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Charles Hudson, managing partner of Precursor Ventures, told an audience at AfroTech the basics of knowing when to invest: The company must have product market fit and some form of traction.
But his next sentence elicited 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 explode every time the founder brings him a problem,” he said. “As you can imagine, the founder basically stopped bringing them problems.”
This in itself can be a problem – both in investing and in life. When someone feels like they can’t trust you with small problems, they probably won’t trust you with big problems either. These small tests can help tease out constructive solutions to problems, Hudson said, and help build trust early on. “There are people to whom you can tell your deepest, darkest secrets, and there are people to whom you can bring ordinary problems.”
Hudson has significant experience building trust with founders. His company has invested in more than 400 companies, including social media applications. Why?! And Deem, as well as the diaper company Kudos. The company has $250 million in assets under management and holds about $89 million in dry powder, according to PitchBook.
He shared with the senior executives in the audience what he looks for in a presentation (balance between storytelling and data); A good team (to see if the founder has good hiring judgment; and even the founders’ previous startup experience. But what really stood out was the way he talked 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 very rare to hear an investor be so open about the importance of being so open. “Not every investor who succeeds or gives you feedback will tell the truth,” he said. The moderator then asked if investors should tell the truth more, to which Hudson responded that “this whole ecosystem would do better if people told the truth.”
He and his team try to give the 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 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 has met a lot of investors who believe they deserve the founder’s trust. “But this is something that has to be earned,” he said. “You will never go into another relationship in your life, expecting a stranger to tell you their deepest dark secrets and trust you.”
He said he always tells founders that his goal is to get to a place where they can trust each other. This way, harsh reactions can be treated as if they were coming from a place of care.
For similar reasons, Hudson said he places a lot of importance on emotional intelligence, “because I think it underpins a lot of the challenges you’ll face as a startup.”
Founders need to learn how to recruit, evaluate, and influence people, the company, partners, and investors. He said that there is a relationship between emotional intelligence and emotional health. “One of the things I always test is: Do I think this person is going to be able to manage the emotional ups and downs of startup life?” he said. That’s why he always looks to other difficult tasks the founder takes on as a guide to how he handles stress.
“This could be a hobby, it could be travel, it could be a startup, it could be a non-profit,” he said. “I just want to see some evidence that the person has worked on something hard and committed to it. Because startups are a huge bundle of challenges.
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