He’s been such a trusted voice in the VC ecosystem for so many years. I grew up reading his blog (and now his Substack) and have watched his journey in the emerging manager ecosystem closely. Which is why what I’m about to say feels strange to me. Even though it’s true.
Charles Hudson isn’t an emerging manager anymore.
We spent an hour with Charles earlier this year to hear about Precursor Ventures Fund 5 and the journey that led him to that milestone. Some of the highlights of the discussion from the virtual event included:
- How Charles found LP-Portfolio Construction Fit
- What “building relationships” with LPs actually means (it’s not what you think)
- When and how he decides to sell via secondaries
- What a GP risks losing as they scale up from fund to firm
The Portfolio Math That Some LPs Couldn’t Grok
Charles makes 80 to 100 investments per fund. Most LPs told him this would never work. Some said they’d invest if he cut his portfolio by two-thirds. Others called it “spray and pray.”
“I can show you math that this works,” Charles explained. “And they were uninterested in the math. I was like, this is a belief. This isn’t something you’ve reasoned your way toward.”
He describes LP attitudes toward concentrated vs. diversified portfolios as “quasi-religious beliefs.” No amount of data was going to change minds.
His solution? Stop fighting and find believers instead. Charles chose to pursue a strategy he believed in rather than conform to what most LPs wanted. He found his people instead of changing his strategy.
What “Building Relationships” Actually Means
If you work in the startup ecosystem as a founder or an investor, a ton of your time goes to relationship building. Coffees, dinners, meetings, Zooms. But Charles takes a different (and I would argue, a more efficient) approach.
“You know how I build relationships with people? I work with them…if I want to build a relationship with the founder, I give them money and I help them build their company in whatever way I can.”
He also gave us some specific examples of how he built relationships with LPs over the course of building the firm.
- Some responded to his writing—they felt like they knew him through reading his work
- Others wanted to grab drinks every time he visited New York
- Some needed multiple pitch meetings over time
Charles also noted that spending time with LPs in non-pitchy environments made them far more honest about what they actually care about.
And this bit I’m about to share was an unlock for me, and should be for you if you’re actively pitching LPs. Charles made the point that relationships with potential LPs don’t have to result in that LP writing a check in order to be mutually valuable. As one LP told him directly: “I’m never going to give you money because I don’t believe in your portfolio construction. But every time I meet somebody who does, you’re the first person I send them to.”
The conversion rate on those referrals? “Actually quite high.”
There’s 2 and 20 (And Now Another 20)
For most of Charles’s career, venture was “a long only buy and hold business. You couldn’t sell, even if you could, it was just considered poor form.”
That’s changed completely. With IPOs rare and M&A limited, to generate DPI for LPs you need to be open to selling private holdings to someone else.
Here are some of the things that Charles and his team think about when considering a secondary sale:
- When a company reaches Series B or C (usually after 5-7 years for Precursor’s pre-seed investments), they plan to sell 20% of their position.
- They stick to situations where the lead wants to buy shares as part of the round.
- If a CEO has rebuffed a secondary offer, Charles won’t entertain the conversation.
Still, it’s always a concern for Charles and for his LPs that Precursor could be selling too much of a great company, too soon. One of Precursor’s LPs indicated as much when they told Charles:
“We’ve noticed that in a couple of cases we’ve had funds that got us our money back fairly quickly, they got to one X. And those funds were never our best performers. In some cases they just sold too much of the good ones too soon.”
Charles also pointed out that LPs have different desires at different points in time. Right now the scale tips heavily toward them wanting DPI, but four years ago during the ZIRP era it was all about TVPI. This is where a long term outlook can really help a GP when making decisions to sell part or all of a position in their portfolio.
The Job You Signed Up For Changes
“I have to fight harder to make sure that investing is still a big part of my day. And that’s not just supporting existing portfolios. That’s also meeting new ones.”
“Fund 1” Charles: He’s the sole GP and sole employee. Lots of time to invest, no legacy portfolio to support, no team to manage, few LPs to manage.
“Fund 5” Charles: 14 people on his team, many LPs, a head of investor relations, and a large portfolio.
There’s a tension that arises as a firm scales up. For instance, how do you keep investing when the job pulls you toward becoming your firm’s full time CEO? “I made a decision a while ago that I didn’t want to become someone who manages a firm but doesn’t invest,” Charles said. He also recognized that other GPs have other preferences and make a different choice:
“I have friends who’ve made different decisions. They’ve decided, hey, I’m going to become effectively the CEO of my venture firm. Because that’s the path to scaling it.”
He also noted that the tension may not become apparent until you’re literally at the point where the tension appears.
The Venture5 Take
Charles is known for giving a transparent perspective on the VC world through his writing and podcast, and our session with him was no different in that respect.
What stuck out most for me in the conversation is how he approaches relationship building. In short, “Do something” with the other person you’re trying to build that relationship with. Not just a coffee, or a Zoom, or a dinner, but actually work with them on something of importance. This could be collaborating on an event, writing an “angel” check into an emerging manager’s fund, co-authoring a blog post, becoming someone’s customer, or hopping on someone’s podcast for an interview. Charles definitely walked the walk on this with us, and it’s another example of why he’s so well regarded among founders, VCs, and LPs.
