Precursor Ventures just raised a second fund to zero in on pre-seed-stage startups

Precursor Ventures, a 3.5-year-old, seed-stage investment firm in San Francisco, just closed its second fund with $31 million in capital commitments, roughly double what it raised for its debut effort in 2017.

Somewhat amazingly, it has 75 portfolio companies to show from that first fund, and many more that it has been quietly funding with the second. Not only does it show how far smaller pools of capital can go, but Precursor is run by a single general partner, longtime VC Charles Hudson, formerly of Uncork Capital. He has help from senior associate Sydney Thomson and, more newly, an analyst, Ayanna Kerrison, but it’s still lot to manage.

How does he do it, and how can he identify breakout companies when he’s moving as quickly as he does? We talked with him earlier today to get an update on the firm, which is focused in part on funding women and other underserved minorities but is more broadly seeking out burgeoning marketplaces and people “who have fundamental insights that are likely to be true for five to seven years,” no matter whether or not they have founded a company previously, says Hudson.

More from our chat below.

TC: Like a lot of fund managers, the money for your first fund came mostly from family offices. This time, you say it’s more institutional money. But isn’t it challenging for big institutional investors to write smaller checks for a fund of Precursor’s size?

CH: It is still hard. We definitely have a more concentrated [investor] base. But I think people who last time around didn’t necessarily believe in pre-seed deals, who thought that it felt like adverse selection and involved too many companies and too little ownership, have changed their thinking. Now, most realize that seed investing is a continuum, as [fellow investor] Hunter Walk likes to say. They see the value of being the first money into a startup.

TC: For your first fund, you were writing initial checks of $150,000, then raising special purpose vehicles to support some of your breakout companies. Were you using AngelList syndicates to do this? 

CH: Yes, we write a small check and if we’re fortunate, we get pro rata allocation and we’ll use SPVs, some on AngelList, some [not involving AngelList]. We did 14 SPVs altogether for fund one and they’ve been a great way for us to maintain relationships with companies beyond even their Series A round.

TC: You’re often funding people who’ve never started a company before. From where is your deal flow coming?

CH: We were the first investor in the [subscription-based sports website] The Athletic because I was introduced to the founders through a founder who I knew from Uncork. Juniper Square [which makes investment management software] I met through AngelList folks and some other people who I know. Carrot Fertility [which enables employers to offer fertility benefits] I think I met through [Evernote founder turned investor] Phil Libin.

We also have almost 300 founders in our portfolio across companies we’ve backed, and they do a tremendous job of referring people. And we try to be a good partner to seed-stage firms so that when they see startups that [are too early for them] they’ll send the founders our way.

There’s a small sliver of entrepreneurs who can walk into an Uncork or Freestyle or First Round with little more than an idea and raise money. Those people totally exist. It’s a small fraction of the population, though.  I think the majority of founders we meet are coming out of another company or experience, they aren’t super famous yet, but they’re totally qualified and have a good idea and need $500 million to $1 million to make enough progress for the bigger seed funds to pay attention, and someone has to fill the gap.

TC: You aren’t the only fund backing these types of startups. In fact, most of your deals are co-investments. But you’re maybe better known in this world. Does that help in terms of securing a meaningful ownership stake? Do you have a specific target when you’re writing a check?

CH: My view is that you want enough ownership that the model works. We could probably be more punitive if we wanted — the air is pretty thin in pre-seed — but with a $30 million fund, ownership of 5 percent is plenty. We’re sensitive to the dynamics of seed funding, wherein seed investors want [a bigger ownership percentage]; if we’re taking 10 percent and they’re taking another 25 percent, that’s already well above the ownership level that a founder should [be left with].

TC: What was the math that you pitched to your investors?

CH:  Basically, I didn’t want us to be a fund where we need multibillion-dollar outcomes. Getting to a billion-dollar valuation is a big accomplishment. I think we’ve gotten numb to it, but it’s still a really hard thing to do. If you get [at an exit at that level], it should return your fund, or multiples of it. For us, though, if we have a company that sells for $500 million and we own 3 percent of it, we’re fine.

Our enemy is dilution. If our 5 percent stake ends up being where we exit, or it goes to 3 percent, we’re okay. If it goes to 1 percent, it’s unlikely that that exit is going to be material. [Working in our favor], we like capital efficient businesses [versus] the companies getting written up for raising large amounts of money [and often diluting earlier investors in the process].

TC: At the outset of Precursor, you’d said that backing women and minorities was going to be among your priorities. How would you score the firm on this front so far?

CH: We’ve made a lot of investments already and we’re doing better on gender dynamics than in fund one. Across the entire population of our second fund, 56 percent of portfolio companies have a female founder on the team and 51 percent of the CEOs are female. As for people of color, 17 percent our founders are either black or Latinx and if you add Asian founders into the mix, that percentage goes way higher.

TC: Do you feel like progress is being made, in terms of underserved populations being better able to access capital?

CH: I’m probably more concerned than I’ve ever been. I think that increased awareness about the issues that particularly black women face has not translated into them receiving more money. In talking with black female founders, I don’t get the feeling that their experience is improving, even while there are more of them, and they are stronger founders with more traction than we saw before.

TC: What are you looking for, exactly, in a founding team?

CH: I don’t care that much about traction. That’s not an important input in our model. Most companies are between five and 12 months away from a public launch, where their product can be evaluated and assessed. So the founders’ insights have to be sufficiently durable that their ideas will be true in a year and where a million dollars can get them from a lack of evidence to an indication that they’re on to something.

TC: Are you funding people who come out of industry and so know what their industries’ pain points are?

CH: Sometimes, or sometimes they’ve encountered a problem in their life that needs to be solved and is adjacent to the work they do.

TC: And how do you keep tabs on all of these companies?

CH: We probably spend the most amount of time internally on our own systems and processes that we use to keep track of portfolio companies, though at this stage, there’s no substitute for spending time with them, so half of my day each day is spent with companies that we’ve already backed.

TC: Do they also give you monthly or quarterly updates?

CH: We work out a cadence, whether it’s monthly meetings in person or over video or via something written. We don’t prescribe the form, but we say, ‘It’s worthwhile for you to report once a month so, so you can get our input.’

I find the founders who share the most information get more value out of us. Some don’t, though, and there’s only so much we’re going to impose on them.

TC: What about conflicts of interest? Given how nascent these startups are and how fast you are writing checks, are you dealing with startups that potentially compete with one another?

CH: We say no to a lot of interesting opportunities because I don’t [want to be in that position].