20VC Raising A Solo GP Fund & Why They Are So Prominent Today with Charles Hudson, Managing Partner @ Precursor Ventures

In this episode of the 20 minutes VC, host Harry Stebbings interviews Charles Hudson, the managing partner at Precursor Ventures, an early-stage VC firm focusing on innovative hardware and software products. Hudson shares his journey from a venture analyst at In-Q-Tel to Google, Ironport Systems, and SoftTech VC, emphasizing the value of operational experience for VCs. He discusses the rise of solo GP funds and the importance of speed and conviction in early-stage investing. Hudson also touches on his investment philosophy, which prioritizes team over market and product, aiming for companies with potential for public offering. He explains his fundraising approach, fund structure, and the significance of consistent check sizes. Hudson's latest investment was driven by the founder's strong product vision and leadership, as endorsed by mutual connections. The show also highlights the importance of personal routines and staying informed with resources like Mattermark Daily and The Information.

• Harry Stebbings opens the show with an invitation for new intro suggestions for the podcast.
• Charles Hudson is introduced as the managing partner at Precursor Ventures.
• Precursor Ventures specializes in first check investments in innovative hardware and software products and services.
• Charles Hudson's background includes a partnership at SoftTech VC and experience at Google, Ironport Systems, and In-Q-Tel.
• Harry mentions sponsorships and a fun fact about mattress sales in Washington.

Now I start most episodes with welcome back to the 20 minutes VC, but I want to change it up.

This quote introduces the podcast and indicates Harry's desire to refresh the show's introduction.

Charles is the managing partner with Precursor Ventures, an early stage venture capital firm focused on first check investments in strong teams, developing innovative hardware and software products and services.

Here, Charles Hudson's role and the focus of Precursor Ventures are highlighted, setting the stage for his expertise in venture capital.

And before we dive into the show with Charles today, we have to thank our sponsors...

Harry transitions to acknowledging sponsors, indicating the commercial aspect of the podcast.

• Charles's first job was as a venture analyst for In-Q-Tel, the CIA's venture capital group.
• His time at In-Q-Tel was foundational but also showed him the need for deeper business experience.
• Charles gained operational experience at Google and in the gaming industry, and he was also a founder himself.
• He returned to venture capital after working with Jeff Clavier and helping to grow SoftTech VC.

Yeah, the brief synopsis. Know, my first job out of college was as a venture analyst for In-Q-Tel, the CIA's venture capital group.

Charles provides a summary of his early career, starting at In-Q-Tel, which laid the groundwork for his venture capital journey.

I was fortunate enough to reconnect with Jeff in late 2009, and we started talking about sort of his future vision for soft tech...

Charles reflects on his partnership with Jeff Clavier at SoftTech VC and the vision they shared for the company.

• Charles emphasizes the importance of operational experience for venture capitalists.
• He suggests that firsthand experience in operations gives VCs a realistic perspective on the challenges of implementing strategic changes within companies.
• Understanding the interdependencies within a company is critical for providing valuable advice to founders.

But until you've actually been in an organization and seen what it actually takes to change the way that a company or a group of people behaves...

Charles stresses the difference between identifying issues as a VC and the practical challenges of effecting change within a company.

• The rise of micro VC firms has made it acceptable to raise institutional funds of less than $100 million.
• Early micro VC pioneers demonstrated the viability of smaller venture funds.
• The increase in third-party services has made it easier for solo GPs to manage a venture fund without a large team.

I think that there's two reasons that it's happening. I think one is that because the micro vc folks like Jeff and Iden, and Mike Maples, and Steve Anderson and Michael Dearing...

Charles discusses the influence of early micro VC pioneers on the current trend of solo GP funds and the venture capital landscape.

So, for example, I don't have an in house CFO, I have a third party firm that does all of my kind of fund...

This quote illustrates the practicalities of running a solo GP fund, including the use of third-party services to manage fund operations.

• Charles Hudson discusses the benefits of using tools like eShares and Angela for managing venture funds.
• These tools help solo general partners (GPs) manage their portfolios without needing in-house resources.
• The implication is a reduction in the management fee overhead necessary to run a fund.

"I have a large chunk of my portfolio companies on eShares, which simplifies kind of keeping track of cap tables. I use Angela so there's a bunch of tools that have been developed that mean as a solo GP, you don't have to own all of these things in house."

The quote explains how Charles Hudson leverages eShares and Angela to manage cap tables and other back-office tasks, highlighting the efficiency tools bring to solo GPs.

• The decreasing costs of starting and managing a fund have lowered the threshold for fund size.
• Successful early micro VC funds demonstrated that small amounts of capital could yield meaningful returns.
• Limited partners (LPs) gained confidence in backing new waves of micro VC funds as a sub asset class in venture capital.

"I think that's part of it. I actually think that there's a lower threshold because people like Jeff, Steve Anderson, Chris Soka and others showed that you could take a small amount of capital and actually turn it into meaningful returns."

Charles Hudson attributes the lowered threshold for fund size to the success of early micro VC funds, which proved that small capital could be effective in generating returns.

• There is no absolute right or wrong in whether venture capital should be a team effort or an individual pursuit.
• Some successful investors like Chris Saka and Mike Maples started solo and later expanded their teams.
• The decision to be a solo GP or part of a team depends on personal preference and investment strategy.
• Solo GPs may benefit from speed and lack of coordination costs in decision-making, especially at the pre-seed stage.
• Partnerships in venture capital can be healthy and functional, as demonstrated by various successful firms.

"I think there's a class of people who deeply believe that venture is a team sport, and that firms with a variety of viewpoints and partners will make better decisions than a single individual without any checks and balances."

Charles Hudson acknowledges that some believe venture capital is better as a team sport, where diverse viewpoints can lead to better decision-making.

• Solo GPs can implement checks and balances by consulting advisors and writing investment memos.
• Investment memos help solo GPs critically assess their own investment decisions and identify any gaps in logic or understanding.
• Syndicating investments is a form of validation, as it requires convincing others in the ecosystem of a company's merit.

"So I have a handful of advisors that I tend to run things by before I do them. I actually write myself investment memos."

Charles Hudson explains how he uses advisors and self-written investment memos to maintain checks and balances on his investment decisions as a solo GP.

• Being the first to commit to a founder's venture can significantly aid in securing further investments.
• Early stage investors signal their belief in a company by being willing to commit before others.
• Solo GPs like Charles Hudson are often the first to invest, helping founders gain momentum in their fundraising efforts.

"I am not afraid to be the first commitment. I do that quite often. I find for founders, the first commitment is the hardest one to get."

Charles Hudson emphasizes the importance and his willingness to be the first investor to commit, which he sees as a crucial role for early stage capital.

• Weaknesses in investment opportunities often relate to the business model, market strategy, or understanding of the competitive landscape.
• It is less common for issues to arise with the people involved and more common with nuances of the market or strategy.
• Reflecting on investment memos can reveal areas of concern that were not apparent during initial meetings.

"Oftentimes it ends up being the connection between the product that they're building and the way that they want to market it or launch it to the public."

Charles Hudson points out that a common challenge in early-stage investments is aligning the product with the market strategy.

• Hudson prioritizes team over market over product in his investment thesis.
• He looks for markets that are not yet quantified but show potential for an inflection point in the near future.
• The approach involves assessing whether the company's vision aligns with the investor's perspective on future market trends.

"My basic investing thesis is sort of team is greater than market is greater than product, which to me means I have to have real conviction about the people and their ability to execute."

Charles Hudson explains his investment thesis and the importance he places on the team's ability to execute in markets that are yet to be defined.

• Postmates' growth was initially overshadowed by Uber's success.
• A shift in consumer behavior was critical to Postmates' inflection point.
• Comfort with technology, such as ordering a car via app, indicated a readiness for similar services.

"Postmates did not have meaningful delivery volume at all. But this was sort of in the shadow of Uber. And I think the knowledge that, hey, a subset of people are comfortable ordering a car from a stranger using an app gives us confidence that the core behavior here is not truly novel."

The quote explains that the success of Uber in getting people to trust ordering services from strangers via an app gave confidence to services like Postmates, suggesting that the underlying consumer behavior was not entirely new.

• Preference for investments where multiple trends converge (e.g., computer vision, robotics, GPS, low-cost manufacturing).
• Belief in the power of combined megatrends to create unique opportunities for building companies.
• Importance of understanding the market and the potential for decent gross margins at scale.

"The ones I like the most, though, Harry, are the ones where I feel like a bunch of different trends come together at the same time, like computer vision, robotics, gps, low cost manufacturing of hardware."

Charles Hudson expresses a preference for investments that capitalize on the convergence of multiple technological trends, which he believes can lead to the creation of particularly interesting companies.

• Uncertainty in predicting billion-dollar markets.
• Focus on identifying a large enough pool of buyers to sustain company growth.
• Emphasis on the potential for a company to become a public company instead of planning for M&A exits from the start.
• Acknowledgement of the higher likelihood of being wrong in venture capital investments.

"What I do think I can predict is, do I think there's a sufficiently large pool of buyers to help the company that I'm working with get to $75 to $100 million in revenue at scale."

Charles Hudson discusses his approach to evaluating the potential market size and his strategy for predicting whether a company can reach significant revenue milestones.

• Personal connections and shared worldviews as a basis for entrepreneur-VC relationships.
• Differentiating based on value proposition to backed companies.
• Balancing portfolio size to allow for risk-taking while maintaining personal relationships with founders.
• Various strategies exist, from deep engagement to quick, less involved investment approaches.

"I think there's a couple of different ways one can differentiate."

Charles Hudson outlines how venture capitalists can differentiate themselves in a crowded market, emphasizing the importance of personal connections and the specific value proposition offered to companies.

• Challenges of fundraising for solo GP funds due to key man risk and investor preferences.
• Similarities between venture fund fundraising and tech startup fundraising, albeit slower.
• Necessity of finding investors who align with the fund's strategy and stage of investment.
• Generalist investment approach in both hardware and software.

"The thing I will say is, the questions that you've asked are very much in line with the questions that lps ask."

Charles Hudson reflects on the fundraising process for his solo GP fund, Precursor, and the importance of aligning with investors who understand and support his investment strategy.

• Influence from co-investors and consideration of investment stage.
• Strategy to maximize returns by investing most at the lowest possible price.
• Acknowledgement of higher failure rates at the pre-seed stage and the strategy to place more first check investment bets.

"I've been influenced by a lot of people that I've co-invested with in my time at soft tech, and I also try to apply one additional lens, which is stage."

Charles Hudson discusses his approach to structuring his fund, focusing on the stage of investment and the goal of achieving the best returns by entering at the lowest valuation.

• Aggressiveness in entering companies is considered beneficial.
• It's important to reserve funds for follow-on rounds for companies that progress.
• Small funds may use other structures like SPVs for continued participation instead of the main fund.
• Limited Partners (LPs) prefer capital deployment in early-stage, high-potential companies over accumulating ownership in a few.

"It's better to be more aggressive in getting into companies. And for those that graduate to the next level, make sure that there's appropriate reserves to at least do the next round."

This quote discusses the importance of being proactive in investing and ensuring there are enough reserves for subsequent investment rounds.

• Consistency in check size is beneficial for both the investor and co-investors.
• A narrow check size range or ownership target range can provide internal checks and balances.
• Consistent investment amounts prevent over-commitment based on emotional bias towards a company.

"I'm a big fan of having a pretty narrow check size range or having a pretty narrow, if you're ownership driven, ownership target range."

Charles Hudson agrees with the approach of maintaining a consistent check size to simplify investment decisions and manage expectations.

• Charles Hudson enjoys working with startups from inception.
• Success for Precursor is defined by the ability to provide returns to LPs and support new teams annually for the next decade or more.
• Robotics, core consumer, and consumer-facing digital health are sectors of interest due to their dynamism and potential.

"If I can do a good enough job with the fund in terms of providing returns for my lps, that I can work with brand new teams every year and be kind of the person who first believed in them for the next ten or 15 years, I'd be really happy with that."

Charles Hudson defines success as being able to continually support new startup teams and be the first to believe in them, contingent on delivering returns to LPs.

• Robotics is an exciting field with significant potential.
• Consumer internet usage patterns change every few years, presenting opportunities.
• Consumer-facing digital health is of interest, though not deep health tech.

"I really like robotics at the moment. I've spent a fair amount of time looking at that space and it's one that I think is very interesting."

Charles Hudson expresses his current interest in the robotics sector, indicating it as a focus area for potential investments.

• The Information is a favored source of daily reading.
• Staying updated with industry news and trends is part of Charles Hudson's routine.

"I really like reading the information. I've been a subscriber of the information for a while and read it every day."

Charles Hudson shares his preference for reading The Information, highlighting its role in his daily media consumption.

• Waking up early, around 4:30 AM, is a key part of the routine.
• A specific coffee ritual is performed daily.
• Prioritizing tasks and tackling the most challenging ones early in the morning is a productivity strategy.

"I get up very early. I have a very specific coffee ritual I do at my house every day where I make myself some coffee with some fancy gadgetry I've assembled."

Charles Hudson describes his early morning routine, which includes a coffee-making ritual, as an integral part of starting his day.

• Recent investment was made based on the founder's reputation and recommendations from trusted associates.
• Leadership and vision around product were key factors in the decision to invest.

"One of the founders has worked for three people that I've known very well for a really long time, and all three of them tried desperately to retain this person before he quit."

Charles Hudson explains the rationale behind his most recent investment, emphasizing the founder's strong endorsements from mutual connections.

• Gratitude expressed for introductions that facilitate interviews.
• Encouragement for audience engagement through social media and newsletter subscriptions.
• Promotion of the sponsor, Lisa, highlighting their social impact and product quality.

"And again, a massive thank you to Bradfeld for the intro, without which the interview stay would not have happened."

Harry Stebbings thanks those who made the interview possible, emphasizing the value of introductions in facilitating such discussions.