Your check size dictates fund strategy | Charles Hudson, Founder & Managing Partner, Precursor Ventures
Aug 19, 2024
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Charles Hudson, Founder and Managing Partner at Precursor Ventures, discusses the evolving landscape of pre-seed investing. He delves into the distinct challenges faced by small funds in an AI-driven market and the necessity for new strategies that distinguish them from multi-stage firms. Hudson provides insights into SAFEs, the impact of policy on venture capital, and how shifting dynamics in Washington influence emerging managers. He also emphasizes the importance of transparency in fundraising and building strong relationships between founders and investors.
Syndicating pre-seed deals has become tougher as small funds shift focus, reducing co-investor networks in this space.
Small venture funds are struggling in AI investments due to high capital requirements, forcing strategic adaptations to attract funding.
Investing in first-time founders lacking networks, small funds can diversify and support innovative startups, differentiating from larger VCs.
Deep dives
Challenges in Pre-Seed Syndication
Syndicating pre-seed deals has become increasingly challenging, with investors finding it more difficult to identify suitable partners. This situation is surprising, as many in the venture capital community believe that the earlier one invests, the more active the market becomes. However, many existing small funds have grown or shifted their focus, reducing the pool of co-investors in the pre-seed space. As a result, investors are now forced to seek new sources for collaboration and to rebuild their networks within this evolving investment landscape.
Small Funds and AI Investment Strategy
Small venture funds face unique challenges in participating in the AI investment space. The trend is moving toward larger investments due to the high costs associated with building foundational AI models, which are often beyond the reach of smaller funds. Furthermore, many strong AI founders are opting to raise significant capital from multi-stage funds rather than settling for small checks, further limiting the opportunities for smaller investors. This situation compels smaller funds to carefully consider their strategies and adjust their approach to align with market dynamics.
Investing in First-Time Founders
A significant focus of small venture funds is investing in first-time founders who lack the traditional social networks and traction typically sought by larger VCs. Founders without established connections or product traction often struggle to secure funding, yet they may possess compelling ideas and innovative approaches. By prioritizing talent scouting and providing support to these previously overlooked founders, small funds can differentiate themselves in a crowded market. This strategic focus not only helps diversify the entrepreneurial landscape but also nurtures unique and potentially groundbreaking startups.
Capital Structure and Ownership Strategies
The capital structure of small funds often dictates their ownership strategies and investment decisions. Many small venture funds prioritize low entry prices over fixed ownership targets, recognizing that maintaining ownership percentage becomes more difficult as they scale. A focus on entry price allows funds to balance their portfolios and hedge against dilution risks while still accessing promising startups. This unique approach emphasizes the importance of aligning investment strategies with the realities of the startup ecosystem.
The Importance of Engagement in Policy
The role of venture capital in shaping policy is critical, particularly for smaller funds that often face unique regulatory challenges. Emerging managers must engage in policy discussions to ensure that their interests are represented and safeguarded in a rapidly changing landscape. It's essential for these managers to communicate effectively with legislators, highlighting the needs of small funds and the entrepreneurial impact they create. By actively participating in the policy-making process, emerging managers can help foster an environment that supports innovation and diversity in venture capital.
In this episode of The Data Minute, Peter Walker (Head of Insights at Carta) is joined by Charles Hudson (Managing Partner and Founder, Precursor Ventures and writer of the Venture Reflections Substack - chudson.substack.com) for a deep discussion about pre-seed deals, the differences between multi-stage and small funds, and the types of investing that work in this AI dominated market.
They also cover SAFEs, how pre-seed investing has changed, Charles' time in the National Venture Capital Association, and how what happens in Washington can affect emerging managers nationwide.
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Chapters: 00:00 Welcome 1:42 Intro to Precursor Ventures 7:06 The changes in pre-seed syndication 13:38 Setting aside reserves in funding 15:23 Competing with multi-stage funds 19:12 Distinctions in AI funding 23:09 Making the case for small funds 30:51 SAFEs and priced rounds 37:47 Handling LP concerns 39:34 Secondary selling and liquidity 43:24 Speed round questions 43:29 Most interesting sector or subsector for investment? 44:12 Most unique way that a GP has brought value to a portco? 45:45 The one question more founders should ask in fundraising? 48:16 The National Venture Capital Association
