someone like you and then they call us and it’s like, oh I know, I can see, I can hear it in their voice, they go, “I had this problem at this company or this company and boom, now I’m addressing it, I know what I’m doing.”
Charles: To your point, I find a lot of these people, it’s like they were director of product at some company and they’re like, “Ugh, I kept banging my head against this one problem and we didn’t solve it. And I realized it’s bigger than just our company. So I’m building a product that can address.” We get a lot of those.
Scott: Those are the most exciting to me. I think those are really cool.
Charles: We’ve done well, we’ve done really well with those kinds of company.
Scott: So they come to you, or they reach out to you, have not being famous. So some of the characteristics that a normal VC would use you can’t really use. So how do you go about evaluating them?
Charles: It’s kind of funny. The biggest thing I look for is a founder who had I think it’s just a non-obvious insight about the problem that they want to solve. My biggest fear honestly is that people will have obvious insights and will end up with 10, 20, 30 other venture back startups that are doing the exact same thing in the exact same category. I think you’re seeing this in some segments of the drug to consumer space. You’ll get 50 companies building the same pair of shoes, all using Instagram Ads to sell them. And you’re kind of like, “Isn’t there more to this?” That’s the big thing that I look for. And we’re a generalist fund, so I don’t have a lot of deeply held theses, I don’t have a punch list that we’re looking for companies in these 8 or 10 areas. It really ends up being meeting founders who can educate me on what it is that they’re building and get me as excited about the problem that they’re solving as they are.
Scott: I think that’s the best part of being a VC by the way is you have-
Charles: By far.
Scott: … You have like a world expert or Osmo who’s so knowledgeable and they spend an hour teaching you. It’s really cool.
Charles: And I find the people that can get me excited, that’s generally a translatable skill. They’ll recruit well, they’ll fundraise well. And I don’t know, I feel like the funny thing is 10 years ago, I think betting on first time founders was harder. There was just less information available about how to start a company. There were fewer third-party serve providers, you would have more stuff in-house, whether it was finance, accounting, server, everything you had to-
Scott: IT, yeah.
Charles: IT, you have to own it.
Scott: You could also find people to work at your startup a lot easier now.
Charles: This is a big thing.
Scott: That’s huge.
Charles: This is a big thing. And I think in general, startup founders are helpful to each other in a way that I think maybe they always have been, they just were harder to find. I think it betting on first time founders I think for a lot of people is scary. But it’s more likely to me, I guess maybe I’m an optimist.
Scott: It’s like the world is flattening a little bit.
Charles: That’s right.
Scott: Because I think that last point is a really interesting one, I hadn’t thought of that. But I think they’ve always been helpful to each other. But now there’s email lists serves that they can … I don’t know if Precursor had one-
Charles: We do.
Scott: But Commentary had one and all … First Drawn capital has one. We get a tremendous amount of referrals from them because they just help each other out. It’s easy to help each other out. It’s a quick little boom, boom, boom.
Charles: A lot less friction in finding. I remember when I was at In-Q-Tel, we would still get business plans in the mail. Like two inch binders and FedEx. And it’s funny sometimes to think about how fast the world can change. My view is that it’s never been a better time to back first time people because the resources they have to be successful are better than they’ve ever been.
Scott: That’s really good … That’s like a quote. That should be on the Precursor-
Charles: We draw this little chart for my LPs, I think they’re probably sick of seeing it, where I tell them, “Look if you think about this two by two chart, there’s how much information do we have about the business and how much information do we have about the founder?” If it’s a really well known person in the business already has traction, they’re going to basically raise an infinite amount of money at whatever price they want. If you don’t know the person, but they’ve got really good data, we call that Strangers Bearing Data, you can get comfortable with the fact that you don’t know the person. If the person doesn’t have any data but is super famous, you’re just betting on them to figure it out. It’s that bottom left quadrant that I think is terrifying for most people. And we’re betting that that’s where we’re going to make our money is-
Scott: Not famous and-
Charles: Low data.
Scott: … And low data.
Charles: You get good prices there.
Scott: Well, I was going to say, there’s one other I think amazing insight that you had. I think you mentioned this it me like we … Somewhere we had going to brunch with you like five years ago, whenever you were starting. And you said something like, “I have a thesis,” I’m paraphrasing here, but, “The Angel market or the pre-seed market needs a catalyst, someone who is willing to price around. That is what is missing.” Then I think like three years ago or two years again, in one of your annual letters you’re like, “I confirm this.” And that one of the core values you deliver is you are willing to write your name down and vie someone a price, which then facilitates capital coming in behind you. Is that accurate?
Charles: This has been the most surprisingly important thing that we do at Precursor. Because I think you can get a lot of people who will say, “I’m in for 100 when you find a lead,” or, “If you get to 750 I’m in, but I won’t fund you.” There’s all this conditional financing you can get as a first time founder. And the other thing is repeat founders, I think, know how or see there you the fog of what they’re being told. They know that that’s not really a commitment. Not every first time founder can see through the fog and they come to me and say, ““Well we have soft circle 200 K in Angel commitments.” I’m like, Okay.
Scott: But you probably know those people.
Charles: I know those people.
Scott: You know how often they follow through on that.
Charles: Yeah. So I said, “Okay, you basically have zero, hopefully, but up to 200.” And what I found that happens is it changes the whole trajectory of a lot of people’s fundraising. When I say, “I’m going to give you a term sheet for 250 K, and our 250 K is not conditional on you getting any other arbitrator money. You’re going to get our 250 K no matter what.”
Scott: Get to work.
Charles: “Get to work. If this is enough for you to get going, you can take just journey and we’ll go back out in three months and raise more.” What I found happens is people who were stuck suddenly get unstuck, and their rounds have momentum. It’s like all fundraising, if you don’t have momentum it’s really, really difficult. And what I found is that giving people a term sheet or making an unconditional commitment to invest changes that dynamic. The other thing is that means we get a price that’s fair. And the thing I always tell our LPs is, “I don’t want to get into the worked of predatory venture pricing.” We have to pay a price that accurately reflects the risk that we’re taking on. But it doesn’t have to be some rock bottom price. Because my biggest fear when I started Precursor and one of the LPs I really wanted to get in who didn’t come in, basically said, “I’m really worried that you’re going to end up in adverse selection. And you’re just going to end up with all the companies that aren’t good enough to get money from the best seed funds.” And I think if you make price the sole vector, that’s very possible that can happen.
Scott: Or you end up three years down the line with the CEOs or the fonder is not owning enough of the company, and they get stuck because they’re not excited. That’s a fine line to walk.
Charles: And the other thing is, the thing we talked about before, entrepreneurs have never been more interconnected. I think if you’re going around giving people really, really low ball evaluations. And the only reason they’re taking them is because they’re naïve and disconnected from capital. When they talk to their friends they’re going to go, “Wow, I really got taken advantage of.” And I don’t want that to be the first experience people have building a relationship with us.
Scott: The other thing that I … I do a lot of conversations, walking founders through the delusion of math. And there’s something you said, you’re like, you basically said up to a million. But most of the stuff I see you doing or other funds like you is 500 K. And if you do math on the … I don’t know what’s the average? What’s your average valuation?
Charles: Ah, four.
Scott: Four million?
Charles: Yeah, four.
Scott: Okay, so that makes the math a little … My math is a bit … you’re selling what, 15 …
Charles: 10, 15%
Scott: That’s not, to get $500,000 and be in business … Because I would say almost everyone I have seen you do is not in business yet, that you get them in the business.
Charles: That’s right.
Scott: That’s a small price to pay to be in the business at least six to nine months or runway. Then they can use your money as a catalyst, It’s different if you’re taking two million dollars on four. You sold half the of course, that better work or you’re in trouble. Often times, actually walking through the math with them opens their mind to it. Because sometimes people will get stuck on … They’re almost hurting themselves when they’re not willing to take money to get into business because they think the valuation is not high enough. Then they waste like three to six months doing nothing. And it’s like, “Dude, if you would have just taken the money, you’d be so far along now.”
Charles: It’s really funny. I was talking to one of our … I’m doing a bunch of end of year check-ins with our LPs. One of them said, “Well, what’s your philosophy on pricing deals?” I go, “I generally have a price in mind. When I meet a founder I take into account where are they with the business, how competitive is it run.” We don’t really put a time frame on our term sheets. I tell people, “This is a standing offer because I don’t want you to feel like you got boxed into this.”
Scott: Totally agree.
Charles: We have a number of companies in our portfolio where we had a pretty significant difference in valuation. I said, “This is the price,” and I tell people all the time, “I don’t know what the right price is. I can tell you what makes sense for me, I can tell you what I think is fair. And I will make an offer at that price. If you find somebody who’s willing to pay more, more power to you. I probably won’t invest at that price. But I’m not going to tell you-you shouldn’t take their money.”
Scott: And be successful.
Charles: And be successful. We have two companies right now where I’ve given them term sheets and the founders were … I sensed there was some hesitation. I’m like, “This is not a binding exploding term sheet. If you feel like you have other conversations that you want to explore, I’m willing to keep this open for quite some time because I want you to feel really good about the decision that you’re making. It’s not open forever. But if you need three or four weeks to have a bunch of other conversations, to get more data, I’d rather you take my money and feel like having surveyed the market the price is fair.”
Scott: That’s exactly it, yeah. Because then there’s no resentment over the years. Everyone could be very healthy and positive and yeah, that makes so much sense.
Charles: I guess I’ve just never felt like I wanted to enter into a relationship with a founder where the first thing I did was give them a really hard time and squeeze them into something. Every now and then people will take a term sheet I give them and they will use it for leverage to get someone that they like better and a higher price. I’m just like, “Okay. It’s not the end of the world.”
Scott: Mental note.
Charles: Mental note. That person and I probably weren’t meant to work together.
Scott: Yeah. It’s kind of like you want your prom date to be excited to go to the prom with you.
Charles: That right.
Scott: You don’t want me taking someone to prom at gunpoint. I think what you’ve done is fascinating, you and these other folks you mentioned have defined a whole asset class. We’ve talked about it, the asset class, in terms of founders. But you’ve also defined this asset class for investors. When I say investors I mean institutional capital or wealthy people. Maybe you can talk about that journey a little bit.
Charles: I dramatically underestimated how much skepticism I was going to encounter when I started Precursor. I was like, “Yeah, I’ll get the general skepticism of there’s 500 or 600 …” I don’t know, however many VC fronts Samir from First Republic says exists now, I’ll just add 100 to that since there’s probably 100 more since his last report. I wish as like, “Yeah, it’ll be the general skepticism that why does the world need another venture fund?” I didn’t anticipate the amount of skepticism I would get about the model or just the thesis that there was this gap at the bottom of the market that used to be filled by seed funds but is now available. And a lot of LPs just told me it doesn’t exist, I’m pulling out the decks of these see funds-
Scott: To say they’ll do those checks.
Charles: To say they’ll do those checks.
Scott: But they don’t really want to do those checks.
Charles: I just asked them when was the last time they wrote a check this small, where it was meaningful to them. Sometimes they’ll do it as a supporting check or to have a small part of the [crosstalk].
Scott: You’ve been on the ground. That’s the power of you being on the ground.
Charles: Yeah.
Scott: In very much the same way the founders you back, you saw this opportunity because you’ve been on the ground, you’ve been talking to everyone, you know what’s going on.
Charles: The tricky counterintuitive thing though is the trick for Precursor is how do we stay small?
Scott: Interesting, I never thought of that.
Charles: Because it’s like the-
Scott: I have to say, I kind of assumed you would march up the fun size, so that’s interesting you’re going to stay small.
Charles: I think I’m very sensitive with our model that if we raise too much capital for a fund, I will be subject to the same laws of returns gravity as every other VC fund is. If we had a 75 million dollar version of Precursor, I’d probably start saying, “Well, in what universe is this 250 K check ever have a chance of returning a big chunk of the fund? And why did we write such a small check? We should write a bigger check.” Then you become something else.
Scott: Well, it’s also, I think people may not understand but the scalability of you, Charles Hudson. Because there’s only so many emails you can answer, so many people you can talk to and podcasts you can record.
Charles: That’s right.
Scott: That’s one of the things that forces people up is because it’s just better for them. So you want to stay small. That’s like-
Charles: I do. Maybe I’m too stubborn on this point. I just feel like this is the work that I really enjoy doing. And I think it’s a privilege to be able to work with people at this stage and that they’ll take our money and that they’ll work with us and that they’ll refer their friends to us. I think we can do 20 to 25 investments a year and be good partner to those people. I don’t really know that I could do much more than that. One of the tensions in our model is by having only one decision maker, we certainly have portfolio companies that we’ve gotten into because I was able to move faster than other people and I’m grateful. We also have some investments that we’ve made, if I had a partner, he or she probably wd have talked me out of it and they would have been right. And my biggest concern, the thing I wrestle with is what would we lose if we had a larger … If we had a larger decision making investment committee and more capital, I think we would probably … It feels to me that we would lose both tails. They really wacky stuff that I’m glad that we’re in that was sort of esoteric and my gut. And I think some of the stuff that we probably … I think we probably lose a little bit on both of the tails. And I think we need the tails.
Scott: I’ve been there in investment meetings where I’ve been told no for deals that went on to become humongous. I’ve also been there for our deals that the partners saved me from. But sometimes in venture capital the good ones outweigh 10 bad ones. So I totally get what you’re saying. Also, I think at some level, you have an incredible brand, people know who you are, people love working with you. If you move up the capital raising, you’re kind of battling out with the same 5 to 10 seed funds. You may actually be able to move faster and have a higher success rate where you are just because of our branding and your track record already.
Charles: I think so. The other thing, I have not aspiration to build the traditional seed fund because I think there’s good ones. And the thing that’s kind of frustrating about Precursor is I wish there were more Precursors.
Scott: I was going to say, I don’t really have many other people I can refer those deals to. That’s how I know you’re in this zone because I can be like, “Oh, I know I should refer this to Charles.” I don’t have another Charles.
Charles: And we miss stuff. It kills me when we miss stuff. But the reality is I think entrepreneurs would be better off if there were 10 Precursors and not from a pricing standpoint. I think the pricing would stay largely the same. I just think there’s different styles. Like our style in UI in Precursor, it’s not right for everyone. There are people who want something different. And I think they should be well served. And look, I think between the old guard of seed funds and the new generation your homebrews and that stuff, there’s 20 to 25 really good institutional seed funds. I don’t know that I need to be the 26th. And pre-seed, we have a real shortage in my opinion of high quality institutional pre-seed funds that can help founders. And there’s so much demand. We’ll never be able to saturate. 10 more funds, I wouldn’t worry at all about not getting into the companies.
Scott: Also ethical, nice to work with. All these things that make it a pleasure to type that email. I have one digression question. Do the seed people take you out to dinner? How is that courting process? Because you’re kind of like front of the funnel for them. How does that work?
Charles: Yeah. It’s interesting. We have a small set of funds where we have a really close … I have a close relationship with the GPs. And we have a very active dialogue. They understand which companies are in our portfolio, they know which ones are coming down the pipe that they should co-invest in. Some of them send us gifts, we’re very grateful for those. But in general, I think of them as a very important constituency for Precursor. Because part of my promise to the founders is my job is to be in touch with what those people want so that when it’s time for you to raise, I can give you good advice.
Scott: And make it easy. Ultimately, you’ve taken your position with your capital and now you need other people to help fund the company. It’s just how it is.
Charles: Honestly, half the time I end up telling funders, “I know that you really want to pitch this person. I just had coffee with them, I can’t imagine they would possibly be interested and the business. Just given what or working on and what their interests are.” So we spend a lot of time trying to do that. For the most part it’s pretty cool. The only time it isn’t is there is a handful of companies that are on the cusp where I meet them and the offer is one on four, a larger seed fund says, “Oh, these people are great. They could skip pre-seed-“
Scott: 2 on 10.
Charles: 2 on 10. And that happens sometimes. And I think it’s fine. The founder gets more capital at a better price. I’ll probably make a lower return on those investments. But that’s okay.
Scott: Yeah, that’s awesome. Okay, I told you this was going to go fast. We’ve only got a few more minutes. I had asked the question at the beginning off mic that you’re really liked. Do the companies that you invest in realize you’re a startup too? That’s a very broad … It’s funny, but you could take it a lot of different ways. What comes to mind?
Charles: I try to shield them from the startup nature of Precursor. I’d be lying if I said we are always successful. Look, I think the biggest challenge and the most startup-y thing that we’ve done that we’re trying to break this habit is for most of the time that we were deploying capital out of fund one, we were still fundraising for fund one. So there were definitely times where I told founder, “Hey-“
Scott: Yeah, it’s tough, yeah.
Charles: “… We’re totally in. You’ll get your money in 30 to 45 days.” Now we made good on every single one of those commitments, but in some cases it took a little while longer than I would have liked. And there were just some things I’d say at the beginning of Precursor we were rough around the edges because we were still trying to figure them out. I’d like to think every day we get better and we get more professional. But there’s still some startup-y things. Then occasionally founders will ask us about our business and our fundraiser and about our budget, and I can see the gears turning in their head. They like, “Wow.” I’m like, “Yes, this is a very lean operation just like yours.” But I try not to make our problems and challenges their problems and challenges, they have enough to deal with already.
Scott: The funding one is a good one, because at Lighthouse, at that fund, we recycle capital. So we were dependent on money coming back in to put it out. I know exactly what you’re talking about. Where you love a company, you want to invest, but being upfront with them is key in that situation.
Charles: Yeah. We’ve had people that have said, “Look, based on what’s on the table, I have everyone else can close now and you can’t, I’m going to go with the people that can.” I’m like, “I totally respect that.”
Scott: Yeah. For sure. What’s one commiserating … Hopefully this jumps to mind for you. You’re talking to a founder, they’re complaining about something, and then you commiserate with them as a startup as well. Like, “Oh my god, the copier is broke and I don’t have enough money to fix it.” Or something like that. Is there something that jumps to mind?
Charles: I would probably say honestly it’s investors getting all the way down the line. You think you’re going to close them and they change their mind. LPs have done that to me and it’s their right, it’s their money. And if at the last minute they decide that Precursor is not right for them, I don’t begrudge them that. But sometimes I’ll talk to founder like, “Oh, we’ve got five meetings in with this person. We went out to dinner. I thought it was a done deal. And I just got the email that they couldn’t get it through the partnership.” And I’m like, “Yeah, let me tell you I’ve got the committee with this firm and I thought they were going to be an anchor and they didn’t come in at all.”
Scott: It’s the same exact thing.
Charles: Same thing.
Scott: Like you’re living in the same exact world. That’s awesome. Okay, the final question. We are going to do a series on this coming up, How to Raise a Seed Around with one of our CEOs. So I thought I would ask the master here. Because essentially you’re giving them enough capital to then position them to raise a seed round. What are one or two things that advice you would give?
Charles: I think the most common piece of advice that I give people, and I feel like a broken record is the downside of all of this information on the Internet is I think people think that seed rounds are deterministic. If I get to 100,000 in recurring revenue, then I will raise. I’m like now-
Scott: It’s not a formula.
Charles: It’s not a formula. And don’t worry about the formula. Yes, more revenue is better than no revenue. But the right kind of revenue, and I’ve seen companies do really weird things. And again, you’ve got some arbitrary revenue threshold of 20 K. But the 20 K you generated isn’t at all indicative of how the business will work at scale. The other piece is I tell people, “Remember, seed is still as much about the story as it is about the data. So make sure you’re answering the really big questions about your story.” And a lot of times when I invest, we have a little checklist and air table we invest which is usually, “Okay, what’s the one thing that I think this company needs to prove as part of this raise?” And often times it’s … For pre-seed, often times ship the profit. But sometimes I’m like okay, there’s no risk that we can ship, but can we crack customer acquisition? Or can we figure out some really nuanced thing about the size of the market or the market timing.
Scott: Or can you get five people excited about the product or something like that. That makes total sense.
Charles: And I think I’m sympathetic to founders because I think what they really want is tell me what I have to prove to unlock the round that I have to run through a brick wall and do it. And sometimes they’ll tell you, “I don’t know exactly. If you look kind of like this, if you’re growing quickly and you figure these things out, then you’ll be good. And if you don’t, then it’s going to be heard. And I can’t give you the answer that says you will 100% raise if you do these five things.”
Scott: I always tell people exactly that. I think that’s amazing about us, because I always say, “Some people are better salespeople than others,” or, “Some people know how to tell a story or they’re friends with someone and they get the round despite they don’t have this formulaic AR number or whatever it is.” Because I think people do kind of latch onto that a little much.
Charles: They do.
Scott: But it’s kind of like latching onto the GMAT score when you go to MBA. That’s the one quantitative thing that you can control, so people latch onto that. Whereas there are so many more intangibles that go into it.
Charles: I also tell people, “Remember, a really good seed investor in this environment is going to make six or eight new investments every year. So instead of thinking about how good your company is on an absolute basis, think about it like this person can say yes six or eight times a year. And how do you make yourself one of those yeses?” That’s the real competition. And I think it’s unsatisfying for founders I think to sometimes have realized that. But I’m like that’s what you’re up against.
Scott: That’s life, the ambiguity.
Charles: Mm-hmm (affirmative).
Scott: Yeah. Okay you’re the man.
Charles: This was awesome.
Scott: Okay, tell everybody where they can find Precursor and how they can reach out to you.
Charles: I spend probably too much time on Twitter. So I’m just CHudson@Twitter. And then we’re PrecusrserVC.com. My email address is very easy to guess. We try to respond to every cold email we get as long as it’s well written. And you can also submit your company for review on our website. We’ve got a formula piped right into our CRM. So hope to hear from many of you.
Scott: Yeah. Thank you for doing this, I really appreciate it.
Charles: This was awesome.
Scott: Thanks Charles.
Charles: Thanks. I hope you enjoyed that podcast with Charles Hudson. He is a long time friend. Hope you hear it in the conversation. He’s so smart, he’s awesome. And I’m glad we were able to get him on the podcast. And before we sign off, quick shout out to BREX, they make credit cards for startups very easy. With no personal guarantee, it’s easy to get them all integrated in the QuickBooks, you can sign up, you can provision new credit cards very easy. They have great rewards. So we’re huge fan of BREX. Check them out. And when you go through the BREX sign up, just type in Kruze, K-R-U-Z-E and you get a discount. And I hope that’s it. And enjoy BREX. And I hope you got a lot of great stuff out of this Charles Hudson podcast. Thanks

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