Charles Hudson, managing partner of Precursor Ventures, told an audience at AfroTech the basics of knowing when to invest: A company should have product-market fit and some form of traction.
But the next thing he said garnered some surprised looks from the audience: Founders should test investors with a small issue to see how they react to problems. ”I’m on a board with someone who tends to blow up every time the founder brings them a problem,” he said. “As you can imagine, the founder has basically stopped bringing problems to them.”
And that, in itself, can be a problem — both in investing and in life. When someone feels they can’t trust you with little problems, odds are they will not trust you with big problems, either. Hudson said these little tests can help weed out the constructive problem solvers, and help to establish trust early on. “There are people you would tell your deepest, darkest, secrets, and there are people that you would bring ordinary problems to.”
Hudson has a lot of experience in establishing trust with founders. His firm has invested in more than 400 companies, including the social networking apps why?! and Diem, as well as the diaper company Kudos. The firm has $250 million in assets under management, sitting on around $89 million in dry powder, according to PitchBook.
He shared with the high-level executives in the audience what he looks for in a pitch deck (a balance of storytelling and data); a good team (to see whether the founder has good hiring judgment; and even founders’ previous startup experience. But what really stuck out was how he spoke about the importance of vulnerability and the skills needed to build trust, including how to have a conversation, and how to convey emotional intelligence.
It’s quite rare to hear an investor be so open about the importance of being so open. “Not every investor that passes or gives you feedback is going to say the truth,” he said. The moderator then asked if investors should tell the truth more, to which Hudson responded that “this whole ecosystem would work better if people just told the truth.”
He and his team try to give a founder as much feedback as they want to hear. But they often aim to go deeper than that.
“I think it’s a beautiful thing when an investor and a founder can get to a place where they trust each other to be honest and open,” he said. “Vulnerability can go both ways.”
He said he’s met a lot of investors who think they deserve a founder’s trust. But that’s something that should be earned, he said. “You wouldn’t approach any other relationship in your life, expecting a stranger to tell you their deepest darkest secrets and trust you with them.”
He said he always tells founders that his goal is to get to a place where they can trust each other. That way, hard feedback can be taken as if it is coming from a place of care.
For similar reasons, Hudson said he puts a lot of weight on emotional intelligence, “because I do think it underpins a lot of the challenges you’ll have as a startup,” he continued.
Founders need to learn how to hire, evaluate, and influence people, a company, partners, and investors. There is a relationship between emotional intelligence and emotional well-being, he said. “One of the things I’m always testing for is, ‘do I think this person is going to be able to manage the emotional ups and downs of startup life,’” he said. This is why he always looks for other challenging tasks a founder has taken on as a clue to see how they handle stress.
“That could be a hobby, that could be travel, that could be a startup, that could be a nonprofit,” he said. “I just want to see some evidence that a person has worked on something difficult and stuck with it. Because startups are a big bundle of challenges.”