The Past, Present, and Future of Pre-Seed | Charles Hudson, Precursor

12:37Charles Hudson:So I think when I first started Precursor, we were in the founders should be aware of multi-stage funds signaling marketing era. Because that benefited you, right? I think it benefited. I think there were two things. I think most seed funds had enough experience with deals that had been backed by multi-stage funds at seed, failing to clear the Series A bar. Oftentimes, with the firm that had done the seed declining to lead the A, and people are like, oh, you're going to get signaling if you take them in. I'm like, well, it's only a signal if you don't raise money, and you're probably only going to not raise money if you're bad.

13:17Charles Hudson:relative to what else is in that company's funnel. So it's not as if taking a seed check from a multi-stage fund gives you the fast pass on the next round. It just means they know a little something about you. It might decline it to take their check. It might actually speed you up because then they want it. So it's like it could go either way. And this was the argument that I think carried the day from, we'll say, 2010 through maybe like 2017, 18, most founders were like, I'm open to the idea that taking a check, a C-Round check from these multi-stage funds is not great for my business. And then it flipped.

13:57Charles Hudson:And then founders were just like, you know what? I think it was really driven by repeat founders who were just like, I know the bar at those funds. If I can't clear it, whether I have their money or not, I don't care. Their lack of willingness to fund me is a signal of quality, and I can deal with it. And I think it eroded this argument that multi-stage funds shouldn't play. Because we've gone through this cycle where multi-stage funds would dabble in seed, they'd create a lot of ill will from founders who they didn't follow on, and they'd pull back, and they'd be like, you know, we should just leave this to the seed people.

14:32But my whole theory is that in a world where AUM

14:38Charles Hudson:is the name of the game. And I'd like to point out the firm with the most AUM in our industry,

14:43Turner Novak:how old is Andreessen?

14:45Charles Hudson:15, 17 years old? Not 20, a less than 20 year old firm is the largest, I reported AUM, firm in our industry. So in less than two decades, they've gone from non-existent to the largest AUM firm.

14:58Turner Novak:And at some point, if you're going to grow AUM, the only way you can do it,

15:01Charles Hudson:if you believe that each of your individual strategies has a different elastice. Like you can put a lot of money in growth, You have to be in every asset class. So at some point, I think the multistage folks said, you know, if we're really going to be a tip-to-tail multistage VC fund, we actually cannot allow someone else to just do seed for us. We have to have our own product in the market that competes with what they have. There's an AUM opportunity here, but there's also a full lifecycle pipeline opportunity here. And their decision to come in in a permanent way, I do think, changed seed. Because I think a lot of repeat founders are like, wow, I can get a large chunk of money on terms that are very friendly to me from a firm that I held in high regard that I hope does my next round.

15:48Charles Hudson:And if they don't do it, I'm probably out of business. And I think I'm okay with that. And that, to me, is the biggest shift because suddenly those repeat founders that I think that was honestly an arbitrage opportunity for seed. There were people who probably could have gotten money from the big funds, but every two years, the big funds were out of the seed business. And so if you were a person starting, you're like, well, I have to go to these seed specialists. And seed specialists were paying$15 or$20 million post money for companies that they're paying 50 or 60 post money for if they can even get into those companies.

16:22When you say if they can even get in is an interesting, interesting line because most seed managers today, you're the biggest question that you face for your business is can you compete with these

16:38Turner Novak:mega funds? and I think one what you tweeted something it's probably a couple months ago where you're like the biggest there's like this pretty big difference between how the the venture managers are saying the kind of the current state of the seed market versus what's the current stage of the seed market from the LPs they're actually investing in all these funds so what are kind of these two things that you're hearing and how are they not or the same

17:06Charles Hudson:I think are they different or the same there's a lot of early stage managers who i think as capitals really started to concentrate in this business it felt like i have to defend seed investing and i'm like well you should always maybe not defend it but you should always understand am i in a good business i think a lot of them said well these mega funds don't make any sense you can't generate the kind of returns that we can generate the lps who are opting for these funds are dumb yeah or they don't get it. I'm like, yes, small funds outperform.

17:38Turner Novak:Yeah. Like, therefore, you should just only invest in smaller funds. Yeah.

17:41Charles Hudson:I'm like, well, that's a very circular self-serving argument. Doesn't mean it's true or untrue. I was like, guys, like it just it isn't true. The people who are making these allocation decisions are very sophisticated and smart people. And, you know, I'd argue piling a bunch of money into a company that's compounding rapidly, that's working really well, can generate dramatically outsized returns.

18:04Turner Novak:Yeah, if you just think about your seed fund, you're investing in all these companies that are probably going to fail versus just put a bunch of money into Anthropic, the fastest growing company ever. That's right. What is those two pitches coming to an LP? They look different. That's right. There's different reasons to do both of those things.

18:22Charles Hudson:And if you're an LP who has a cost of capital hurdle that's quite low, even if those firms do underperform relative to small firms, they still might perform well in excess of the cost of capital hurdle that you need to clear for it to be a good investment. And, you know, if you told someone you have two choices, you've got$100 million to put to work. You could give$50 million to two firms or you give$10 million to 10 people. A lot of people are like, oh, to get to those 10, how many managers do I have to meet? I got to meet 200 managers to get to 10. And then I got to make sure I get 10 million into each.

18:57Charles Hudson:Then I have to go to 10 AGMs. Then I'll be on 10 LPACs. And I have 10 re-up decisions. Oh, that's a lot of work. Or I could give these two people$50 million each. They're going to cover everything from pre-seed, in theory, pre-seed to growth. And if they have good brands, they should see and get into all of the stuff that I care about. And why shouldn't I do that? And I'm like, for some people, if you're a one thing about this, Turner, if you were at a family office and you're like,

19:25Turner Novak:I'm responsible for all privates, every asset, private credit, venture,

19:30Charles Hudson:all forms of PE and buyout. You don't, you don't have time to meet 200 early stage VC managers, in addition to the rest of your work.

19:39Turner Novak:Yeah.

19:39Charles Hudson:So giving a large chunk of money to one person who can cover the whole swath of venture, if they have good access and they run a good firm is actually a completely rational strategy. So I've told people, it's like, also, it just sounds lame to be like, well, you shouldn't give those people money because they're bad at their job. I'm like, well, I think the people who are giving them money have a peek into the returns, know what's in the books, and they're not throwing their money away. They might be wrong, but they're not throwing their money away. And it's hard to raise money from people by telling them that they're idiots.

20:11Turner Novak:Yeah. That's so true.

20:13Charles Hudson:It's like, you're dumb, but give me money. That's right. Yeah.

20:16Turner Novak:it's kind of like the um i feel like you see a lot of times where founders maybe get frustrated like investors and that's another thing that that can be tricky to navigate too and it's like you know you gotta there's an investor that's like you're you're like grinning while they're telling you that you're gonna fail and your idea is bad or whatever you know you and that's another just mean it's a it's a skill that you need as somebody who's starting a company it's just like constantly people telling you you're not gonna make it you know so when you can build anything Amplitude lets you know how to build the right thing.

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21:58Turner Novak:That's merge.dev slash Turner to try Merge for free. Do you think that the seed model is broken then when you just think of like this, you know, I don't know what the most average seed strategy is, but like 30 to 40 companies, two to four million checks each. Maybe there's some follow-on reserves, but you have a 150, 200,$250 million fund. Like, does that work anymore? I don't know.

22:24Charles Hudson:And I say I don't know because I don't run a firm of that strategy. I have good friends. You know, my old friends at Uncork, they've dramatically increased their fund size. I have other friends who run, we'll say, anywhere from 100 to$250 million funds. I think if you think about what the old premise was of those firms, it's like, we're going to buy 10 to 15 % ownership. We're going to take a board seat. And these are going to be billion-dollar outcomes. And so, like, the math works that by the time you figure on dilution and everything, a winning company should return the whole fund. I'm not sure you can win 10 or 15 % of the companies you want to be in as a large seed fund manager.

23:07Charles Hudson:if the multi-stage funds are cherry picking repeat founders and high signal people. So I think it's harder to just like execute the model of buying that amount of ownership. And the cost to buy it is probably double what it was three years ago.

23:23Turner Novak:And is this like a capital supply demand thing basically is like the amount of capital like supply is way up or maybe the founders or the supply, the demand is way up. So there's just the pricing. is increasing.

23:35Charles Hudson:I think what ends up happening is that the people who have access are able to raise amounts of money and on terms that are like hard to pencil if you're a$100 million seed fund. It's like, you know, how do you, how do you come in at a billion dollar pre-seed, in quotes, valuation for a company when you're like, well, even if it's a$10 billion company, my problem isn't capital deployment, my problem is cash on cash returns.

24:00Turner Novak:Yeah. Because that needs to be a core position for you. It needs to be a core position for you. But for the very large pool of capital. It's more of an option check for the next couple rounds.

24:09Charles Hudson:Yeah, and if you think about it, like, I think that the challenge with Seed is, someone once told me, like, you should always be nervous if someone else makes your job their hobby. And I think what you have is you have Seed funds who are like, hey, I'm running a model here, which is ownership, entry price, check size dependent in order to get the returns that I want. And so, like, Seed is really important And the physics of these rounds are important in terms of valuation, entry point, et cetera. And exit terminal size. If you're a series A, if you're a multistage fund, you're like, well, seed is like a part of my strategy.

24:43Charles Hudson:But seed is a way for me to get access to companies such that I can put large amounts of capital into them in the future.

24:49Turner Novak:And then also keep your brand as a VC firm.

24:50Charles Hudson:Like, keep my brand as a VC firm. Yeah. So I'm actually more interested in the dollar-weighted aggregate cash-on-cash returns I can make from being in this company than I am the return on my initial seed check investment. Because in the grand scheme of things, it's going to be 1 % of what I put into this company if it's successful. And those two strategies push you in really different directions. The latter strategy pushes you to be totally access-oriented and relatively price-insensitive because for the stuff that works, you're going to put a lot more money in in the future and you have a seat at the table.

25:25Charles Hudson:And when you're running a dedicated strategy, you have to decide, well, how elastic is this thing? Can I do 50? Can I do 100 posts? Like, what is the, like, when does the rubber band snap? Which is why I think, like, increasingly, I think dedicated seed and multi-stage seed are two different businesses with different dynamics. and I feel it when I talk to my friends at multi-stage firms about how they think about seed and I see how hard some of the best seed managers I know right now are working to get into consensus hot companies. I think if you're sub$100 million, the problem's different, which is like the assets you're buying are different than the assets that the other people are buying.

26:02Charles Hudson:You're saying sub$100 million fund. Sub$100 million fund, yeah. You're probably like looking at companies that are not on the radar screen of those other firms and the risk is that like no matter what you do, that basket of companies will never become interesting to the other folks relative to what they're seeing. And you end up with a bunch of stranded assets. So I would say this is the hardest period for seed I can remember in my entire investing career. Wow. Okay. Hardest for sure.

26:28Turner Novak:I want to maybe talk a little bit more about that. But one thing you made me think about is the bigger the pool of capital is, the more it's about velocity of like movement of money. versus what the valuation of anything specifically is. Because they just see as like, if I can put in a very large amount of money and it's worth three times more in a year, that's incredible. Like you'll just keep doing that all day and that's all you care about. So that's really what you're paying attention to. It's just like the velocity of how fast you can put money in. And it's because it's just the proximity to liquidity, basically, like the closer you get to liquidity, whether that's, I mean, public markets mostly, is like an IPO.

27:11Turner Novak:And like, how, how does the public markets value this idea? Yeah. Like, that's really

27:18Charles Hudson:what you're going for. Also, I'd argue we live in a world now of increased secondary sophistication. You know, 11 Labs, some of these companies, they're, I've called them like the perma-privates. Like, they have almost all the things you'd expect from a public company. Regular liquidity windows, like, price discovery is not that hard for the top 15 companies you could call any secondary buyer and they could tell you what the going price is for Databricks. It doesn't need to be public. There's a pretty deep and liquid pool of buyers, and in some cases, buyers and sellers for these names. And I think it changes the game in terms of if you decide to get out along the way, you can.

28:01But also, I think in a world where liquidity

28:04Charles Hudson:takes a long time to happen, I think more and more of VC fundraising from LPs is based on perception and velocity. So there are a lot of AI application-led companies where I'm not sure that they will survive long-term relative to the advancements in foundation models. And I don't want to pick any specific companies, so we won't name them. But I think there are companies that are not, if you said, I'm in these five or 10 companies that are valued at tens of billions or multiple hundreds of millions of dollars, LP's are like, I know that name. I've heard of that company. Oh, you're in that company.

28:38Charles Hudson:That's a hot company. Therefore, you're going to continue to get into more. And also, when I go to the committee and tell them, hey, Turner's in this hot company, like, well, Turner must be a good VC fund. And if you're like, Turner's in 10 companies that I've done a bunch of research on that you've never heard of, but I promise you are good. That's so hard. Some people would just say, is he an Anthropic, Databricks, OpenAI, Stripe, or SpaceX? And if the answer is no, people would be like, Okay, so you're not in the good, you're not in the hot companies. Yeah. So what are you in then? And so I think it is this weird, it's this weird byproduct of concentration.

29:11Turner Novak:One of my favorite things to say now is I am technically a pre-revenue investor in Anthropic. Yeah. Because one of my companies I invested in pre-revenue was acquired by Anthropic.

29:22Charles Hudson:I got equity in Anthropic.

29:23Turner Novak:So I can say that with like telling you the truth. I'm a pre-revenue investor in the equity of Anthropic. But I don't think that's, it's not quite the same, But it's still it's I think it's but like that's the thing people get most excited about is like, oh, you have Anthropic in the fund. Yeah. And it's because like a lot of my LPs are like, so how much of the fund are we going to get back when this IPOs? And I'm like, I have no idea. I'm just going to give you the shares when it when it goes public. Because like you're not paying me to make that decision. That's right. Like this is a Jesus take the wheel.

29:56Turner Novak:That's right. Like I did. I didn't know this was going to happen with it where it's at today. and you're going to make some money from it. But there's like way other companies in the fund I'm actually more excited about. Yeah. That will actually make more money, but it's just so far away. It's just people don't really care that much yet.

30:12Charles Hudson:They don't. And I think like the attention spans is concentrated in maybe the top five names, which feel very, top five or six names just feel very liquid. Maybe the top 25 companies where there's at least an active market for them and everything else, it's hard. Yeah.

30:29Turner Novak:Yeah. And so you mentioned this is the hardest time to be like an early stage investor. So what's the strategy?

30:38Charles Hudson:Like, how do you survive and what do you do? So there's, it's funny. I think there's like the intellectually, morally superior, like, hey, I'm going to like invest in the things I want to invest in. And I'm going to like stick with it. And eventually I'll be proven right. I've been guilty of this at times. And I think right now the challenge is like LP attention is sorting seed managers. And they're like, these people have access and appear to be in the hot companies. We will continue to fund those managers. I think if you're doing things that are contrarian or like not yet understood or whatever term you want to use, I think there's a set of LPs who are like, well, the game on the field right now is enterprise AI.

31:19Charles Hudson:We don't actually know if most of these enterprise AI companies we're funding are going to turn out to be good investments when like it's time for liquidity right now that's where the heat light and energy is and if you're not in those companies some people are like maybe you just don't get it yeah are you any good are you any good what are you spending time on if you're not chasing down uh this next harness or model infant whatever it might be you're not chasing what are you doing because also what i'm hearing from the people who work at the big funds where i've given them all of my money is like that's all they care about So are you telling me that they're wrong?

31:54Charles Hudson:Those big funds that are going on?

31:55Turner Novak:And you're like, no. Yeah, they have 100 people doing research all day, adding all this value. They're talking to founders. And all they care about is this one very narrow sliver of the market.

32:03Charles Hudson:I'm like, well, you can walk and chew gum at the same time. This can be really interesting and important. And other things can be interesting and important, too. So one strategy is you just hope that you have LPs who are supportive of enough or you can finance your organization. through this period of having like deeply misunderstood companies that feel out of favor. And when the tide comes in, it'll come in a major way. The other one is you go, you know what the game on the field is? Game on the field is chasing and getting out of the cap table of hot AI companies. Either because A, I deeply believe that these companies are the future, or cynically, I believe that being associated with these companies and getting the markups and getting the brand affiliation with the people who will lead them will make the survival of my fund easier.

32:46Charles Hudson:because without LP capital, most VCs would go out of business. And part of raising LP capital is having a product that LPs want to fund. And right now I would say, if you're in a bunch of the really hot AI companies and the ecosystem thinks that's the person who sees the best hot AI stuff, you will have a relatively straightforward time raising capital. If you're pursuing some other strategy that's like not perceived as being as interesting or as popular, you'll have a harder time. That's been my experience. Yeah.

33:16Turner Novak:And I think when you think about the P &L, like the income statement of a asset management firm, like you need revenue, right? Like you just think like, is this a good business? Is this a bad business? Like how much revenue does it have? And the revenue comes from taking a clip management fees of the amount of capital that you raise. So really the incentives of if you have an asset management firm, increased revenue, it's increased management fees. So it's like the incentives are there. And yeah, like it's again, it's like you. And so if you're taking that strategy of like you talked about earlier, there's like two buckets and like, can you graduate to the bucket?

33:53Turner Novak:that's like pretty bold to say I'm going to sit in this bucket where there's not as much revenue for my company and graduate. And then, you know, maybe you say you, you build a reputation over a long time of like, oh, Charles has done this. He has 10 companies over the past 10 years that have become generational businesses that he gave money when there was no consensus around it. We just know he's going to do it again. But that's like, someone doesn't meet you for the first time and you've never done that before. Like, oh, sure. I'm in.

34:21Charles Hudson:Super hard. And two years ago, I was on a panel at an AGM for an LP I love, who is sadly not an LP in my fund. And I was on stage with three other seed managers. And we were talking about this topic. And they asked us, like, what's your strategy? I said, you know, we've always been sort of 70 % first-time founder, 30 % repeat founder. That feels like a good equilibrium for us. But, you know, a lot of the people that we back, they're just not popular when we fund them. But that's sort of, we don't look for those people on purpose. It's not like, oh, if you're popular and interested. I'm just like, it's totally fine if the people we meet are a little raw or a little hard to underwrite.

34:57Charles Hudson:I don't mind that. I have two years to work with them to help get them better. And I don't like this legible term, so I'm not going to use it.

35:03Turner Novak:Legible to capital. Legible to capital. I love it and hate it. I love it and hate it. I try to avoid using it, but it is the thing.

35:09Charles Hudson:And I'm like, I can help you become easier to understand and tell your story in a way that will get investors excited.

35:15Turner Novak:Yep.

35:17Charles Hudson:And the other people on the panel were like, we're uninterested in your strategy. We, one of them basically said, if I can't compete for and beat the multi-stage funds and the deals I want, I don't want to be in this business. I was like, wow, because I think they have that part of the market in a bit of a, it's like a vice. Like I think every year the multi-stage funds get better and better and better at going after the most obviously pedigreed people raising seed rounds. And they get 5 % better, 10 % better every year. And that vice just gets tighter and tighter. And eventually, like, there's not much left.

35:55Charles Hudson:Now, my argument is, like, all of the great companies, in my opinion, are not going to come from the pool of repeat or well-known founders. If I thought that, I'd close up my shop and say, like, well, the vice is going to get tighter. They're going to take 100 % of the opportunity. And 100 % of the winners are going to come from the pool they dominate. That's what a bunch of LPs are like. Like if you think it's 100%, all the best companies are going to be repeat people who are good friends with VCs who are going to raise big seed rounds. You should just like abandon your seed strategy. And if you think it's 0 % are going to come from that pool, you should never put nearly as much money into big funds.

36:28Charles Hudson:No one thinks it's zero that I've talked to. And only one person I know thinks it's 100. So the only question is like, where does that slider rest? Is it 50-50? Is it 75-25? I don't know where it rests, but I do know that I continually meet teams where I'm like, these companies are going to matter and they didn't fit the screen of what those folks were looking for.

36:48Turner Novak:So an interesting data point along that. One of the prior guests of the show, I think by the time this comes out, it'll have been a couple of weeks ago. His name is Nunu at Chameleon Ventures. So they kind of built this product internally. They kind of call it for like hedge funds. They do a lot of factor investing. So they've kind of built this strategy that sort of borrows from hedge funds, like taking a bunch of sentiment and it gives you a bunch of data and you make a decision. One of the data points that they found is, I believe it starts with 70%. I think it's 76 % of all unicorns did not have a fund over$100 million in that first kind of like seed round.

37:31Turner Novak:So basically what it's saying is 76 % of unicorns, their seed round was led by a small fund. So this is like historical data over forever. So obviously this is a moving number. But it essentially goes to show that like a lot of the biggest companies, the first investors, were not a big pool of capital. The caveat is, of course, like the market is changing. We should look at it in the past year. I mean, that's the hard part. Like if you look at it in the past year, you don't know. You don't know. Which of those companies will go on to become big businesses. That's right. What the consensus says will tell you that the most highest valued companies are probably the ones that will go on and become.

38:11Turner Novak:But like that never actually happens. So it's like interesting that, like you said, it's somewhere in the middle.

38:19Charles Hudson:But where in the middle is it? It's funny. I had a similar conversation with we've we every fund. we take a little bit of money from a big multi-stage fund, usually for relationship and also for me to learn from them, how do they operate, how do they think about the world? And I was hanging out with someone who put money in our last fund. And he said, you know, we just did this big analysis. And it turns out that we found there was like, seed valuations are noisy. If you look at companies that were ultimately successful, the price at seed is very noisy. Some of them are very expensive. Some of them are very cheap.

38:52Charles Hudson:Price is a signal more of capital access than of like ultimate value. He said, when we looked at series A's, it's not anything like that at all. The good ones are all expensive. And he's like, there's actually a very strong price quality correlation at series A historically. And I'm like, that, that makes sense by the A, you should know a lot more about the business and the ones that look good should get bid up. And it's one of those things I think about a lot, which is like, as information becomes in theory, better understood, pricing should become somewhat more rational.

39:30Turner Novak:And then I think the interesting thing, though, is, okay, so everything that's going on today, we kind of did this exactly five years ago, like during Zerp, right? Have we learned anything?

39:43Charles Hudson:No. Is this okay? Is this all justified because of AI? It's funny. I've gone on this journey on this topic. Okay. Because my initial thing was like, we are crazy.

39:53Turner Novak:Zerp was like insane, like we're doing the same thing. I have this like,

39:59Charles Hudson:can I do like a two-minute philosophical?

40:02Turner Novak:Oh, yeah, definitely.

40:04Charles Hudson:I think early in my venture career, I was like, well, there must be a corrective force for mistakes and bad behavior. I think within firms, there are corrective forces. I think partners do get asked to leave and do get fired when performance isn't up to standard. But I think about 2021, I asked an LP who has a lot of exposure. I said, you know, 2021 was crazy, right? He said, yeah. I said, remember my 2021 AGM? All of you guys were all over us. Like, those marks aren't real. Like, what's the stuff worth? And then people wrote blog posts about never again, and we kind of overdid it. And now capital efficiency is back.

40:44Charles Hudson:That lasted for 22 and maybe a chunk of 23, maybe. And I asked this LPS, who did you fire as a manager based on the performance and decisions they made in 2021? And the person's like, well, none of our core relationships. I was like, okay, so you just like ate it. He's like, essentially, yeah, like they made a mistake. But like, it wasn't such a big mistake that we fired them. I was like, all right. I was like, well, who did you fire? He's like, oh, we fired some emerging managers because the totality of their track record was 2020 and 2021. I was like, also, that's a low-consequence decision.

41:21Charles Hudson:Those people have no power. And I was like, well, what does it mean to invest in a business where the capital providers have limited corrective power? I don't know that anybody's going to, if this AI stuff doesn't end well, I don't know how many firms are going to go out of business because they went YOLO all in on very expensive AI deals that didn't work out. if those firms have established brands and strong relationships with LPs. And so I think maybe my lesson from 2021 is it's as dangerous to sit out a bubble as it is to participate in one. And it's actually potentially more dangerous to sit one out because it's not as if the people who were sober and restrained during 2021, in my opinion, have gotten a lot of credit from their LPs for having not participated in the circus.

42:14Charles Hudson:Yeah. So I'm like, is that really today what modern venture capital is about? It is like if there's a speculative frenzy, the rational thing to do if your goal is to remain a venture capitalist might be to participate in the frenzy, even if you have deep skepticism about the final outcome. Because you need to remain relevant. You need to remain relevant. You need to remain in business. To your point, you need to remain in business and be able to raise capital. And to do that, your firm has to be relevant and feel like you get it, like you get the message. And that's like a really different, it leads you in a really different set of directions.

42:48Charles Hudson:If that's true, then it would if you're just like, Hey, the people who go crazy and lose a bunch of money on bad things will be punished. And the punishment will be, you will not raise another fund. I was like, I don't really think it works that way.

43:00Turner Novak:Yeah. Cause tying back to just like how venture works, like you just have to be right once. That's right. You go crazy and you were right. And like, yeah, you were really crazy. Like you torched a lot. You lit a lot of things on fire. But you were right in one of them. And like, that's the point. Like, that's a good, you could argue that was the best strategy.

43:19Charles Hudson:I don't know what else is in Menlo's fund, but I know they got a lot of Anthropic and I don't think it matters.

43:25Turner Novak:Yeah.

43:25Charles Hudson:Whatever else it is, I'm sure they're great companies for the longevity of their firm. I can't believe there's anything else they've invested in the last five years that matters even 10 % as much.

43:36Turner Novak:Well, and that's kind of the whole, like, one of my friends, Pratouche at Sousa, he He has this like thing where, you know, there's the power law. Yeah. We all took the power law pill. But really, in a lot of cases, a lot of people just swallowed the whole bottle of pills. Yeah. And like, it's just like the power law, but like 10 times, 100 times more than like the actual power. Like, it's like the ultimate power. Like, it's all that matters. It's just you get one company that returns the industry. Yeah. And if you're in that company, like, that's the point. That's it. So like, who cares if you invested in Web3, if you invested in, and like you, to your point, enterprise AI app that's actually not worth anything.

44:17Turner Novak:It doesn't matter.

44:19Charles Hudson:It doesn't matter. And it's what you said, I think is like really true. And I met somebody who invested in Anthropic at a billion in a desire to pick up the logo. And that person's up hundreds. They're going to get a greater than seed. And this is the other thing I've like, tried to explain to my team, not well, is if you think about the goal of a seed manager is to get really high cash on cash returns in the early stage. With the benefit of hindsight, Anthropocated Billion was early in its development, but not early on an absolute price basis. And how do you think about companies where you could still see 200 to 300x price appreciation at entry prices that look really different than what we've done in the past?

45:02Turner Novak:and like on on that maybe note of like rationalizing something i've heard the data centers in space where like this is like the final frontier of just like computing and like it's it's early and it's gonna like the entire area around the earth like the other 99.99999999 90 % of the mass of the solar system is just data centers. And the upside is a million X from here. I'm exaggerating this like quite a bit, but like if you believe that, then it's still early to invest in like that, that trend or that thesis. And so, I mean, then that's really like, it comes back like that's the point of venture capital is like you're investing in something where like the upside is like unbounded.

45:51Turner Novak:That's the point of this.

45:52Charles Hudson:I think in some ways, this goes back to something. I hadn't thought about this connection you just made me think about this I think in some ways in the beginning of my venture career stage names were useful and they served us because everybody kind of had a lane and it was good to know well this is my lane

46:11Turner Novak:my lane is like seed and like my friend that does series B's at KOTU I'll let him know when I have a company raising a series B

46:17Charles Hudson:and he's not interested in A's and he's not interested in seed and now I think there's like no lanes anymore and I think like we've adjusted the fact that everybody's going to be in everybody's lane. But I think maybe seed managers as a group, we've been slower to realize that we can get the kind of cash on cash multiple returns we want at later points of entry. And that still might be early in the grand scheme. It might not be the first or second round, but it still might be an opportunity to find a crazy everyone like Keith did Stripe at a billion and a lot of people were like that's nuts. And I'm like, not if it becomes a meaningful part of the internet's GDP?

46:56It's like not nuts.

46:59Charles Hudson:It's a really good company that's like aggressively priced. And now I think a lot of people are like, wow, if I could use a hundred billion, I'd be quite happy. And so it's also made me realize that for companies that are really, really working, once they're really working, maybe the optimal thing is to find a way to be a part of those companies, even if it's off model for you. I mean, I wouldn't go buy a bunch of common shares off of some like shady secondary exchange or something. But maybe find a way, if you have access, to get on the cap tables of these companies that matter. Because I will say, every time we've done that, I've learned things about the market and the way those companies are that were not obvious from the outside.

47:33Interesting.

47:34Turner Novak:Because I think the point of this is just find founders that are building generational businesses and help them out. Give them some money, and you'll make money doing that. And whether it's Stripe at a billion or a CPG company at one million. And like, I have a friend who he's not a CPG investor, but two of his best investments have been angel checks into CPG companies that were raising like 150K to like start a new cereal brand or something. And he made like 100X return in a couple of years. And that's, I mean, that's like anthropic levels. Like, that's incredible. We're going to have a couple.

48:08Turner Novak:We have a couple.

48:09Charles Hudson:It's funny, like our CPG companies right now are thriving. I think partially because most people are like, there's not a lot of AI threat for those businesses. Fair, yeah. And also, none of their competitors can raise capital. So that's one market where if you have capital, and also most of them have had to live for the last five years on limited capital, so the businesses are actually pretty efficient. So much to my pleasant surprise, they're some of our top performing companies.

48:35Turner Novak:Yeah, and that's why when I come back to just the entry valuation you come in at is so important. Those are the two levels. the two levers. It's what price do you pay? And then what price do you get when you sell? And those two things can make any investment interesting. That's right. Like, and I think you need to buy high quality assets. So whether that's like the founder or like the business that exists, like make sure it's good and like the best you can find, whatever. But like you can have a great investment where the valuation is just too high because you paid too high of a price. That's right.

49:05Turner Novak:And so any investment is interesting when you just take that lens of like, what do you pay what can you get for it in the future and i don't know it's almost like we kind of have lost some creativity in that process over like the overtime and i think that's why i tell our team

49:20Charles Hudson:i was like i'm always just trying to figure out how could this company become valued 200 times more than it is today because if that happens factoring in future dilution will probably make

49:30Turner Novak:between 75 and 100x is that your model is like can we get 100x return on this single check

49:35Charles Hudson:and this is like in share price that's in share price and that of dilution which is normally just like for simple modeling purposes, if you assume you need 200. So I'm like, you can do an investment at 25 posts. You just have to believe it's going to probably be a$5 billion company. And I'm like, you know, a$5 billion company with asset price inflation and general inflation in seven to 10 years, that's maybe a$2 billion company today is a$5 billion company in 10 years. So, but I'm almost like, you have to believe that it's going to be of that order of magnitude. Otherwise, you shouldn't do it.

50:08Charles Hudson:That's a 25. You're giving up too much of the upside at 25. And if it's a billion-dollar company, you're going to be like, oh, I made like 15, 20 times that money. Good. But a company of that scale should deliver more for you.

50:20Turner Novak:One thing I feel like, maybe we talked a little bit about this, but do you feel like there's an addiction to this consensus, just like investing in consensus? Yes.

50:29Charles Hudson:But I think all of the system rewards right now are feeding the addiction. Because I think it's such a big circle. I don't know what's first. It's kind of like, I'll give you one example. Dropping out of college used to be a low status decision. Like high status decision was like finish college, get a good job. Dropping out was either like you couldn't hack it or you were like crazy enough to think you had an idea that was so good. It was better than graduation. I'd argue that like dropping out now has become a high status activity for college students at elite universities. partially because 20 VC firms have fellows on campus or scouts who can give you money to start your idea.

51:11Charles Hudson:Get a million bucks. Get a million bucks. And VCs think, I think, still haven't updated their firmware and dropping out is a signal of seriousness. I'm like, well, if you got into Stanford and you drop out, you still got into Stanford. You're a pretty smart person. Yeah, that's the hardest part. It's the hardest part. It's easy to finish. Maybe you can't get a job at McKinsey or Goldman Sachs because they would want you to graduate, but it won't stop you from getting a startup job or being in tech. So it's not as risky of a thing anymore as it used to be to drop out of college to do a startup.

51:44Charles Hudson:So there's a lot of energy around, let's find these 18 to 22-year-old cracked AI dropouts. So if you're one of those people, you are going to get found. You're going to get found. There's a lot of belief that people coming out of a small subset of companies have some earned secrets that will make them more successful as founders. There's a lot of people who are just like, I just want repeat founders in an environment like this. So there are like whole subsets of founder archetypes that I think are being, they're kind of like overfished tuna. Everyone's like, oh, I want tuna. I'm like, we can't all eat tuna.

52:17Turner Novak:We're out of tuna.

52:18Charles Hudson:And so there's like so much concentration on that population of people. But also if you're like an emerging manager and you're like, I want Sequoia and Dresden General Kettle, I want those guys to do the follow-ons of my portfolio. You're like, well, one easy way to do it is find the founder archetypes and profiles that I know that they're looking for and find them a tick before they find them. Talking about velocity, like you'll move quick. Yeah, you move quick and you'll find them two months before they find them. Yeah. And then your whole deck is like, hey, I found these 10 companies two months before these big multi-stage funds.

52:56Charles Hudson:And I did them at price X and they did them at price 3X. and my whole portfolio is marked up 2.5x as a result because I found all these great companies before them and everyone goes, wow, you found companies before these firms that we think have excellent judgment. Everything pushes you in that direction. When you don't have those signals and you go try to talk to LPs or other founders are like, I don't know any of these people. These companies, are they even any good?

53:22Turner Novak:The thing that I think, I've noticed this tipping point where, so so my my strategy initially and like is always kind of been like these like non-consensus but you think they will graduate into and so i've had some that have been graduating yeah and like it gets so much easier when people notice the portfolio companies and like it's it's just night and day between like you have some of these consensus and you were actually early in them

53:48Charles Hudson:before they were consensus and it's like i've gone back and forth of like man i should have

53:55Turner Novak:just done that from the beginning. Like I should have just, I should just have raised, tried to get allocation open AI and raised a hundred million dollars and like retired.

54:02Charles Hudson:I could have done that.

54:03Turner Novak:Why am I messing around with this? Like trying to give somebody 250 K for this like crazy idea

54:08Charles Hudson:that no one else thinks is a good idea, but it's fun. It's more fun to do that in my opinion. It is more fun. And I think I'm curious if like, you know, these companies are going to go public soon and we're going to know a lot more about them as publicly traded companies and i wonder if like these are like blips in the sense that like these companies just happen to have be sitting on the most important technology of this generation in a very strong control position and like we're not going to see other companies like this anytime soon until there's a new technology wave because like

54:48Turner Novak:Like, they're just, the thing they're doing is just really special and rare and unique. So you think, like, there was this, like, hole we needed to put a trillion dollars into the capital markets over the past couple years. And once they go public, that drops to$500 billion or$250 billion.

55:02Charles Hudson:You just don't think we'll need that capital anymore. Or we're not going to find companies that can both grow to, like, tens of billions of dollars in AR, but also consume hundreds of billions of dollars in private capital. I don't know where the next one of those comes from.

55:18Turner Novak:Did you see this? We're recording this. I think it was either yesterday or today. Alphabet announced they were raising a$80 billion private round. Did you see this? No. Yeah. So Google is actually raising$80 billion. I think it's$80 billion to invest in AI. And so.

55:35Charles Hudson:Like data center infrastructure stuff? Or companies?

55:38Turner Novak:I haven't read it yet. This is like the classic tech pros on the podcast. It could be anything. Yeah, like this is a classic just like Tech Bros on podcast, just like, did you see this? Like, oh, this is the whatever. But it's kind of interesting because you used to think you had to be a private company to do that. And I think when you think about the incentives for an investment firm, it's all about the management fees. And so if you are investing in traditionally as like a public market investor, you used to be able to charge roughly 2 % and 20%, 2 % a year, 20 % of the profits. you got paid quarterly, which is pretty awesome.

56:14Turner Novak:The liquidity, it's like mark to market, you get paid. There's been pricing pressure because there's no differentiation. That's right. So instead of being able to charge 2%, you maybe charge 1 % per year. The carry also comes down to maybe only get 15 to 10 % of the profits per year. And also the companies are, you're at the whim of the market. So if the market pulls back 30 % in a year, your revenue drops 30%. versus if you're in the private markets, you can charge 2%. Some people charge more than that. And you also can just go out and you have like a reason to like structure these like really big step ups in your management fees.

56:53Turner Novak:And it also doesn't go down. That's right. So the market's been like the incentives for an investor is to be a late stage private market investor. Like that's really how you make the most money. But Alphabet is now raising capital in the public markets. I'm assuming so like that$80 billion, who takes the fees on that money, I think is like what you, what is pretty important in how the market will continue to change. I think going back to something we talked about earlier about this like big fun, small

57:26Charles Hudson:fun thing. I think if you think of the largest firms in our industry as scaled asset management firms that whose principal business is venture capital, their behavior makes sense. Because like my sense is like those 10 firms really compete with each other. They don't compete with me. They compete with each other for zero sum access to the very best companies. And, you know, General Catalyst now has that the lending financing product that's like non-dilutive. One of our companies just took a very large chunk of that. And I expect you will see more innovation from those firms for two reasons. One, the only way you can grow your firm is to either grow your core products or launch new products.

58:09Charles Hudson:And I think the answer would be, yeah, we'll do both. And this desire to grow AUM and fund size is a very real pressure. And I think about a firm like Thrive, where they have really great access to the most important companies in our industry. And I was like, well, the limitation to how much money Thrive could deploy is really how much money the top 10 companies on the internet would take from them. It's not how much money they could raise. It's how much they think they could. And again, in a world where you have companies like OpenAI and Anthropic, where putting in$10 billion doesn't really mean anything in the scale of what they need to raise.

58:55Charles Hudson:For an asset manager, that's like the dream. It's like a highly valuable company with a voracious appetite for capital that's highly regarded by other people. I don't know that it gets any better than that.

59:08Turner Novak:If your goal is to grow AUM.

59:10Charles Hudson:And why would you not do that? Why would you choose to not participate?

59:13Turner Novak:you wouldn't yeah so it's interesting and i think like is a is a participant in the ecosystem whether you're an investor or founder like you just need to know that and like there's opportunities to benefit from it to counter position against it to make money yourselves to benefit like i said to

59:29Charles Hudson:like to part like be in it like make it to become part of that so and that's this has been my one frustration with some of my seed emerging manager friends i was like there are things that are having that you don't like, they're still going to happen. And you can complain about them or you can criticize them or you can mock them. It's probably more useful to figure out what does this mean for me and what am I going to change about my business as a result?

59:52Turner Novak:And the answer

59:53Charles Hudson:probably shouldn't be, it doesn't impact me and I'm changing nothing.

59:56Turner Novak:Yeah. Okay. So it's an interesting question then. So what is the strategy at precursor or precursor today? So you, I think on your website, it says you do about 30 to 40 investments per year. So what's like the general strategy if I'm a founder talking to you or I'm an LP, what do you do? What's the current strategy?

1:00:13Charles Hudson:The goal is to get into post-idea pre-product market fit companies. The majority of those will be companies that are raising at sub$10 million valuations with a lot of first-time founders. If that's our major, our minor is there's a lot of repeat people I've met in the the last 30 years in the valley. They come to me, but they don't raise on terms that work at that sub 10 million dollar valuation. But I'm like, these are good founders. And I think on a risk adjusted basis, they're likely to be successful. And the prices at which they're raising are prices where I still see how we make money on those companies.

1:00:51Charles Hudson:And we do those too. And those companies, first of all, those founders don't really ask me for much help. They don't need it. But I'm also just like, part of what I'm betting on is that like, you will have access to capital and you have management experience that makes you, on a risk-adjusted basis, more likely to succeed. And on the first-time founder, so it's just like we're at barbell. It's like we're paying for experience and access over here. We're paying a premium. And over here, we're paying a steep discount for the unknown, for founders where no one knows that they're going to be any good, for markets that are maybe not understood.

1:01:20Charles Hudson:And as long as some of these work and some of these work, you end up with a really great fund.

1:01:26Turner Novak:One thing that I saw, literally Claude told me this, so I don't know if it's true. It might have been hallucinating. you, the way you do the principal role at Precursor, you actually give them money that they can make decisions with. And it's, so how does that work? How's that a little different?

1:01:41Charles Hudson:I started talking to a bunch of my LPs, like, well, how are you going to develop your team? I was like, well, I'm more interested in like allowing them to express their judgment than I am developing them. This whole, can you teach people? I'm not sure if you can teach people venture. I think what you can do is you can give them money and figure out what they think good looks like. And then I, as the person who runs the firm can decide, do I want more of this person's judgment and taste in our firm or less? The answer is never, I want the amount that I, it's either you want more. It's a friend of mine said, there's only two kinds of companies in your portfolio, companies you wish you owned all of and companies you wish you owned none of.

1:02:13Charles Hudson:And I'm like, well, it's a little harsh, but I understand the sentiment. So I started everybody in our team with a budget. Think of it like a mini fund. It's fully discretionary to them, subject to a couple of constraints. Like, I give them a check size constraint. So they start off with 25 to 50K checks. So like a big angel. They have to conform to our LPA so you can't invest in prohibited sectors. And they have to generally be credibly pre-seed companies. So you can't go put 50K into a triple-layered SPV and Anthropoc. You can't do that.

1:02:44Turner Novak:As fun as that would be. As fun as that would be. And so I tell them, I was like,

1:02:47Charles Hudson:I'm judging you in the beginning more on underwriting and less on performance because I want to know that you can identify great founders work with them and get on the cap table. I don't want you chasing just hot markups so that you can say, oh, well, my portfolio is up like 3X, so you have to make me partner. And then with each successive fund that they're with us, I increase the check size to figure out, can this person win access onto cap tables of the same quality?

1:03:16Turner Novak:With a larger check, because you're going to displace better people, and it's harder to do that.

1:03:21Charles Hudson:And it keeps going until you write the same size check as I do. And if at any point in time I think your performance isn't good enough to continue, I tell the person, like, thanks for playing. It's not going to happen for you here. The only terminal state in this program is you make partner. And if at any point in time you either decide you don't want to do that or I decide you're not going to do that, the experiment is over. and my LPs at first were like well why don't you put your thumb on the scale why don't you make them get your approval I'm like well because that will then become part of their algorithm and they will just say like well I only will have to sell him on this deal and he hates XYZ category or I don't think he's going to like this and they'll talk themselves out of it I'm trying to figure out what they like not what they like that they can sell to me but like what do they like and it's actually not a very expensive program to run, like the V1 for a person's like between 250 and 500K.

1:04:17Charles Hudson:And I get 10 yes decisions from them about companies that they picked. And I can decide like, do I like this? And now my LPs went from being like, this is very irresponsible to like, oh, this is actually a very good way for you to get a sense for their judgment rather than giving them$5 million after they've been at the firm for five or six years and just say, go crazy with this. So you go from zero to 5 million. So we go from zero to 500K. Oh, I'm saying other firms. Yeah, other firms are just like, hey, you've been here for a while. Like you're a partner like here.

1:04:49Turner Novak:Now you can start. Now you can start. So in other firms, you maybe don't even get to do that.

1:04:53Charles Hudson:How does it work maybe in like a traditional venture setting? The way I think about it is most people, if you come in as an associate, it's probably going to take you two to two and a half years to get check writing privileges. If you come in as a principal, maybe it's a year. the one gate is to get into the program you have to source something that we work on together and that we close so that I get to see how you work and then after that I'm like this is your this is your audition this is your like ticket to show what you can do and like you know in this environment I told our team the bar for what like a winning company looks like has gone up in my mind because LPs are holding me to a higher standard I was like guys 3x in 15 years is not very good it's really not that great from an IRR standpoint, 5X in 15 years is like the equivalent of 3X in 10.

1:05:42Charles Hudson:So I'm like, the bar for what a great company looks like in the context of our fund has to go up because I don't think the hold period is going to come down.

1:05:50Turner Novak:It's probably going to keep extending.

1:05:51Charles Hudson:Probably going to keep extending. So I'm like, maybe 7X is really the new 5X.

1:05:55Turner Novak:But the other side, though, is like for a high quality asset, there's a lot of liquidity. So again, do you want to sell those high quality assets or keep holding them? but it could be a 7x fund return in three years, maybe.

1:06:08Charles Hudson:And we now take a little bit off in the B if we can. Oh, I think I actually saw that, yeah. Yeah, we take a little bit off. Mostly because now our Bs are five to seven years old by the time they get to the B. So I'm like, you know, taking a little bit off and returning it to LPs is probably not the worst decision in the world. If they've gotten a B, it's a de-risked asset, but not a riskless asset. And like clawing back some amount of capital,

1:06:31Turner Novak:I think makes sense. So we do that too. How do you size up and decide how much to sell? Is it the same every time or is it contextual?

1:06:38Charles Hudson:I talk to a lot of people and they're like, you should just pick a formula that works. Some people are like, anything above X valuation, we sell Y%. I just said we should try to sell 20 % if we can in the B, provided that it's not hostile to the company and that they're supportive and that the pricing isn't crazy. And ideally, we're selling it to the new round lead, which is what we've done the last two times we did it.

1:07:02Turner Novak:Yeah, and it's interesting. I actually, A16Z put out some data on the amount of capital deployed by stage, like secondary crypto, et cetera, over the years. And I think, I may be remembering this wrong, but I think they bought something like a billion dollars in secondaries in those other 24, 25. There's like a pretty big chunk of their strategy is buying secondaries. And a lot of it's in those cases. And actually the number may have been like 500 million, But it's still like an astronomical amount of money compared to a precursor selling 20 % in a Series B.

1:07:37Charles Hudson:And look, there's only 100 points of equity in a company to go around. So at some point, I'm like, look, the private equity guys figured this out. There's this like handoff, like the middle market guys like sell. Like there's like a mechanism. And I think venture is figuring out. I tell everyone's like, we're like a part of finance, but also apart from finance. Yeah. And I think we're discovering everything that everyone else has discovered before. continuation vehicles and like second like we're discovering all of the like financial engineering because the sums of money in these asset management firms are getting such to the point that like figuring out how to get out on a regular basis is more important than it used to be.

1:08:15Turner Novak:One way that I've heard you kind of describe what you do I think I think there's like a post that someone made where you like had it was like a sample of your deck or something and there's like this kind of like there's this like axis and there's a quadrant. It might be helpful for people to understand And you've basically said this already, but it might be helpful to like restate like, where do you operate in that quadrant?

1:08:34Charles Hudson:I think like there are people, so the quadrant has like two different dimensions. One is like, what do you know about the business? And what do you know about the founder? So, you know, like there are some things like if you know a lot about the business, you know a lot about the, so if, I don't know, if we'll make this up. If Mark Zuckerberg started another social network tomorrow, he would raise that like, if he even took outside capital, it'd be at like infinity dollars, right?

1:08:57Turner Novak:Yeah. You could probably get a billion dollars from someone pretty quick.

1:09:00Charles Hudson:That's right. And you'd be like, oh, the guy knows what he's doing. Or Jan LeCun. Oh, yeah, that happened. That happened. Somebody who's people are like, this person knows a lot about LLMs, and he's a high-profile founder. So that upper right-hand quadrant, those are expensive deals where people feel good about paying them because they're high consensus. There's another quadrant, which is like, you know a lot about the founder, but you don't know a lot about the business. I call that like, that's like your business school roommate or your former coworker who you think is a smart person, but you're like, I don't really know what they're building.

1:09:28Turner Novak:Yeah, second time founder. Second time founder.

1:09:30Charles Hudson:Maybe a slightly weird idea, but we'll figure it out. There's a lot of market. You know, she's really good. That's right. Yeah. There's market for that person too. Then there's what I call strangers with data, which is person who moves to San Francisco from, I'll make this a button, from Louisiana, starts the company, gets to 50K in MRR. And people are like, I don't know this person. They didn't go to college. They're not my friend. But the traction's interesting enough that I'll at least investigate the business and maybe get to know the person. Yep. Then there's people where you know very little about the person and very little about the business, and almost nobody wants to fund those companies.

1:10:01Charles Hudson:And we spend a lot of time in that bucket. Really?

1:10:04Turner Novak:And it's not efficient. You meet a lot of people, and you're like, uh... You might do 100 meetings and find no founders that you get excited about.

1:10:12Charles Hudson:That happens sometimes. But I'm like the asymmetric upside from finding these people because most people never meet with them. It's funny. When I started the fund, everyone's like, oh, you're going to end up with all the rejects of the seed funds. I'm like, not if I do my job properly. If I do my job properly, I'm going to meet all the people who haven't quite figured out how to get in front of those firms, either because they're not far enough along with the business or their network isn't developed enough to get the warm intro to get in front of them. But if I'm re-rating the stuff that they've already passed on, you're right, I will fail.

1:10:40Charles Hudson:But if we're finding stuff that's been unrated, that has never been underwritten, then I think we've got a shot.

1:10:46Turner Novak:And so one thing I think would be interesting to talk to you about, because you've probably seen this really more than you're probably like the top 0.001 % in the world of like people who've seen those kind of founders. What is it typically like to raise money when you're a founder? In that case, like what are you usually going through when you are extremely non-well known and your idea, you don't have a lot of data?

1:11:08Charles Hudson:It's really hard. Raising money for a private venture-backed company is really different than anything else. because usually like it's not like going to the bank and you're like here's my five-year financials and i'm raising money for an ice cream shop and the bank's like i know how ice cream shops work here's the money you're going to find firstly you got to find a way to get in front of these people and is that hard typically i think uh in 2019 through 2021 we went through an era where people like maybe venture should become more open maybe we should be more welcoming outsiders maybe this warm intro thing is like a little too much.

1:11:42Turner Novak:And then I think AI, everyone's like, there's so much slop and there's so much scaled outreach.

1:11:49Charles Hudson:I now I'm going to go back to human filters and put more weight on those because it's too much to process without that. And if you're new, you maybe don't have the relationships. You also probably don't even know how to tell your story in a way that it works for VCs, which is different than the way it would work for a banker or even for an angel. and third there's a there's a set of process and style steps around how you want to fundraise that you might not know and so i think we can help people with that in the beginning and many of the people i invest in they don't they don't know what they're doing when they go out to raise their

1:12:20Turner Novak:first company also recruiting and hiring is hard when you're doing it for the first time if you're not embedded here in the network you didn't work at google you didn't work at facebook you didn't go to stanford or berkeley and that's one of the risks where vcs like well can you hire good people around you like well yam lakoon probably will be able to hire great people shouldn't have a problem yeah so then what are you looking for then when you're meeting these people and you're like

1:12:41Charles Hudson:you know there's you're unrated yeah you start to rate them i think the biggest thing i've learned is one it really does help if you've been in some kind of zero to one experience um it doesn't have to just be a startup it could be you started a non-profit you started You're a college kid who started a club at school. You worked at a startup not as a founder, but you were one of the first 15 or 20 people. I need to know that the chaos of zero to one won't phase you. Does it phase a lot of people? Oh, man, does it ever. Especially I find people who come from highly structured corporate backgrounds.

1:13:17Charles Hudson:The lack of structure, it tends to paralyze slash overwhelm them in many cases. Not in every case, but in many cases, they're like, wow, this is hard. they're either too slow or too tentative or unwilling to or they want to recreate everything they had at their old shop can't make decisions there's like a lot of failure votes there the other thing i'm looking for this is like very squishy in some ways but i don't want to see it people who have untapped management potential management potential i mean a lot of people where like they were an individual contributor and they worked at a company where their job was small by design because the company's like, look, if you leave, we can't be dependent

1:13:56Turner Novak:on you.

1:13:57Charles Hudson:You're an individual contributor. So we're going to keep you in this box. So they're hiring, strategy, fundraising, budgeting, charisma. All of these things have been like suppressed because they've never been able to use them in that environment. And if you put them in the environment of being CEO, like I tell our team all the time, we're mostly hiring CEOs who've never done this before. So our job is to try to project for whom will the added responsibility be something that causes them to flourish as opposed to shrink.

1:14:29Turner Novak:I kind of think about it as like, would this person be a good public company CEO? Yeah. It's like part of the, it's not everything, but like, that's what you hope, right? You hope in 15 years, they will be leading the earnings call, like after they rang the bell a couple of weeks ago. And like, that's really, I think everyone's goal really at the end of the day.

1:14:49Charles Hudson:I agree. And I think what helps give me confidence is we've seen a lot of people in the last 12 years go from rough around the edges or inexperienced to quite polished and successful and effective in three years. So I know for the right people, for the right people, the development can be very rapid.

1:15:11Turner Novak:What have you found to be the traits of the people who can get to that development? Like when you're sussing out, like, do I think you'll be that person? Like, are there other things you're kind of looking at?

1:15:21Charles Hudson:A lot of times I'm trying to figure out, like, what does this person know about this problem they're trying to solve and how do they acquire that information? And what can I glean about the way that they go about problem solving for how they gleaned information? And there's something about me that's just like, oh, I read a lot of stuff online. I'm like, well, you just go talk to people or go, like, get closer to the actual work. So that's a good indicator. People who are like getting closer to the problem, essentially. I think part of the problem is I think founders now know that like urgency is something that VCs are looking for.

1:15:54And people will sometimes fake a level of urgency during a fundraising.

1:15:58Charles Hudson:It's performative. Then you start working with them, you're like, oh, the you that was fundraising was a lot more urgent and driven than the you that's running the company now. Interesting. I've seen this happen in a few cases where people have adopted a personality that doesn't survive.

1:16:15Turner Novak:I've definitely seen our calls on Thursday and we're closing around in 24 hours and you need to make a decision. Kind of an urgency that was not real.

1:16:25Charles Hudson:It was not real. Or I see people who are lightning fast on every reply during a fundraising process. And you're like, well, that's not really what the email experience of dealing with you is like on a regular basis. or the follow-up. But part of this is we're trying to make speculative bets on unproven people. And I'm like, if we're right 10 or 15 % of the time, we're going to do really, really, really well with this pool of people because the pricing dynamics make it such.

1:16:55Turner Novak:One thing, maybe slightly different topic that I think you maybe have an interesting opinion and perspective on, you actually made some videos. Oh, a lot of videos. So if I'm somebody who thinks I really like investing, made some good angel investments, or I'm working in another fund, I want to start my own fund. I want to start turning Novak Capital, which I mean, Banana Capital, I've done it. But so what do you usually go through with people when they say, hey, I want to start my own venture?

1:17:26Charles Hudson:During the pandemic, I had so many people who were reaching out.

1:17:30Turner Novak:And every call I had was the same. I was literally one of those people, I'm pretty sure.

1:17:37Charles Hudson:I was like, I'm starting my own phone. Yeah, yeah, yeah. But I had people who, everyone asked me the same questions. And I'm like, I have an hour for you, because the pandemic, I have a bit more time. 48 to 50 minutes would be fund admin, and how do I get started, and what do I need to know about LPs? And the last 10 minutes would be the stuff that was actually unique about them. So we'd finish this hour, and people would be like, this is great, when can we talk again? I'm like, well, what? Well, not anytime soon. We just spent an hour together. And I realized that I wasn't getting what I wanted out of that hour.

1:18:11Charles Hudson:So I made a video series, which is like, this is everything you need to know. And I tell people, I'm going to give you an hour. I probably won't be able to give you another hour anytime soon. But you get an hour. You have two choices. You can like, there's an audio version, there's a video version, there's a text version. You can consume this thing that I built. And we will spend the majority of the time talking about the things that are uniquely relevant to your fund. It will be far more fun for you. You'll get way more out of it. You don't have to do that. You can also just not read it and we can spend the hour and we'll probably spend a bunch of time on stuff that you could have read.

1:18:50Charles Hudson:And I am happy to spend that. I've agreed to spend the hour with you in either case. And I've had three people who, now three, before I talked to you last time, I was two, now three people who've like watch the videos. I'm like, I don't want to be a fund manager.

1:19:06Turner Novak:And I'm like, well,

1:19:07Charles Hudson:they're like, well, basically what you've told me is like the investing part is only one third of the job. I'm like, yeah, you have a management company to run, which is like running a law firm or an accounting firm. You have to go fundraise for your fund. Yeah. And then you get to invest too. So if you really like investing, being a fund manager is more of a management job than an investing job for a lot of people, especially if your firm grows in size. Like we have 14 people. well, I spent like a non-trivial amount of time on non-investing things in addition to investing. And so I was like, if you really want to be an investor, like find a structure that allows you to invest without all the overhead of.

1:19:43Charles Hudson:So we had our first emerging manager in residence with us for a year.

1:19:47Turner Novak:Oh, interesting. We never really talked about it.

1:19:49Charles Hudson:He's a good friend. He's closing his first fund, I think next week. And I was just like, hey, if you want to raise a fund, you can hang out with me for a year and I'll help you figure out how do you size a capital call? Why do LPs get irritated when your K-1s are late? How do you pass tax and audit? How do you choose the tax and audit? I'm like, I'm going to help you see all of the things. So you at least know what you're signing up for. Because I think most people are like, I want to start a venture fund so I can raise enough money to invest. Well, that's like not great. You might be happier doing one-off SPVs.

1:20:23Charles Hudson:You might be happier with a smaller operator fund that you run on the side. but like running an institutional venture capital firm is really three jobs. And I feel like when I explain to people, they're like, oh, I thought it was just like an investing job. No, not as a founder.

1:20:38Turner Novak:Are these videos public anymore?

1:20:41Charles Hudson:Yeah, they are. They're like, it's like a public secret.

1:20:43Turner Novak:It's like a Notion page I have that I freely give out to people. Can I throw it in the description and people can watch it if they want? So then they can watch all those. They'll pause. They'll come back after 50 minutes or whatever. So then what's the last 10 minutes of the conversation? Like, how do you usually go through, like, what makes you unique?

1:20:59Charles Hudson:Honestly, like, the main thing, and maybe you've experienced this because I know people come to you for advice too now. People are just like, this is my strategy. I'm like, it's not unique. Like, what do you mean?

1:21:10Turner Novak:What's usually not unique about what they say?

1:21:13Charles Hudson:Usually it boils down to, like, I'm a smart person with a good network. I'm like, so is every other person you're competing with for capital. They believe that to be true also. So I'm also on the investment committee for Screen Door, which is a fund of funds for emerging managers. Through that, I've seen, I was like, wow, some of these decks are really bad. And they're not like bad design. They're not like bad content. They fail at the core question, which is the most important question I ask myself every day. Why did the founders that are in our strategy, why are they going to pick us? it's a right to win.

1:21:52Charles Hudson:I'm like, I don't know. I don't know about all that stuff. All I know is that like, we have to have a really clear reason why. I'm like, I think for these first time founders that are post idea, pre-product market fit, we are one of the best landing places for those people in terms of the amount of support you're going to get, the founder community we can plug you into, the amount of you're around we can speak for and the help we can give you in your first two years. I think we're very good at that work. Are other people good at it too? Absolutely. As long as that's true, I think we should, and we do our work in like maintaining good relationships with our network, we should attract the kind of founders that fit our strategy.

1:22:28Charles Hudson:Half the people I meet, I'm just like, do you want to co-lead seed rounds? I'm like, great, here's the top 10 seed firms. Who are you going to beat? Who are you going to like, who are you going to bump down the stack so that you can be in the top 10? Or what are you doing that's interesting? And sometimes I meet people and I'm like, it's you. It's a cult of personnel. Like, it's really you. Like, you are the main attraction. And like, you should just lean into that. Like, well, our strategy, your strategy is like, you're more interesting than like the strategy. And in some cases, people tell me strategies.

1:22:59Charles Hudson:I'm just like, I just don't think that will work. I don't think that's available to you. I met someone who's like, well, we want to like lead top tier series A firms. Well, how are you going to beat Sequoia, Andreessen, Lightspeed, Index, GC? And their answer, I found to be utterly uncompelling.

1:23:12Turner Novak:What is the average bad answer look like when it's like, I'm going to get the hottest companies and I'm going to beat all the best firms?

1:23:18Charles Hudson:I think most people I meet think of venture capital like stock picking, which is, oh, if I identify the asset, I can just go buy it. I'm like, no, no, no, no. If you identify the asset, you have to convince them to sell you equity. Yeah, you have to convince the asset to pick you. That's right. I'm like, the stock picks you. It's not you pick the stock. And I think this is a fundamental misconception I find in a lot of first-time fund managers. The other one I find is I meet a lot of people who are spinning out of established platforms. And I talk to them, I was like, well, how much of your success do you feel like came from the domain behind your email address?

1:24:00Charles Hudson:People were just like, none. I'm like, none? You don't think it helped you at all to have like the at famousvcfirm.com which I was like, none? I'm not asking you to say all of it. That would be disingenuous too. But I find like those people have a different problem, which is for them, the whole business of running a fund is usually an abstraction because they have an IR team that raises the money and a finance team that does the wires and a tax, like there are all these functions that are abstractions to them. Yeah, that's how I describe it to a lot of friends

1:24:33Turner Novak:who have been from that. It's like all the teams that you have, like the departments, like there's like 10 different teams that do these things. I just do all that stuff. myself and like i mean it's just everything is different like my i mean my marketing is like i make memes and i have a podcast that people listen to and like that like it's totally different than what your firm does for marketing yeah my capital call strategy is i just call 25 and i tell my lps a quarter or two ahead of time when the capital call is probably going to happen yeah based on but there's like teams that like have that strategy.

1:25:09Turner Novak:Maybe we have like a line of credit to like

1:25:11Charles Hudson:bridge.

1:25:12Turner Novak:Yeah. And like it's like it's totally different. And like the fundraising, it's like the IR people that sometimes you join the calls. Like I have to do all that myself. It's pretty hard. It's pretty hard.

1:25:23Charles Hudson:There's a lot of stuff that goes into it. And you have to do all of these things. So I tell I was like, oh, the first fund, it's kind of not as bad because you don't have an existing portfolio to service and you can just decide to not meet companies while you're fundraising. You get the fund two, three, and four. You're like, I have like a whole business over here called my existing portfolio that I have to continue to run. Yeah. While fundraising, it's hard. My issue is I keep meeting companies while I'm fundraising.

1:25:44Turner Novak:Me too. It's always been, it's like, man, I just really need to spend more time in this, but there's just so many cool people you want to meet still. So it just, you don't, it goes from like, there are five people doing it full time, 500 % of the time, whatever, to me doing it like 20 % of the time when I should be doing it 500 % of the time. It's hard. So one thing you've talked about, you've, you've written about this, you talked about there's two kind of deserts in venture capital there's the first desert and the second desert the first desert deserts out there you maybe we can talk about what it is you can talk about your experience going through these deserts i don't actually know what the second desert is like you kind of talked about it so when you started precursor first fund you went

1:26:25Charles Hudson:through this process we just talked about so what was that like i think i talked to like 300 lps i I would have talked to more. I couldn't get more people to talk to me. A lot of people were just like, I don't like your portfolio construction. It's too many companies, not enough ownership. And I respect that. I think for a lot of LPs, portfolio construction is close to religion. And so I just accepted that. And it was hard because I didn't really know what I was doing fundraising. I was like learning by doing. I'd been at Uncork, but Jeff did all the fundraising. So I'd observe. It turns out observing and doing are quite different when it comes to fundraising.

1:27:02Charles Hudson:And also, I didn't, in the beginning, understand what was my LP fund manager fit. I didn't know who liked us. And it took me a long time to figure out, like, oh, we're not really that popular with fund-to-funds and big endowments because our fund is small and our portfolio construction. But family offices and smaller institutions, they seem like what we do. So let's spend more of our energy there.

1:27:23Turner Novak:So how do you qualify LPs then when you're doing your very first fund? How should I think about who I should talk to?

1:27:29Charles Hudson:I think it's really important to understand what are the things about your fund that are potentially problematic. So I'm a single GP. And when I started Precursor, I thought, oh, the single GP thing is going to be the real sticking point. So I'm going to qualify everybody.

1:27:44Turner Novak:And a lot of people are like, you know, I did Steve Anderson's fund a long time ago.

1:27:49Charles Hudson:I did Sock's fund. He's like, I've done solo GP. That wasn't as much of a disqualifier as I thought. The real disqualifier was portfolio construction. and I didn't know that when I started so then I was like oh well I have to like make sure people are at least open to my portfolio construction otherwise I'm going to waste their time and my time and I'd rather not do that yeah um and then I started saying like okay well how big is our fund how big of a how big how much of our fund do I think an LP would like to be a lot of LPs I met were like well we don't want to be more like you know procedurally we can't be more than 10 % of fund for some people.

1:28:27Charles Hudson:And like in practice, 20 % is about the max. So I'm like, well, I'm raising a$15 million fund. I need to find people who can write one to$3 million checks if I want to get this done. Because people who want to write a$5 million check, they're probably going to say, I don't want to be a third of the fund. Yeah.

1:28:42Turner Novak:It's too much exposure.

1:28:44Charles Hudson:And then I was like, well, who writes those funds? And ironically, most of the advice I tell people is go find a fund manager who's one to two funds ahead of you, who closed recently. those people generally have the best intel about who's actually deploying and the kinds of lps that fit your filter um but it's the hardest part is like i think figuring out like because i i don't know if you had this experience i've gone and talked to people and they're like i just had this meeting with this lp they suck they're the worst i'm like that's my largest lp yeah or they'll be like this i'm like ah this person's so difficult they'll be like oh my god that person loves my fun they've been super supportive and i'm just like yeah it's like your mileage may vary

1:29:22Turner Novak:It depends, yeah. So did the pitch like evolve at all over time? Like did you change anything with your pitch or was it more so like dialing in on specifically? Oh, I did.

1:29:31Charles Hudson:I changed one big thing. And I see this less today, but I still do see it sometimes. When I started my fund, it was right when AngelList had started doing SPVs. And I was friends with the AngelList guys. So I went to their office. They're like, you know what would be kind of novel? What if you had this small fund and you just ran SPVs? This is in 2014. What if you ran all of your follow-ons on our platform as SPVs? You can invite your existing LPs, and we have this vision of eventually bringing outside capital to the platform. It would allow you to keep your fund-level reserves low, continue to participate in the follow-ons of your best companies, and then you have economics on this stuff outside of the fund.

1:30:14So you get basically single company.

1:30:17Charles Hudson:You get an American-style waterfall. You get this better deal over here.

1:30:21Turner Novak:Imagine doing an Anthropic SPV with that, and you get paid to carry around. It doesn't matter how the rest of the fund does. Doesn't matter. And LPs also are excited about that. Give us some Anthropic. That's right.

1:30:34Charles Hudson:And I did all that, and it was in the deck. I went and showed somebody who's been doing seed investing longer than I am. And all of the novelty and the fun SPV thing, it was all on the front of the deck. It was like the lead was innovating on the seed model. This person was like, you don't understand LPs. This is going to scare the bejesus out of them. This is like too much innovation, too much novelty. I was like, what should I do? He goes, put this in the end, in the appendix. He's like, you want vanilla ice cream with sprinkles. And I was like, oh, and I didn't really appreciate what he meant.

1:31:17Charles Hudson:and I took that first version of the deck to people and they were just like, I don't even know how to explain this to my committee. There's so many moving parts. I'm like, not really. It's one moving part. It's really this. But I was like, oh, wow, to you, this feels novel. And I think novel is good. And for you, novel is scary. And it was a good reminder to me that different people have different preferences. And that leading with the novelty was fun for me, but not fun for the audience. I was trying to convince to come invest in our fund.

1:31:49Turner Novak:Interesting.

1:31:50Charles Hudson:Okay.

1:31:50Turner Novak:And then, so the first fund was$15 million. What was the kind of like the evolution of the fund strategy over time? Yeah, then we did$31,$49,$85, and$66. Okay. And over those different periods, like, did you have any changes to the strategy? Any like changes to the LP base? How did you?

1:32:12Charles Hudson:I had a lot of changes to the LP base.

1:32:13Turner Novak:we added a lot of foundations and funds,

1:32:17Charles Hudson:two, three, four, and then five.

1:32:20Turner Novak:It's interesting. In fund one, we had a lot of family offices and individual GPs who could underwrite direct deals. So I'd bring them SPVs and they'd be like,

1:32:29Charles Hudson:that company's interesting. I'll put a little bit of money. Oh, that's kind of cool.

1:32:32Turner Novak:And then we had all the foundations. They were like, hey, no fair.

1:32:35Charles Hudson:We don't have a direct team. So you should do an opportunity fund. I'm like, would you fund it? They're like, absolutely. So we did an opportunity fund. And it was really small because a bunch of my other LPs were like, well, I already have exposure to series A and B companies through other vehicles. I'm with you to get the early stuff. If you need me to do the app fund, I'll do it. It's really not my preference. And I was like, oh, I just spent a bunch of time raising this off-cycle app fund that people aren't as enthusiastic about as I am.

1:33:04Turner Novak:Interesting.

1:33:05Charles Hudson:And then for a while, it was only me writing checks. and then like the check writing team expanded. Those are probably the only meaningful changes. We're still sub$100 million, still doing predominantly pre-seed with some seed, still trying to get in early. I can't think of too much else that's changed. Another lesson I learned for our fourth fund, which ended up being$85 million. My original goal was I want a$20 million kind of breakout op fund. And I was like, main fund should be like$65 million. And I went to my LPs and they're like, please don't make us take two small funds to committee. It's so much work to get ready for committee and to do it for two small funds.

1:33:48Charles Hudson:I'm like, well, they're not stapled. They're like, thank you for not stapling them also, but please don't make us take these two things to committee. I was like, okay, I hear what you guys were saying. I said, what if I matched them together and had some liberal, but defined and bounded crossover provisions such that the 85 functioned more like two different funds. Two funds.

1:34:09Turner Novak:Yeah.

1:34:10Charles Hudson:They're like much better. So that's what we did. And then the fifth fund, I was like, you know, we need to be somewhere between 60 and 75. I don't need the appendage of a growth vehicle for this one based on what I know about the world. And we also raised that fund. We started pre-marketing before SVB crashed. Okay. And everyone's like, we love you. We have all the money in the world for venture. Then SUV crashed and they're like, we don't know if we have any money at all. And so I went and tinkered with the sizing of our last fund. I was like, hey, this is a weird time to raise. A lot of people have existential questions about venture and the U.S.

1:34:50Charles Hudson:banking system. This is probably not the time to like force the issue. Yeah, that's fair.

1:34:55Turner Novak:And then so is this this are you in this like second desert phase? Like what is this? Yeah. What is the first desert?

1:35:01Charles Hudson:I think the first desert is like, you're just trying to stay alive for your first three funds. And there's all these programs. There's RAISE and there's Emerging Manager Circle. There's all these programs that want to help you be successful. There are LPs who have dedicated pools of capital to keep you in business. It's like being in a warm blanket. People are trying to make you successful. They're trying to support you. there's a lot of like peers going through the same thing that's the first desert if you get through fund three and get to fund four you made it right like it's over

1:35:38Turner Novak:like you've navigated it all and you're good

1:35:40Charles Hudson:but a lot of stuff goes away a lot of your LPs who helped you with the first three funds are like well that's the business we're in we're in the one through three business then I was like well who does four and beyond they're like it's for you to figure out sir and you're like no longer emerging but you're not Sequoia you're not like so established that you're a no-brainer for people. And also, like, I find when I would, when I got to fund four and five, I'd go talk to my emerging manager friends. And their problems were problems of survival, and mine were problems more of, like, scale and growth.

1:36:11And I'm like, oh, I remember being really wound up

1:36:15Charles Hudson:about the thing you're talking about. It just isn't my problem anymore. I have different, it's not like, no shade. It's like, I have different problems now. I have problems of, like, figuring out which people on my team I'm going to promote and figuring out what I want to do with my LPAC and figuring out like, what is the longevity of our firm? I was like, I said, taxes. I like different problems now. But also - Yeah, we got distribution.

1:36:37Turner Novak:Distributions, yeah. When do we sell? These are good things. Like, yeah. Like we're going to make a bunch of money for everyone,

1:36:41Charles Hudson:but like, man, this is a hard decision. It's a hard decision. And then it's also just, I was like, I have fewer peers. And the people who had advised me when I was fund one through three, most of them had retired or were like far less active in venture. So I'd go to them and they're like, I'm kind of out of the game. And so you find yourself having to like recreate from scratch kind of a community and support system when there are just far fewer people that you know who are still around. So really like the challenge is just like never go away.

1:37:17Turner Novak:It's just like on the company side, people are like scaling from zero to a million, from 1 million to 10 or 100 to a billion. Like the challenges are always there. Like there's something.

1:37:29Charles Hudson:They're just different.

1:37:32Turner Novak:One last thing I wanted to ask you about. You wrote a post about the last 250K effect. So what is this concept of the last 250 grand?

1:37:43Charles Hudson:I started noticing this like very strange phenomenon where I'd have these companies and I'm just like, guys, you got to cut burn. no, we can't cut burn. Everybody here is great. I'm like, okay, fine. We got to like cut one of these, but no, we got to work on everything. Everything we're doing is like needed and essential. And like, we got to do it all. I'm like, okay, fine. Then the company gets down to, I just picked the last 250K because that seems to be about where it happens. And they're just like, oh, wow, we have like four months of cash left. Okay, we're getting rid of our office. We're like selling all of this stuff.

1:38:18Charles Hudson:We're canceling this like middling project and we're firing this person on our team who's not operating and we're going to laser focus and put all of our energy behind this one product we have that's working. And I'm like, it could have, and they're like, oh my God, I was so afraid to make all these changes. And because I was forced to, I realized that like our company was bloated to make all these changes. And this is so much better. I'm like, it could have always been this way. It could have always been this way. But you needed to experience this like weird near-death moment to get the level of focus to do the things that are necessary for the business.

1:38:53Charles Hudson:And I'm like, I just wish I could get people to have that experience without literally getting down to their last$250K. I've had a lot of founders who, when I posted that, they're like, yeah, you're right. You know, like I thought I needed it. I was dealing with a founder who has like a medium-sized team. And I was like, you should be able to make it work with a team of this size or smaller. He's like, I can't imagine these things, these things. I was like, if you had to do it, you'd find a way. and the only reason I have this conversation is because like you don't believe you have to do it and he finally did it and he's like oh wow I'm like yeah those people weren't bad you just didn't need them and you were like conflating like if they're good I need them I was like no sometimes there are good people that you'd love to keep in the org but you can't afford them or they don't fit into the plan

1:39:39Turner Novak:yeah it's just it's almost a sense of urgency just around like once you get down to the wire you figure it out you have to But you weren't close enough to the wire to had to figure out yet. So can you get there sooner? Like I say you have 5 million in the back. You have 40 months of runway. Like, can you get there faster?

1:39:57Charles Hudson:I have a company that raised$8 million. And they said, well, here's what we're going to do. We're going to put$5 million in this other account over here. That it's our money.

1:40:05Turner Novak:Oh, interesting.

1:40:05Charles Hudson:But we're just going to run the business on this three.

1:40:08Turner Novak:Yep.

1:40:09Charles Hudson:And we're going to run it on three until we find product market fit and something that's really growing and working. And only then will we tap the five. If we cannot find it on the three, we'll figure out if we just return the five or what we do with it. But we're not going to behave as if we have three. And it was a little artificial, but it worked for them. And they have product market fit now and it's working. That's good.

1:40:32Turner Novak:Yeah, I feel like I've seen it quite a few times with teams. It's like as they get down to the 250K, it's not always that number. But just all of a sudden, it seems like things start to work. Totally. It's because of this like weird urgency thing. And you trimmed maybe like the worst engineer or you like didn't need an HR person or the ops person. And you can automate something with AI. And you're like,

1:40:56Charles Hudson:I mean, we didn't quite need it now. And like, it just magically starts to work. Shocking.

1:41:01Turner Novak:Yeah. This has been an awesome conversation. Thanks for coming on the show. I am like, my brain is very full after this.

1:41:06Charles Hudson:Yeah, this is a lot of fun.

1:41:07Turner Novak:Awesome, man. Thanks. And thank you for listening. Thanks again to this episode sponsors, Flex, Numeral, Amplitude, and Merge. If you enjoyed this episode, please like, comment, subscribe, and share it in the group chat where everyone's raising a pre-seed. Make sure to check out the back catalog of over 100 episodes with the founders of companies like Robinhood, Sweetgreen, and Mercury, and investors like Gary Tan, Alad Gil, and Chathan and Eric at Benchmark. Tune in over the next few weeks for conversations with folks like Hans Swildens, whose secondaries firm Industry Ventures was just acquired by Goldman Sachs, with Peter Rahal, who's chartered RxBar and David Protein, Michael Tannenbaum, the CEO of Figure, and my friend Shensi Ding, co-founder and CEO of Merge.

1:41:48Turner Novak:If you don't want to miss any of these, subscribe to my newsletter, The Split, linked in the description to get each episode plus a transcript emailed directly to your inbox every week. Thanks again for listening. See you next time.