Episode #99: The Death of VC’s Short Kings, Seed Valuations Need a Correction

Charles Hudson (0:00)

The biggest risk in venture is that bending spoons is closer to being right about these values. We could be wrong by an order of magnitude. And if we're off by an order of magnitude, a lot of money will be lit on fire. And if we're off by like a multiple, if some of these companies that we think are worth 50 billion are in fact worth 15, it's probably actually okay. But if they're worth two or five, we've got real problems. And I don't know when we're going to find out the public valuations, because most of these companies seem uninterested in going public.

Mia Farnham (0:27)

It's the week of October 12th. Welcome to The Learning Corner, a Precursor Ventures podcast.

Welcome to The Learning Corner by Precursor. I'm Mia Farnham and I'm joined by our GP and managing partner, Charles Hudson, where we will be talking through the articles and goodreads that caught our team's attention over the past week. Our first piece this week comes from Kyle Harrison on his investing one-on-one newsletter titled The Death of Venture Capital's Short Kings. The two firms that built their entire identity around staying small on purpose have both scaled up within the same year. We had Benchmark raise $2 billion in June, including its first-ever growth fund, and Union Square Ventures just announced $900 million, the largest fund vehicle in its history after Fred Wilson said back in 2010 that USC would never raise a large fund. Kyle's read is that this was less a change of religion and more a response to the value chain of capital, where the decisive rounds now happen downstream and are owned by giants. So the only way to protect your founders is to be big enough to sit at that table. He also pushes on whether more capital actually creates more companies, setting Roloff's point that there are still only about $20 billion exits a year, despite venture dollars growing roughly five times over the decade. Charles wanted your more general reactions to some of the folks who did pave the way for similar sized fund vehicles now moving into a new era in their strategies.

Charles Hudson (1:51)

I think about the James Bond movie Never Say Never Again, and I think in venture, it's very difficult to say like you'll never do something. The world changes. We talked about this in our team meeting. I do think it's interesting that both of these strategy changes were made as part of a generational leadership transition. I wonder if that has created space to reevaluate some of the core tenets. It's very hard, as someone who runs one, I could say, it's very hard to abandon principles or beliefs that you held when you started. Even if the information around you changes, I think the central question in venture right now is, is it really different this time? And I think in the forecamp, there's two things I think about. One is AI does feel like the biggest tech shift I've seen since the Internet itself in terms of magnitude. And second, in my entire career in venture, I've never seen a protracted decline in assets made available to the industry. If invested dollars go up on average every year, it doesn't mean there aren't years like 2008, where you have pullbacks, or 2022 If it's generally up and to the right, then it's unlikely that venture is going to voluntarily become a smaller asset class. And if AI is a big megatrend, you could say, okay, well, that would suggest that maybe even just adjusting, as Benchmark said, adjusting for inflation, fund sizes should get larger because a dollar today punches differently than the dollar than it used to. And, you know, with Cursor and SpaceX, the scale of the outcomes is different. That's like the bull case. The skeptical case is we're in a bubble, and in a bubble, it always feels like this time it's different, and people abandon all of their rules. There's always people who hold out for a long time and capitulate right at the top. Because at the top, it feels like those are what I call expensive beliefs. And holding on to like fund size and round size and discipline, when everyone else has abandoned it, when you're the last person on Discipline Island, it's really hard. And so I think for both of these firms, though, if I were in their shoes, I would have done the same thing. Because if you're Benchmark and it really isn't different, and you realize $2 billion is too much, you can just raise less next time. No one's going to fault you. And given their historical track record, my hunch is they'll get a mulligan if for some reason the $2 billion is too much and they can't return it. They won't get an infinite mulligan, but I think they've earned the right to revisit. And same thing for USV. And if it is different, you've got to learn how to manage a fund of that size. And I think we've, the venture world, in my opinion, is going through another bifurcation, which is that firms for whom it's important to be a lead firm and write the check they need to kind of drive the agenda on the round, and people who are happy being a part of the party. And so I think if you're going to be a lead firm, you have to have a fund that's big enough to speak for the amount of capital that founders want. In the universe of founders you want to compete for. And if you're a firm that doesn't want to lead, I think you just have a lot more flexibility in terms of like check size and entry point. I think it's pretty clear that Benchmark and USV, I think culturally are firms that are accustomed to being the firm of record that leads around. That's their personality, that's their reason for being. They believe that they're good at that work. And so for them to just say, we're no longer going to lead, we're just going to tack out a check. That's how the ethos of why those firms were created. Or even I think how they view themselves in their role in the ecosystem. And so I think we are seeing this sorting adventure where there are firms who are like, hey, look, even at Seed, you're like, hey, I might need to write a five to $10 million seed check to like lead around for a small seed round. I might need to check the size. That might mean you need a three to $500 million seed fund to do 30 to 40 companies per fund at that size and have some modest reserves for the next round versus a firm who's like, I just want to get in. I'm not going to take a board seat. We're not ownership-oriented. We're access-oriented. Firms like that can exist at anywhere from 25 to $100 million in size. And I think that is like the new bifurcation that's happening in venture. We already had the bifurcation of like big firms and small firms. And now I think we're having the second bifurcation of firms that want to lead and firms that are like happy to participate.