Here's how and why this VC is finding opportunities in startups and founders Silicon Valley has largely ignored

DocSend Co-founder & CEO Russ Heddleston, Precursor Ventures Founder & Managing Partner Charles Hudson, and Redpoint Managing Director Annie Kadavy speak onstage during TechCrunch Disrupt San Francisco 2019 at Moscone Convention Center on October 03, 2019 in San Francisco, California.

  • Charles Hudson has created a niche for himself in Silicon Valley’s venture capital ecosystem by pursuing opportunities others have largely ignored.
  • Hudson’s firm, Precursor Ventures, focuses on nascent startups, so-called pre-seed companies, many of which are little more than a basic idea.
  • Precursor also makes a point to seek out non-traditional founders, including women, people of color, and people who don’t come from brand-name universities or top tech companies.
  • The firm makes dozens of small investments each year, and Hudson argues that’s good both for his stable of founders and for Precursor.
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Charles Hudson has learned how to zig when others in the venture community zag.

Hudson, the managing partner of Precursor Ventures, has made it his mission to spot opportunities that other venture capitalists have overlooked. He’s found them in very early stage companies, many of which have founders that don’t fit the traditional Silicon Valley mold.

In a way, Hudson has gone back to venture capital’s roots. Historically, investing relatively small amounts of money in nascent companies that are just getting off the ground was a profitable strategy, he told Business Insider in a recent interview. It’s just one that much of the Valley has gone away from, as the venture industry’s focus has seemingly shifted towards writing huge checks towards more proven companies, often at sky-high valuations.

“I don’t think the opportunity has gone away,” Hudson said.

Like many other venture capital investors, especially those looking at early-stage startups, Hudson is a generalist. Among the startups Precursor has backed recently are delivery drone maker Elroy Air, financial-technology company Finix Payments, and supply-chain analysis startup Fuse Inventory.

Precursor focuses on pre-seed companies

The idea behind Precursor, which Hudson founded in 2015 after a career as both an entrepreneur and a VC, was “can we find a bunch of really interesting early-stage companies where a relatively modest amount of money — in this environment at least — could make a difference between them having just an idea and having an idea and a business,” he said.

Where Precursor differs from the pack, in part, is by focusing on so-called pre-seed startups. These are companies that haven’t yet shown that there’s a market for their product. Indeed, they may not have even launched product yet; they may be little more than an idea. 

Typically, such companies are raising less than $1 million at valuations of less than $6 million. Precursor puts about $250,000 or so in such companies, which make up about 75% of its investments. That category of investing used to be considered seed stage.

But with the flood of money into Silicon Valley in recent years, the venture firms that specialized in that kind of investing started focusing on bigger deals and more mature startups. Few venture capitalists remained focused on the still-wet-behind-the-ears companies, Hudson said.

As the old seed investors started refocusing on more mature firms, Silicon Valley developed a new model to get startups off the ground — the incubator. Hundreds of entrepreneurs in recent years have built their ideas into businesses under the auspices of incubators such as Y Combinator and 500 Startups.

Precursor isn’t necessarily in competition with the incubators. About 10 percent of the companies it’s backed have been through one, either before or after Precursor invested, Hudson said.

The firm offers an alternative to incubators

But Hudson has also found that the incubator model isn’t a great fit for many entrepreneurs. Sometimes the timing isn’t right, he said. Incubators tend to bring in batches of startups once or twice a year, and an aspiring founder may be wanting to start a business outside of that cycle.

In some cases, the incubators require entrepreneurs to relocate to the incubator’s offices to develop their ideas, and some entrepreneurs don’t want to do that, Hudson said. Other founders feel fairly confident or comfortable building their businesses outside the constructs of an incubator, he said. For those kinds of founders, Precursor offers an alternative.

“I think there’s a…kind of entrepreneur who doesn’t want the incubator experience,” he said.

Hudson approaches startup investing in another way that’s different from many in Silicon Valley. The venture industry has become notorious for having a kind of pre-set idea of what a successful founder looks like. Typically, that prototypical founder is white or sometimes Asian, male, young, and a graduate or at least a recent attendee of Stanford, Harvard or some other prestigious university. If the founder has experience at what Hudson calls an “academy” company — Facebook, Google, Twitter — or has founded a successful startup in the past, all the better.

But Hudson believes, and has found through his experience, that good ideas can come from anywhere, whether from women, people of color, first-time founders, or even people lacking in technical experience.

“It doesn’t take a ton of courage to back two people who left Stripe, who were early there,” he said. “We’re happy to meet people from those [kinds of experiences],” he continued, “but we’ll meet people who come from all kinds of different backgrounds. And it turns out that’s relatively unique at the very early stage.”

Hudson’s firm backs dozens of startups each year

And there’s another way that Precursor stands out. Many venture funds these days tend to focus on investing in only a small handful of companies each year. They works closely with their portfolio companies, helping coach the entrepreneurs and helping them build their businesses, sometimes helping run their marketing or product development or human resources operations.

Hudson’s taking a different approach. Precursor invests in about 25 to 30 different startups annually.

One prospective investor in Precursor fund tried to dissuade Hudson from backing so many companies each year, saying that there’s no way he could support them all. But Hudson’s not trying to.

Sure, he’s happy to offer advice to the founders he backs. But he wants them to do and learn things for themselves, rather than having him do those things for them. If an entrepreneur is bad at recruiting, Hudson’s firm will help them in the final stages of hiring someone. But he doesn’t think he should be the one going out and combing LinkedIn for potential candidates.

“When I was an entrepreneur, I didn’t want anybody doing things for me. I wanted to learn how do it,” he said. “Our philosophy in a nutshell is teach a man or woman to fish.”

Hudson sees benefits from having a large collection of investments

Instead of being a burden, having so many companies in his portfolio is actually a benefit, Hudson said. Precursor has an active Slack chat room for its community of founders. Entrepreneurs who are struggling with particular challenges can reach out to potentially dozens of peers who have recently faced the same problems.

“Another core tenet here at Precursor is: peer support is generally better than investor support,” he said.

And having that many investments helps in another way, Hudson said. A major way he now hears about new investment opportunities is through the network of founders he’s backed.

Because  Precursor is investing in such nascent companies, it’s a little early to evaluate the firm’s model. But Hudson has already seen some success. A handful of the startups he’s backed, including marketing firm Bizzy, have been acquired.

Meanwhile, about 65% of the pre-seed companies Precursor backed in its first fund have gone on to get seed-round funding from institutional investors, Hudson said. Of those that haven’t gotten a seed round, many haven’t yet sought one, he said.

And of those companies that made it to seed stage, about 60% have gone on to get series A funding, he said. Again, many of those startups that got a seed round haven’t yet gone after the next round of financing.

“So far, so good,” Hudson said.

SEE ALSO: Here’s why the founder of a beloved productivity app is refocusing his startup incubator on health from artificial intelligence

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