There has been a big debate over the last few years over whether the Series A crunch is real or not. What everyone can agree on, though, is that there are definitely more seed and early stage funds now than ever before, and more people willing to give money to young companies looking to make it big.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
Charles Hudson is Managing Partner at Precursor Ventures.
Before founding Precursor last year, Hudson was a Partner with SoftTech VC.
He was also the Co-Founder and CEO of Bionic Panda Games, a mobile games startup based in San Francisco, CA.
Prior to joining SoftTech VC and co-founding Bionic Panda Games, Hudson was the VP of Business Development for Serious Business until the company was acquired by Zynga in February 2010, and the Sr. Director for Business Development at Gaia Interactive.
Hudon is also the founder of the Virtual Goods Summit and Social Gaming Summit.
He holds an MBA from the Stanford Graduate School of Business and a B.A. in Economics and Spanish from Stanford University.
VatorNews: What is your investment philosophy or methodology?
Charles Hudson: I think the best thing for me to do is to talk about this in the context of my new firm, Precursor Ventures and why the world needs another venture capital firm.
There's 300 plus micro VCs already, and the basic thesis for me is that I feel there was an explosion of micro VC funds a while back, folks like SoftTech, Freestyle, Cowboy, Felicis, and others that started as very small firms that wrote really early stage checks. All of those folks I just mentioned were extremely successful with their early funds. That early success gave them the ability to raise larger subsequent funds. What I noticed is a lot of the folks who broke into the micro VC fund by writing small checks decided to move upstream, because they were able to raise bigger funds. And, as they raised bigger funds, the idea of writing that first $100,000 to $200,000 check to a relatively unproven, unknown entrepreneur, it just became no longer as critical a part of their business model.
What I realized is, entrepreneurs who really wanted $250,000 to $1 million, before they had meaningful traction, to prove out what they were doing had value, it was really, really hard. It was hard for those folks to find that money and the only advice I had for them, as someone who worked at a bigger fund, was, 'You should go find that $500,000 from somewhere else.' Sometimes the answer was, 'Go ask angels.' Sometimes the answer was, 'Go put up an AngelList profile and cross your fingers,' but I felt like the only real change in the market was that the firms that were happy writing that check, they had moved on, and no one had back-filled. There were no new firms to fill that space that had been left vacant, and I was like, 'Entrepreneurs still need that help.' I wanted to build a firm whose thesis was really focused on pre-traction entrepreneurs and providing them with institutional capital that could help them with fund raising, critical hires and general emotional support for that first 12 to 24 months of life as a startup. I felt like they weren't enough people pursuing that model and I really like that work and wanted to make that the focus of the firm.
As you get bigger, you start having to make these decisions about, 'Well, how much of the dollars that we've raised do we want focused on first checks versus follow ons?' What I think ends up happening is you tell yourself the story that, 'Well, because my main fund is $75 million I have to own 10 or 15 percent of these companies and I have to keep that ownership across multiple rounds of financing.' My strategy for the fund has been different. I like first writing checks. If I were to raise a $50 million venture fund, I believe I would behave just like everyone else, because that's what the institutional venture model pushes you to do. So I've come up with a slightly different model, that I can talk more about once I'm done with all my fundraising, that allows me to maintain ownership in companies over time, but really focuses my efforts on getting into early rounds, and buying ownership up front, as opposed to worrying about first checks versus follow-ons.
VN: What do you like to invest in? What are your categories of interest?
CH: Some people have told me that this is controversial thing to say, but I think, in general, entrepreneurs have better ideas than VCs about what kinds of companies to create. So I started the firm and I said, 'I want to be decidedly generalist.' I have no background in deep computation or sophisticated hardware. Those aren’t areas where I think I'm an expert, but in relatively straightforward connected hardware applications, B2B and B2C software, I can really find and investment in some great teams. That's really what I plan to do with the fund. It's my goal, it's the objective of all the things that I'm working on. Its to be broadly diversified, within the domain of software, and hardware where software is an important piece of the puzzle.
Most of the markets I invest in are brand new markets, so I learn from the founders, and I try to do my own bottoms-up analysis. For me the question is always, 'How do you build a bottoms-up use case for any company or product? that you're meeting.' And I always try to start from first principals of fundamentals, regardless of whether its hardware or software.
VN: What would you say are the top investments you have been a part of? What stood out about those investments in particular?
CH: At SoftTech, some of the companies I'm most excited about are still private. Jeff led our investment in FitBit. I think that probably stands out as the strongest company that the firm was a part of, but that was all his work and leadership, not mine.
Other SoftTech companies I'm really excited about the prospects for companies like Tulip Retail, Vidyard, Top Hat, Kahuna, Drone Deploy. There's a number in that portfolio that I'm very excited about in terms of their future prospects.
A lot of the investments from Precursor haven't been announced. There's a handful that have publicly announced that they've raised money, and that I'm a part of the race. That'd be companies like Dispatch Robotics, which is building self-driving autonomous delivery vehicles. It's an incredibly talented team of people with background in computer vision and robotics. They're just really inspiring, and I thought the convergence of things, like lidar and mapping, and people's familiarity and comfort in and around robots and robotics, just made the timing for a self-directed robot delivery solution perfect.
Another one that I'm really excited about is Zenrez, which provides last minute fitness classes in conjunction with studios. They're doing really, really great work. I'm an investor in a company called Omni, which provides item level storage for things that would otherwise end up in your garage.
The others will become public soon enough.
VN: What do you look for in companies that you put money in? What are the most important qualities?
CH: I find that really, really talented people have a lot of options. They can be doing anything, and for me, the question is always, 'Why is this founder working on this problem at this moment in time?' I really try to figure what their personal motivation is for solving this problem.
I really think that startups are so, so hard. They’re so hard, and I think you need an affinity for the problem. It can be deep need to succeed. There's a lot of different kinds of of motivation that I've found can be success for startups, but I just always want to understand why this person, who can maybe have a really safe and secure job, or can be doing anything else, why is this person working on this problem right now?
I'm also really looking for a bit of a chip that's going to drive them to go above and beyond. A lot of the time it ends up being people who have felt stifled in their past job. They might have had a boss who didn't listen to their ideas, or didn't give them the level of responsibility that they thought they could handle. It's almost always people who feel like they weren't able to achieve their full potential in whatever it was, whether it's due to management, or what the company was doing, and that this is their chance to prove to the world what they’re made of. I find that those people, they really, really care about the thing that they’re building, and they go well above and beyond.
I think the other thing I always look for is, I don't want to back people who I think will do exactly what I tell them, if I give them input or advice. But I also don't want people who are so stubborn that they'll never listen to advice when that advice is right. I'm always looking for people who are kind of in between, where there is enough data that could convince them that they're on the wrong track about a decision that they've made. I use the word 'malleable.' Like, if you hit them with the hammer hard enough you can actually leave an impact, but they don't blindly fold, and follow the advice given to them by other people right away.
VN: What kind of traction do you look for in your startups? And can you be specific? Are you looking for a number of customers or order volume?
CH: I'm not traction averse. If somebody comes to me with traction I won't tell them, 'Look, I'm not investing because you've made progress.' I just feel like we're in a phase in the market right now where even traditional seed investors are looking for signal. They're looking for evidence that a given company has some amount of traction and I don’t blame them. It's a good way to separate the noise that's in the market. But, for me, having traction is actually not important. I've invested in plenty of companies that are pre-traction. In some cases they're even pre-product. It's just, the less you have to show, the more conviction I have to have, an investor, about the opportunity you're pursuing.
Candidly, it's the about team and price. I have in my mind a valuation framework where, when it comes to investment terms, I try to give people credit for having made progress. To pay the same price for a company that has a bunch of traction that you pay for a company that's really concept stage, to me, as an investor, doesn't sit well.
VN: How long does it take before you meet a startup and make an investment and how do you conduct your due diligence?
CH: A lot of my due diligence is actually focused on doing independent reference checks on the founders. My simple investment philosophy is that, in most startups, there's a few things that are easy to change, and there's few things that are hard to change. I actually think the hardest thing to change is the founders. If they’re not great, talented, insightful people, then you're kind of limited in terms of what you can do. If they pick the wrong market, you can get a company like Slack, that starts out in video games and pivots into enterprise software. That doesn't happen very often, but it can happen. I think product, ironically, is the thing that can change most often for a company.
If I know that making a mistake with the founders is the hardest thing to change, I try to limit the number of times I makes bets on the wrong people.
VN: Given that these days a Seed round is yesterday's Series A, meaning today a company raises a $3M Seed and no one blinks. But 10 years ago, $3M was a Series A. So what are the attributes to get that Seed round? Since it's a "Seed" does it imply that a company doesn't have to be that far along?
CH: It used to be that a seed round was about proving that you could build something period, your Series A was about proving you could sell and market it, Series B was about expansion and then all the other rounds were about how big it is.
I think it's not just that the seed rounds have gotten bigger, and have taken the place of Series A. I just think that there's more steps in a fundraising journey today. You can easily do a pre-seed round, an incubator, a seed round, a seed extension, a Series A. Think about that, that's four or five different fundraising rounds before Series A. That can, and does, happen. I have evidence in my portfolio that you can follow that path. The downside for founders is that fundraising is a distraction to the process of running a company, and the more frequently you have to fundraise the more peripatetic your cadence becomes. The upside, though, is you don't have to hit these hard and fast metrics. There's a lot of intermediate places you can stop along the way to raise money if you need it.
In the old days, you raised a friends and family, angel, seed round, them you prayed that you got a Series A of $3 to $5 million. If you got it, you were good, and if you didn't you shut down and you started over. Now there's just so many other players in the ecosystem that it's a more complicated formula.
The problem is that is used to be that friends and family and angel, that was pretty clearly just a bet on you. The Series A was a bet on the product you'd built. There was nothing in between, so the lines were actually pretty clear. You knew that, with your angel and friends and family money, you had to build a product that would catch the attention of a Series A investor. Now, friends and family is one thing, seed is somewhere between no product and traction for Series A, and seed guys are all wondering, 'If I write a check to this company, what are odds that they'll execute well enough to get to Series A? Because I don't want to invest in a company that can't get to the next level.' So you get the seed, and if you need the seed extension then the question is, is this incremental additional cash going to make a difference between this company getting a Series A and going out of business? At every turn, you have this new, intermediate bar to clear, and you have a person who's looking down at you, in terms of what you've done to date, and also looking up at the next round, and figuring out, can this company clear the milestones to reach the next level?
I think that's just stressful for founders. I honestly think it's made life a lot harder for founders, and I'm sympathetic to their plight.
VN: What are the attributes of a company getting a Series A?
CH: I'll tell you something that might be counter to what other people do, but it's what I believe. Every startup founder says, 'You tell me the metrics I need to hit to raise a Series A. Do I need $100,000 in revenue as a SaaS business? Do I need 100,000 DAUs as a consumer business?' I think the reality is that there is no magic number. If I said, 'Hey, get $100,000 in MRR as a SaaS business, and you'll raise money,' that's not a guarantee. You can get to $100,000 and still not be able to raise money. There's no value in me giving hard metrics. I can tell you directionally where I think you need to be, but that's probably the best I can do.
It's also inconsistent. I've seen companies with very little traction get a Series A, and I've seen companies with a ton of traction fail to get Series A. At least in my opinion, I think about what's the Series A investors calculus? They make two to three investments per year, and those investments need to be career makers for them. So, the real question is, is your business sufficiently interesting that someone else wants to make you one of the one to three investments that they make all year?
Interestingness is a relative term. Two years ago, it probably would have been difficult to raise money for a self-driving car startup. It was for Cruise. Now it's a thing. My bias is to find markets where I think the timing is ripe, that something that, today, feels crazy and difficult will seem logical and well-timed in 12 to 24 months. The reality is, if companies don't get the timing piece right, they'll probably go out of business before they can achieve their vision. That's just the cold hard reality.
It's as much about storytelling, and framing, and the timing at which you launch your product in the market, as it is about hard numbers. Think about it: if it was just about hitting some month-to-month growth rate, and some revenue floor, and churn floor, you wouldn't actually need judgment. You could just put it into a model. Most founders I know want to know the formula because they're achievement oriented people. What I try to coach them on is, 'The most important thing is you have to be in the top 10 percent of interesting businesses that are fundraising when you fundraise. What makes you interesting? Totally subjective.' Part of my job it to try to help coach them around storytelling, so that the fundamentals and facts of the business, which they spend all their time obsessing over, yields an interesting company.
VN: Given all the money moving into the private sector, I believe there's more money going into late-stage deals in 2015 than there was during the heyday, back in 2000, do you think we're in a bubble?
CH: I've been here since 1999. In 2000, the entire market was in a bubble. Everything was overpriced. There were very few sub-segments of venture that were not bubbly. Optical networking was bubbly, consumer Internet was bubbly, so was business software. Everything was systematically overpriced due to too much optimism.
I'd argue that there's probably some bubbles within venture now. I also think there are some sectors that are systematically undervalued, and there's some where I think people may be a little too optimistic about what the future will yield. The cool thing is, these bubbles tend to work themselves out. It's funny, in January was like, "Oh my god, we're all screwed. There's no acquisitions, there's no liquidity, no one's buying anything, we're all doomed.' Then you get Dollar Shave Club and Jet, and you get companies getting taken out for real money. My feeling is that any time someone proclaims deep optimism or deep pessimism, I'm like, 'Wait two quarters, it'll probably all feel different.'
VN: If we're in a bubble, how does that affect your investing?
CH: The way I think about bubbles, I think of the hardest things to do as a founder, and I've been a founder several times, it's really hard to not get caught up in what other people are doing. For example, if one of your competitors, or another company that you know, raises a $20 million Series A, and you've raised a $2 million seed, then you're like 'Why didn’t we raise a $20 million Series A? What are we doing wrong?' Most of the really good startups I work with, they're really only focused on the things that they can control, which are the problems and issues in their own startups.
I have some friends that work the in on-demand space. There was a time when there was a lot of enthusiasm about on-demand, and I don't think I'm breaking any news by saying there's less enthusiasm around on-demand than there once was. So the reality it is that, if your expectations around your exit, and the amount of money you'd be able to raise, and the terms at which you could raise it, were rooted in those really early days, you're going to be disappointed.
I try to spend time with founders before they go fundraise. Across the portfolio, I talk to a lot of seed and Series A guys about the investments they're making and how they think about valuation. One of the things I try to do is be a person that has good data for my portfolio companies about what should expect when they go out to fundraise. I really want to be a source of reliable information. If they go, 'I want to raise $4 million on a $16 million valuation,' I'll probably tell them, 'I know that's what you want, but based on where you are, and based on what I know about the Series A market, I don't think you'll get it.' Or, in some cases, they can could do better that than. The reality is that, as a VC, I'm part of many more fundraisings than any one founder is. And every founder thinks their company is, unique, special awesome, and wants to get the best terms because they're the ones that have to deal with dilution. Part of my job, as an investor, is to be a voice of reason, both positive and negative, if I feel like the plan doesn't make sense.
VN: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?
CH: I'm originally from just outside of Detroit, Michigan. I moved our here to go to Stanford, kind of on a whim. I thought it would be a cool thing to do to live in California. I graduated right towards the tail end of Internet 1.0. I had been working at Excite, then Excite@Home, and I kind of had the sense that that company was not going to be a Google type outcome. I had studied e-con and Spanish in college, so I said, 'I'm going to go do something in the world of finance after graduation, but more investment than banking or money management.' My boss at Excite pulled me aside and told me her husband was going to start a venture capital firm, and that he needed some help, so would I meet with him, and listen to his pitch and what he wanted to build and see if it was something I'd be interested in? I thought about it, I didn't know a lot about venture capital, but I said, 'This sounds like fun.' And I trusted her judgment.
So that got me working at In-Q-Tel, the CIA's venture capital group, and that was a job I held for a couple of years. I learned a ton about venture, I learned a ton about the government, learned a ton about investing in the Valley, and it was like one of those seminal early jobs. I also realized that as a new college grad that had never worked at a company, let alone a startup, there wasn't a lot of strategic advice I could really offer any of the companies that we worked with. That wasn't my role in the ecosystem, but I wanted to get to the point where I could become a trusted adviser to the founders.
I went back to business school, Stanford, really just trying to figure out, as someone who'd never had much of an operating experience, what does it mean to be in sales? What does it mean to be in biz dev? What does it mean to be general management? So I went back to business school, and came out feeling like I wanted to be a founder. I worked for a company called IronPort Systems, which was a great experience. It taught me that I probably did not have the ideal background to be a successful, world class, B2B product manager, but I learned a lot from Scott Weiss and Scott Bannister. Then I went to Google and worked with some friends there, and then spent five years working in games, including building in the background a games and media business that did conferences and market research, in and around games. It was a great experience. I thoroughly enjoyed that, it was an awesome job, and a lot of fun.
I started making some angel investments, and taking on some advisory positions, and was an adviser to a company called Zong, that was acquired by PayPal, and my friend David Marcus went on to be President of PayPal and then the head of Facebook Messenger. That kind of opened my eyes to what angel investing and advising can do when you're fortunate enough to be part of a really good team. I just really liked investing. That was 2010, right at the time when a lot of the micro VC firms were beginning to think about how to scale up their organizations, and how to get bigger. I learned a ton in that process, and wound up working with Jeff for almost five years at SoftTech.
It took me a long time to start Precursor. Honestly, it took me a really long time, because I really liked working with Jeff and Steph and I thought that there were a lot of advantages to me, as an investor having the SoftTech platform behind me. Jeff did a lot to build the brand, we'd been a part of a bunch of good investments. Personally, for me, I learned a lot about how to be a good institutional investor from Jeff. He's done a great job at building SoftTech, and it's a really well run fund on the inside. Even at my time at In-Q-Tel, because the government was our LP, I never had to deal with a lot of the back office, behind the scenes things that you have to deal with as an institutional venture capitalist. I never appreciated, before I started Precursor, how valuable it is to have that background and insight, because LPs care about the way you operate. It's important to them.
Ultimately, what I realized is that SoftTech was going to become a different firm. We were going to raise a much larger fund, we were going to have more assets under management, and we were going to become a firm that went from being a small player in early rounds, to a firm that start making fewer, but more meaningful, investments every year. And, more importantly, having a longer term relationship with companies across multiple stages, and I just felt like that what wasn't what I'm best at doing. I felt like I was best at going the old thing that SoftTech did, and I felt like Jeff was going to be build team around him that would be optimized for the new SoftTech. If I was honest with myself, the right thing to do was to really go back to my roots, and do the thing that I think I do well. I spent a lot of time talking to Jeff about my thoughts and he gave me some really good advice and ultimately was really supportive of me spinning out. I thought it was important to work with him in replenishing the partnership and team before I moved on, but it was a really hard decision.
VN: What do you like best about being a VC? What makes you excited?
CH: The big thing for me is that, when you're an entrepreneur, you live and die for successes of your own company. As a VC, the thing I like about the stage that I invest in, is the people I back, they're really hungry, and they have really great ideas. Honestly, capital is the one thing, many times, standing between them and success. This sounds kind of cheesy, but I get so much joy from seeing them succeed. It's the best thing in the world when a team that I backed comes and tells me they've closed a partnership, or they shipped a product, or they got a big, new customer. I get so much pleasure, because, to me, it's clear when I meet them they've got all the ingredients that they need to be successful, other than money, and maybe some occasional advice and emotional support. I feel really lucky that people pick me. That they give me the chance to invest in their companies, and be along for the journey as they try to build something really interesting and successful.
VN: What is the size of your current fund?
CH: I cannot yet say because I haven't closed it.
VN: What is the investment range?
CH: Between $100,000 to $250,000. Over the lifetime it's hard to say, but my goal is to participate as long as it makes sense for an early stage fund to be involved.
VN: Is there a typical percent that you want of a round? For instance, do you need to get 20% or 30% of a round?
CH: The one philosophical difference between my fund and a lot of other is that I'm not ownership oriented, I'm access oriented. My view is I'd rather be a really small shareholder in an amazing company, than a large shareholder in a company that has a mediocre outcome. So we don't have hard ownership targets at the fund.
VN: Where is the firm currently in the investing cycle of its current fund?
CH: Since we haven't closed yet, we're pretty early.
VN: What percentage of your fund is set aside for follow-on capital?
CH: There’s some sensitivity around that part of the strategy, but I will say it's an unconventional approach.
VN: What series do you typically invest in? Are they typically Seed or Post Seed or Series A?
CH: Candidly, I don't even know what pre-seed means. The reason the term even exists in our vernacular, I think, is because what seed investing used to be has changed, and those firms just haven't renamed their stage, and I don't blame them. So I tell people that this is classic seed investing. My focus is really on companies where the core viability of the idea, or concept, is unproven. What you’ll probably see is the vast majority of investments i make would broadly be classified as pre-seed. You'll see a little bit of stuff that looks more like institutional seed, and occasionally you'll see a Series A.
VN: In a typical year how many startups do you invest in?
CH: I'm still working that out. It's still early in the fund, and I'm working out exactly what the right pace should be for the fund.
VN: Is there anything else you think I should know about you or the firm?
CH: I feel like I found my thing. In a world where a lot of other venture funds are changing their strategies and evolving, I'm pretty confident that this is what we're going to be doing at Precursor for the life of the fund.