Venture

Charles Hudson’s Precursor Ventures Eyes A $10M Opportunity Fund

San Francisco-based Precursor Ventures, a venture capital firm led by Charles Hudson, is eyeing a $10 million Opportunity Fund, per an SEC filing last week. According to the filing, no capital has yet been closed for the new fund; however, it’s not uncommon for firms to submit regulatory disclosures immediately prior to accepting their first capital commitments.

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This fund, if fully raised, would be less than the firm’s two previous funds: Precursor I and II are $15.2 million and $31 million, respectively. The first two funds focus on seed stage startups ranging in focus from SaaS, e-commerce, and marketplace.

According to Crunchbase data, Precursor has invested in at least 176 known startups to date, including companies we have covered such as Finix, Anyroad, and Squad.

Precursor’s Hudson was unable to comment regarding the new fund. Last time we chatted with him, however, was for our quarterly report on venture capital dollars raised by female founded companies. Hudson, one of the few African American venture capitalists in the Bay, explained that his firm invests in minority and underserved entrepreneurs without branding or strategy.

His only strategy, he said back in July, was to invest in more women is having a diverse team. Two people in his three-person funding team are black women.

What Is An Opportunity Fund?

In venture capital, fund naming matters, and those names point to what the strategy of the fund might be. Precursor’s first investments in companies primarily happen at seed and Series A stage.

It’s common for venture capitalists to secure pro rata rights with their portfolio companies. For example, if a hypothetical investor acquires 10 percent of a company’s stock in its Series A round, and gets pro rata rights, that investor has the right (but not the obligation) to invest additional capital in the company’s Series B round, such that their 10 percent stake is maintained. (Crunchbase News went over the math behind pro rata rights in a handy guide.)

However, many investors have covenants in their limited partner agreements which bar them from committing more than a certain percentage of the fund to any single portfolio company, as a risk management strategy. For particularly fast-growing portfolio companies, investors may quickly exhaust the capital they’ve internally allocated for follow-on funding in a particular portfolio company.

Some investors may opt to raise additional follow-on capital through so-called special purpose vehicles (SPVs) which, as the name might suggest, are structured similar to VC funds, except instead of investing across a broad portfolio, all the capital raised in an SPV (less legal fees and closing costs) is invested in one particular company, and often just one particular round of funding.

Though Precursor Ventures may have a unique strategy for Opportunity Fund I, the general pattern for seed and Series A firms is to raise a more generalized pool of follow-on capital which can be spread across multiple successful portfolio companies from the firm’s flagship funds. These capital pools may be called “opportunity funds,” but “growth funds,” “select funds” and other monikers are also used. Regardless of name, more follow-on allocation gives early-stage firms additional runway to exercise their pro rata rights, and to buy these firms a seat at the negotiating table in future funding rounds.

Illustration: Li-Anne Dias. VC Defined graphic by Jason D. Rowley.

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