San Francisco, CA – The dynamics of seed investing are undergoing a significant transformation as venture capitalists adapt to new liquidity pressures. Charles Hudson, a veteran VC and head of Precursor Ventures, has been re-evaluating traditional investment strategies amid changing expectations from limited partners (LPs). This shift is driven by a decrease in venture returns and the availability of more liquid investment alternatives.
Hudson, who recently closed a $66 million fund, was prompted by an LP to assess the potential outcomes of selling portfolio companies at varying stages, from Series A to Series C. The exercise revealed that while early exits at Series A didn’t justify the loss of potential returns, exiting at Series B could yield a fund multiplier north of 3x. This newfound insight is reshaping Hudson’s approach to portfolio management, especially as smaller funds like Precursor Ventures face mounting pressure to provide quicker returns.
With over two decades in venture capital, Hudson observes that LPs are increasingly impatient with the traditional seven-to-eight-year hold periods, which are now seen as excessively long. The steady venture returns of the past have diminished, causing LPs to seek alternatives that offer quicker liquidity.
Industry Ventures founder Hans Swildens corroborates this trend, noting that venture funds are becoming more adept at generating liquidity. This includes hiring full-time staff to explore secondary sales and other options, a strategy that Swildens has noted among seed managers who now spend considerable time “manufacturing liquidity.”
The pressure is particularly intense for smaller funds like Precursor, which prides itself on backing unconventional founders. As large funds like Sequoia and General Catalyst can afford to wait for massive $25 billion outcomes, smaller funds are compelled to be more tactical about when and how they realize returns.
This shift is also altering Hudson’s interactions with LPs, such as university endowments, which have traditionally been prized venture investors. These institutions are currently navigating challenges from President Donald Trump’s administration, including federal investigations and scrutiny over endowment management. As a result, some LPs are eager to see returns sooner, even if it means accepting suboptimal long-term outcomes, while others continue to prefer holding investments to maturity for maximum returns.
Hudson acknowledges the growing complexity in managing these demands, seeing a shift in venture capital towards a model that resembles private equity, prioritizing cash returns alongside major successes. This change requires a level of portfolio management sophistication that has not traditionally been necessary in seed investing.
Despite these challenges, Hudson remains optimistic about the opportunities these changes present. As funds grow and deploy more capital, their strategies become more algorithmic, focusing on specific founder backgrounds and categories. However, Hudson warns that this approach risks overlooking the “weird and wonderful” companies that have historically provided some of the best returns for Precursor Ventures.
For those interested in more insights, Hudson’s full interview is available on TechCrunch’s StrictlyVC Download podcast, which releases new episodes every Tuesday.
