Charles Hudson has lived in the Bay Area for the last 20 years, working as product manager, as an entrepreneur, and an investor. As such, he’s had a front row seat to a number of changes in the way startups are funded, including the evolution of numerous angel investors into so-called micro VCs into fund managers who are now responsible for hundreds of millions of dollars.
Take investor Jeff Clavier, who began sprinkling tiny amounts of money across what appeared to be a new crop of capital-efficient startups back in 2004 and soon after launched a firm, SoftTechVC, where Hudson would become a partner in 2013. By 2014, SoftTech had closed a fourth fund with $85 million. Last June, it closed on a record $150 million across two funds.
Hudson was cheering on the firm — from down the street in San Francisco. Since last year, he has been creating his own brand, Precursor Ventures, to seize on the funding vacuum creating by firms like SoftTech that can no longer write small checks. Hudson, one of few African-American VCs in the Bay Area, also sees another underserved opportunity in funding women and other minorities.
We talked with Hudson last week about how he’s approaching both missions and whether they were a difficult, or easy, sell for Precursor’s investors, who’ve given the company $15.3 million for its first fund.
TC: Why strike out on your own with a new fund?
CH: The big observation for me was that all the micro VC funds are really big now and they’ve stopped doing classic seed-stage funding. The goal for Precursor is to write checks in the range of $150,000 to $250,000 to teams that have maybe two founders and a prototype and probably not much in the way of a launched product or traction, with about 20 percent of the capital set aside to participate in [slightly more mature] companies that are maybe raising $2 million on a $6 million [pre-money] valuation.
TC: How many companies do you think you can support with this new fund?
CH: The idea is to write 18 to 20 checks per year, so I’ve made 50 investments over the last two years, including [as I was raising this fund].
TC: And investors didn’t think that was too much, that you were spreading your investments too thin? Why not go in the exact opposite direction and make lesser, more concentrated bets?
CH: For one thing, because there is so little institutional capital at the pre-seed stage, I felt like I could be more aggressive. Also, because of the rising cost of doing business in San Francisco, and because a lot of the founders I back don’t need to be here, I’ve encouraged many of them to stay where they are — in Tampa and Raleigh and Charleston and Baltimore. And it’s pretty cool to see how much more capital efficient they can be in these regions with $150,000 to $250,0000 in backing.
TC: Are you leading most of these rounds?
CH: I didn’t think we’d lead, but we do lead a lot, because without us, these rounds don’t come together. It’s sort of like, everyone is in for $25,000, but no one wants to issue terms. Believing in people early and being able to issue terms helps rounds come together.
TC: Investing in so many deals doesn’t leave much for you to invest in breakout companies, though.
CH: Interestingly, where I got the most pushback in this fund model is through my use of AngelList Syndicates. I’ve syndicated six follow-on rounds already for companies that had raised a preseed round of $1 million but went on to raise an institutional round of $2.5 million to $4 million.
TC: Can you elaborate a bit on how that whole process works?
CH: So a couple of companies that were raising follow-on funding allocated me, say, $225,000 of the round. My fund wrote a follow-on check for $25,000, but I syndicated the rest to LPs and other funds that I’ve gotten to know through AngelList. It gave these LPs a way to double down on the companies they see as interesting, and they got a fee break.
TC: Why would investors push back on this?
CH: it’s just tough to pitch to institutions. They want to know: who else is doing this? How much should I reserve for these syndicates? [It helps that] I offer them every single [follow-on deal] but they don’t have to do any; it’s my responsibility to fill that syndicate.
TC: I’d think they’d be more concerned about how much of these companies you can own, writing such small checks, relatively speaking.
CH: I’m looking to own three to five percent at the outset, and I have companies where Precursor owns more and some where we own 50 percent to 75 percent more than our target. But for a small fund, you don’t need crazy ownership. If something is bought for half a billion dollars, it’ll probably return the whole fund.
TC: You’re also very focused on this being an “access” fund. What does that mean? What types of companies are you funding?
CH: It’s a generalist fund. I’d say 10 percent is in hardware, another 45 percent is consumer, and the last 45 percent is [business-to-business]. Then about 30 percent of the founders we’ve backed are female. One thing I kind of set as a goal was to invest a quarter of the fund in female founder-led businesses, a quarter of it in startups that are led by or have an African-American CEO, and a quarter that have a Latino founder or CEO.
It hasn’t proven that hard to fund women who are starting good companies.
TC: What about African-American and Latino-led startups?
CH: I have a couple in New York, a couple here in the Bay Area, one in Baltimore. Sourcing is hard. Helping is hard. But to me, it’s an important thing to hold myself to. If I were at 23 percent, I wouldn’t force a fit, but I’d wonder what we should be doing to make it known that we’re approachable.
I think everything in venture is hard unless you make it priority.
CH: I think it’ll be a single GP fund for the foreseeable future. Having another partner would make me smarter, but right now, the fund can move as fast as I can think.