Why Raising Your First Round Is Harder Than Ever l Build Mode

The Changing Venture Capital Landscape

• The venture capital landscape is currently challenging, with growth being hard to achieve, and founders who are doubling or tripling their growth rates are being told that it is good but not great, and some seed-stage companies are not getting a down round, but rather no round at all 10s.
• Charles Hudson, the founder and managing partner of Precursor Ventures, has spent over a decade investing in the earliest stages of companies, backing hundreds of founders with their first institutional check before they have found product-market fit, giving him a unique perspective on the changing venture landscape 2m6s.
• The old playbook for fundraising no longer works, and founders are navigating a landscape shaped by AI, shifting investor expectations, and more competition than ever before, making it essential for them to understand the new rules of fundraising and what it takes to build momentum in today's market 4m42s.
• Precursor Ventures focuses on zero-to-one investing, making 40 to 50 new investments every year, with check sizes ranging from $250,000 to $500,000, and the firm is a generalist, investing in everything from AI to consumer companies, and backing both first-time and repeat founders 8m30s.

Investing at the Earliest Stages

• Investing pre-traction, post-idea, requires basing investment decisions on the founder and the people themselves, rather than on traction or scale, which gives Precursor Ventures a unique lens on the fundraising market and the challenges that founders face 10m50s.
• The fundraising landscape has shifted significantly in recent years, and investors are now looking for founders with tenacious personalities, good ideas, and insights that can endure for multiple years, as well as the ability to navigate the challenges of the AI era 10s.
• In the pre-AI world, a good idea had a longer half-life, and having a head start made it harder for others to catch up, but in the current AI world, the level of competition is much higher, and many companies have the same core insight and are using the same tools, making it harder to determine which company will win 1m42s.

The New Rules of Fundraising in the AI Era

• There are two dominant founder archetypes that investors are looking for: repeat founders who have done it before, and college dropouts who are cracked engineers, making it harder for mid-career people in tech with good insights to stand out 2m6s.
• The market is very founder-friendly for those who are AI founders with traction, have dropped out of a top university, and have experience as a repeat founder, but it is much harder for everyone else, including those building non-AI companies 3m30s.
• If a company is not building an AI product, it may be harder to get venture capitalists to pay attention, as many VCs believe that the best opportunities are in AI, and companies in other categories, such as consumer, may have limited venture-funded competition but also limited interest from VCs 5m10s.
• Founders of non-AI companies can try to stand out by having a unique value proposition, a strong team, and a clear vision, rather than just using buzzwords or trying to fit into the current trends, as there are many great ideas and impactful companies that can be built outside of the AI space 6m40s.

Strategies for Founders in a Competitive Market

• Most VCs are transparent about their investment interests through social media platforms like X or LinkedIn, and their portfolio investments can also provide clues about their preferences, allowing founders to curate a targeted list of potential investors 10s.
• Founders should not waste their time pitching to VCs who have explicitly stated their investment focus is on a different area, such as enterprise AI, if their own company does not align with that focus 42s.
• The current environment requires founders to be more thoughtful and targeted in their outreach, as simply sending cold emails is no longer an effective strategy, and they need to get creative in their approach 2m6s.

Valuation and Investor Fit

• Optimizing for valuation when raising funds may not always be the best approach, as the investors willing to pay the highest price may not necessarily be the best fit for the company, and founders should prioritize building a strong relationship with their investors 4m30s.
• Founders should pressure test the claims made by VCs, such as the quality of their GTM team or recruiting services, by speaking with other founders who have worked with them, to ensure they are making an informed decision 6m40s.
• The relationship between founders and VCs is a long-term one, typically lasting seven to 10 years, and founders should prioritize finding investors with whom they have a strong connection and can work well together 8m10s.

Turnover and Instability in Venture Capital

• Venture capitalists have learned that winning a deal is crucial, and they will do everything to win, knowing that once a choice is made, it's locked in, which can lead to an overfocus on valuations and neglect of due diligence on the firm's ability to deliver on its promises 10s.
• Founders should consider whether the person writing their check will still be at the firm in two to three years, as the current high turnover rate in the venture capital business can leave companies without a sponsor or advocate inside the firm 42s.
• Even partner-level positions are not safe from turnover, and having a founder and managing partner lead an investment is no longer a guarantee of stability 2m6s.
• The venture capital landscape is experiencing turnover due to various factors, including the dramatic expansion of venture firms from 2020 to 2023, leading to some people deciding that venture capital is not a long-term career option, while others are leaving to work in operating roles at AI companies 2m6s.
• Some venture capital firms are retreating or retracting, reducing their need for talent, and some individuals are voluntarily leaving the investor side to work in more exciting and interesting roles, such as at AI companies like Anthropic, Open AI, or Open Evidence 4m30s.

Challenges for Small Venture Funds

• The trickle-down ecosystem of venture capital, where limited partners (LPs) invest in major funds, makes it challenging for smaller funds to compete, and these smaller funds often have to pay higher prices to attract investments because they struggle to get people to take their dollars 6m40s.
• The traditional architecture of the venture capital industry is breaking down, making it a tough time to be a small fund, as they face significant challenges in competing with larger funds and attracting investments 8m10s.
• The venture capital ecosystem has changed, with big multi-stage funds now involved in seed rounds, having their own scout programs and accelerator programs, and competing with small funds for zero-to-one founders, making it harder for small funds to invest at reasonable prices 10s.
• Small funds can still succeed by looking for founders in places where big funds are less likely to find them, such as outside of top AI companies like OpenAI, Anthropic, and Harvey, and by having a vertical specialty where they are subject matter experts, although this can be challenging as big funds may also staff teams in the same area 42s.
• Having a vertical specialty can be effective, but it can also become less unique as the area grows and big multi-stage funds take notice, as seen in the case of AI, which has become a consensus theme, making it harder for specialist funds to stand out 2m6s.

Alternative Strategies for Small Funds

• Another approach for small funds is to build a "cult of personality", where founders want to work with them because they like and trust them, and this can be an effective way to get a seat on the cap table, as some limited partners (LPs) have noted 4m30s.
• Seed valuations have risen significantly, driven by AI mega rounds, but pre-seed valuations have been dropping, creating a "tale of two cities" where highly credentialed founders with breakthrough AI insights can access large amounts of capital, while those outside of this area may struggle to fundraise 6m10s.

The Disparity in Funding Access

• Investors looking at non-consensus areas, such as companies outside of the AI space, may be more likely to invest if they can get a good deal, as they are taking on not only execution risk but also the risk that others may not be interested in the company, even if it performs well 8m30s.
• Many great non-AI businesses with excellent metrics and growth are struggling to raise funds because they are not in the categories and markets where VCs believe money can be made, and as a result, VCs are not invested in their success 10s.
• The expectation for top-of-market growth has been rewired by companies that have achieved extremely high valuations and growth rates, making it challenging for other founders to meet these expectations and leading to a situation where anything less than vertical growth is considered not great 2m6s.

The Pressure of High Growth Expectations

• Founders who are growing at historically amazing rates, such as doubling or tripling, are being told that their growth is good but not great, and VCs are only interested in investing in companies that demonstrate exceptional growth 4m6s.
• The pressure to meet these insane expectations can lead to down rounds, but it's often difficult to distinguish between down rounds caused by macro conditions, execution problems, or the inability to achieve high expectations 6m10s.
• Companies that opt for aggressive plans and raise money at high valuations may struggle to continue on their trajectory, and down rounds can be challenging to execute, especially pre-series A, as they require believing that the company is good but the valuation is the primary issue 8m30s.
• In many cases, valuation is just one of several problems that a company faces, including market and product issues, making it essential to carefully evaluate the company's overall health before making investment decisions 10m40s.

Down Rounds and Their Implications

• The number of down rounds in pre-series A is relatively small, as they are only worth doing when valuation is a significant issue, and the real worry for founders is not getting a round at all, which means not achieving enough and having no new money come in 10s.
• As an early-stage investor, protecting oneself in term sheets is challenging, especially when deals are done on safes, which creates complexity, and the goal is to figure out if a down round will accomplish anything 2m6s.
• In some cases, down rounds can result in a company turning around, such as a company that did a big recap in 2022, went back to a low valuation, and then closed a $10 million round, but this is not always the case, and often down rounds prolong the inevitable 2m6s.

The Risks of High Valuations

• Founders who are tempted by big valuations often do not listen to advice about the potential challenges and expectations that come with them, and instead, believe they are exceptional and that problems will not happen to them 4m42s.
• The real risk with big rounds is that founders can become prisoners of their own company, having raised a lot of money and sold investors on a big vision, but then struggling to grow the business and being stuck working on something they may not believe in for three to five years 6m10s.
• This situation can be a pressure cooker for founders, who may struggle to find a way to grow the business and meet the expectations of their investors, and ultimately, may have to work on something they do not believe in for an extended period 8m30s.

Founder-VC Dynamics and Investor Exit

• Venture capital firms often move on from investments that are not performing well, but the founders of those companies still have to work hard to motivate their teams and build their businesses, which can be challenging 10s.
• High valuations in venture capital can be seductive and feel like validation, but building a sustainable company often requires a different mindset that prioritizes fundamental unit economics over rapid growth 2m6s.

Growth vs. Profitability in Venture Capital

• There is currently a pressure in the venture capital industry to prioritize growth over fundamental unit economics, which can make it difficult for founders who want to build traditional, profitable businesses to secure funding 2m6s.
• Some founders may not need venture capital to survive, but could use more capital to grow, and are instead turning to private equity or other capital sources that have a different balance between profitability and growth 4m42s.
• Venture capital is not suitable for every business, and founders should carefully consider whether they need to raise venture capital or if they can build a successful business without it 6m15s.

The Long-Term Vision for Founders

• Founders who do decide to raise venture capital should be aware that they will need to build a large, scalable business, typically with a valuation of at least $5 billion, in order to meet the expectations of venture capital firms 8m30s.
• Founders who do not have a plan to build a large, scalable business may be better off raising smaller amounts of capital from funds that are happy with smaller outcomes, such as a $500 million or $1 billion valuation 10m0s.

Choosing the Right Investors

• Founders should carefully consider the investors they choose, as those investors will be part of their company's journey for the rest of its future, and it is essential to know what they are signing up for 10s.
• Investors have different roles and expectations, and some may be more hands-on than others, so founders should understand their investor's approach and whether it aligns with their needs, such as Precursor's focus on helping companies from zero to one in the first two to two and a half years 1m30s.

Investor Support and Founder Development

• Precursor tries to optimize their firm to be good partners to founders for the first two years, and they do this by helping with fundraising, providing introductions, and sharing metadata about individual VCs and VC firms 2m6s.
• The firm also tries to provide helpful advice by spending time with each founder, at least an hour a month, to get to know them and understand how they think, process information, and what their values and pressure points are 3m30s.
• Additionally, Precursor connects founders with other founders in their network who have experienced similar problems, as this can provide more tactical and relevant advice, such as helping with issues like CPG inventory or conflict with co-founders 5m0s.
• The goal is to provide founders with the support they need during the early stages of their company, and then refer them to other investors who can help with later stages, such as IPOs, if needed 4m0s.

Peer Support and Founders' Networks

• The importance of tactical peer-to-peer advice for founders is highlighted, and it is noted that YC has done a good job of creating a community that supports and helps each other with important issues 10s.
• The concept of a "co-founder therapist" is mentioned as a valuable resource for early-stage founders, particularly those who may not have an established network in Silicon Valley 2m6s.
• The Silicon Valley network is becoming more of an insider circle, making it harder for new founders to break in, and the idea of repeat founders and Stanford dropouts is becoming more prevalent 2m6s.

Accessing Silicon Valley Ecosystems

• The "field trip" program is introduced, where founders from outside of San Francisco are brought to the city to work out of an office and connect with other founders, investors, and experts in their field, with many reporting a significant boost in productivity and progress 4m30s.
• The program has been successful, with some founders deciding to move to San Francisco after experiencing the benefits of being part of the community, and others finding ways to stay connected and access the resources and network 6m40s.
• The idea of "soft landing" programs for international founders is also discussed, where founders can come to Silicon Valley for a short period and accelerate their business through connections and meetings, with some reporting a 10x increase in progress compared to what they could achieve back home 8m50s.

The Power of Networking and Chance Connections

• The value of casual connections and chance meetings in Silicon Valley is highlighted, with an example of a founder from Canada who was able to get help with a problem by connecting with someone who had a roommate working at the relevant company 10m40s.

Challenges in Securing Funding Momentum

• The biggest challenge that early-stage portfolio companies are facing is gaining momentum for their funding rounds, and this can be achieved by finding an investor who is excited about the company, which can be a difficult and time-consuming process 2m6s.
• It now takes 60 to 80 meetings to get momentum for a round, partially due to the increased number of funds and investors taking more meetings, even if they are not entirely sure about the company's potential, because they want to stay informed about every startup in a particular space, such as AI 4m42s.
• The storytelling aspect of a company is crucial, and many founders do not have a well-prepared elevator pitch or five-minute pitch, which is essential for securing meetings with investors and getting their story across 6m15s.
• Even small details like the company blurb are being scrutinized more closely, and investors are spending more time crafting the perfect blurb to increase the chances of getting a meeting, as a great blurb can make a significant difference in determining whether a meeting is secured 8m10s.
• The use of AI-enabled tools is also changing the way investors evaluate companies, with some using AI to screen and select potential investments, and in some cases, AI may even be used to generate the initial blurb or pitch 10m5s.

AI and the Future of Investor Evaluation

• The audience is thanked for their presence, with a special mention of Morgan Little, who leads various teams including audience development, The Foundry, and Cheddar video teams 10s.

Closing Remarks and Acknowledgments

• Appreciation is also extended to the builders and the wider startup community for their involvement 10s.
• The conclusion of the segment is marked with a farewell message, inviting the audience to return for the next session 10s.