Welcome back to Field Notebook!

Here are some of the thoughts, essays, and hot takes that have surfaced across the Redbud team this month. In Edition #4 of Field Notebook, we discuss the implications of noise in early-stage investing, conditions for innovation, and how our investing opinions have changed. 🕺

Redbud VC invests $250k-$500k in early-stage tech founders. We deliver insights and learnings we shared over the last month to our over 15,000 readers.

There’s a lot of noise in early-stage investing right now.

Hordes of accelerator-backed 18-year-olds are generating millions of views on their newest startup, industry titans are funding $100M+ seed rounds, and anyone with an idea and a Claude account is vying for VC funding.

Because AI has lowered the technical barriers to building and simultaneously created a new category to build atop, there seems to be a competition to make the most noise, grab the attention of top VCs, and raise the largest seed round possible. Noise creates an existential issue for VCs. They must turn their heads to listen because their limited partners or competitors will kill them if they miss out on an obvious, in-your-face unicorn.

This noise is deafening. Founders worry not about how to build their product but fret over how to best grab VCs’ attention. VCs consequently talk to dozens of new founders freshly resigned from miscellaneous technical roles at OpenAI, DeepMind, and Anthropic and arm their favorites with eye-watering sums of capital. This cycle creates quick markups and hype-based kingmaking. Great founders are slipping under the radar. All the while, this new era of investing in resumes has eroded one of the most defining structural forces in venture, adverse selection.

Adverse selection is the concept that the “best” founders will only raise from the “best” VCs, as those VCs bring brand hype, leaving the remaining VCs to parse through the “non-pedigree” founders, preventing smaller VCs from building a successful portfolio. But the noise has changed this. Scrappy VCs are zeroing in on those great founders the market is overlooking.

VCs have access to the same signals. Anyone can track when someone at a top startup leaves to start a stealth startup. Emerging firms are addressing the inefficiency gap by cutting through the noise, but still need to optimize for outbound conversion. And yet, incentives are preventing large VCs from adopting the same playbook.

Incentives for top institutional VCs make this playbook difficult to imitate because it’s far more defensible to tell limited partners that your fund generated poor returns after investing in founders with shiny pedigrees and a tried business model than it is to defend a founder no one has heard of, creating something unique. In our risk-off environment, missing an obvious winner is more damaging than an investment going to zero, considering singular investments are now paramount to returning a fund. Noisy, consensus deals attract attention. In particular, attention from VCs who center their strategy around inserting themselves on the cap tables of the hottest new companies backed by Sequoia. This, in turn, results in quick markups that these VCs can show to their LPs as they try to raise their next fund. Opportunity cost and quick markups make it impossible to walk away from this strategy. Stepping away means sacrificing obvious winners, shunning quick markups, and muddying the fund’s reputation with its LPs.

These same incentives have also distorted pricing, creating an edge for emerging VCs. Pre-seed and seed rounds are more expensive than ever. It’s not uncommon to meet founders raising $30-100M post-money rounds that are pre-revenue. An increasing number of VCs are chasing the same, limited subset of generational founders. They have the leverage to demand larger rounds at an earlier stage. And funds like a16z have raised such large funds that the economics only work if the tech industry itself expands multiples of what it is today, making entry price negligible and “call-writing” entire sectors a viable fund strategy. Large funds play without price sensitivity in the early stages. Smaller funds who try to play by the same rules are punished by the economics.

Returns in venture are compressing for a reason. If one were to invest at a $10M post and it took three funding rounds at 20% dilution to reach a $1B valuation, the return would be 51x, whereas a $50M post taking two rounds to reach a $1B valuation assuming 10% dilution would only return 16x. VCs willingly continue to play this game, and it’s unintentionally setting the stage for disciplined investors to kill them from below. Institutional gravity pulls VCs towards what is loud and obvious. But now, anyone can be loud. Fund cycles are approaching 2-3 years, so consistently showing brand names across vintages can cloud the scrutiny around liquidity and realized returns. Investing in deals for the quick markup and brand recognition is rewarded the most in fundraising.

VCs who built their edge on adverse selection are now exposed by it. Inflated valuations have locked VCs into a cycle of quick markups to “raise and graze” off management fees, while distributions continue to falter. The scrappy investors fighting to find the undiscovered founders are now breaking down the grip of adverse selection that fought against them for so long. VCs who have the strength to cut through the noise and focus on the founders themselves will define the next set of great investors.

There's a response I keep thinking about. Someone pushed back on my piece about capitalism, and they made a great point: some of the most delicious recipes have their roots in poverty. Buffalo chicken wings.

They're right. And it changes how I think about a few things.

Reform isn't top-down. It never has been.

The question I was asked: is it even possible to restore market integrity without a full overhaul of the relationship between markets, government, and society?

Probably not. Not at the macro level. Regulatory capture is real. Hype cycles and inflated valuations that have nothing to do with actual market fundamentals — that's real too. The funding ecosystem, in many ways, has drifted from the capitalist spirit it's supposed to embody.

But here's what I believe: you don't have to fix the whole system to build something right within it. Redbud was started with that premise.

The buffalo wing lesson.

Buffalo wings were invented in 1964 at the Anchor Bar in Buffalo, New York. The wing was trash — the part of the chicken nobody wanted. Cheap. Overlooked. A resourceful cook turned scarcity into something extraordinary. Decades later, that technique and flavor profile were absorbed into fine-dining menus around the world. Elites didn't create it. They discovered it after the fact.

This happens constantly. Jazz. Hip-hop. The best street food in the world. Constraint is a forcing function. Necessity sharpens. The innovation came from people who had no choice but to make something out of what they had.

Which brings me back to the question of whether innovation is actually tied to economic structure.

I think it's more complicated than either side admits.

Capitalism creates the conditions for innovation to scale — access to capital, incentive to build, the ability to capture the upside of your own risk. But it doesn't always create the conditions for innovation to originate. Some of the most creative problem-solving happens at the margins, in communities that capitalism has underserved.

The failure isn't capitalism. It’s access.

What this means for us:

We can't fix the macro entanglement between markets, government, and policy from where we sit. But we can control who gets capital, who gets taken seriously, and who gets the chance to build.

Founders strengthened by struggle aren't just a feel-good thesis. They're often the most resourceful operators we meet. They've been making something out of nothing their whole lives. That's who we feel confident to bet on.

The reform we can actually do isn't legislative. It's allocative. It's showing up in rooms and geographies where capital hasn't historically gone. It's questioning the pattern-matching that causes investors to fund the same profiles over and over. It's being honest that the funding ecosystem has its own version of incumbent protection — and deciding not to participate in it.

Buffalo wings didn't need a government grant to become iconic. They needed someone to stop overlooking what was already there.

The venture industry evolves at high velocity, and more so now than ever before. It’s dangerous not to maintain some level of introspection. Our point of view is constantly changing as we collect data points and keep a steep learning curve. I’ll note just a few things that we’ve learned over the years.

Early on, I focused too much on securing competitive entry prices and even passed on opportunities we may have had conviction in because of price. This mindset works for certain fund strategies, but it’s hard to maintain that mindset when building a firm, growing a brand, and increasing fund sizes over decades. Not only is it dangerous in the sense that you can lose out on generational companies because of a strict valuation rule, but you’re also choosing a reputation that can deflect quality entrepreneurs.

You're balancing what you want to be known for, the deals you get into, and how that makes you look publicly. You’re balancing the FOMO risk, the echo chamber, and the excitement of investing in a company for LPs. There are many traps at play, and it’s easy to fall for them.

It’s a small industry, so it’s easy for a band of tourists, identity seekers, and self-gainers to impose their influence on founders, LPs, and investors.

The north star is always to make the most money for LPs, which can sometimes be misaligned with the choices to building the firm.

We avoid the trap of investing in a company because it looks sexy. Stay true to having conviction in founders, trusting your gut while also trusting the data.

There are opportunities where it makes sense to pay higher prices. If you have more conviction in something that costs three times as much, but you believe the outcome is greater or has a higher chance, then you should be investing in that company.

You'd be doing a disservice to your investors because you're stuck in a certain range or guardrails. LPs are entrusting the manager to make sound investment decisions, which should be judged over time, not at the instance of the investment.

Early on in your investing journey, everything sounds amazing. Every company looks great and is exciting.

Over time, you continue to change the bar for what's good and bad, not becoming cynical but becoming more realistic. I think we keep changing that and increasing the quality of the pipeline. Knowing that what gives us a job is how good our brand is, our sourcing, and the founders that we're bringing in.

As you continue to increase the quality and size of the pipeline, you have a higher chance of plucking a successful founder and achieving a big outcome.

A message to my younger self: Understand when someone is trying to sell you. Investing in hardcore salespeople can be very dangerous and risky. You have to exercise a lot of caution when investing in younger founders, because there's a lot more risk involved.

Resilience is the greatest driver of venture returns, but the thing that could kill companies is a lack of integrity in entrepreneurs.

We’ve really doubled down on understanding if we can trust somebody. What’s their integrity? Their character? How can we find the founders with the most resilience and integrity? That’s what we've spent more time thinking about recently.

We don’t fall for the trap of ‘this market isn't big enough.’ We have a more open-minded point of view: we're talking to a very good entrepreneur who has a great idea, who knows the market better than anyone, and who's got solid founder-market fit.

Yes, the first wedge isn't very big, but maybe do an exercise with the entrepreneur to understand how they unlock this to become a multi-billion-dollar company, rather than just saying no immediately when the TAM isn't billion-plus.

I used to believe that aggressive founders who moved fast and broke things would win, but there is more to it. Yes, this works to a degree, but this alone can mask some red flags. It’s about balancing thoughtfulness and speed. Leaning too hard on either side can kill companies.

A lot of salespeople are just go, go, go. They're not going layers deep, but the flip side is overthinking and striving for perfection when you need to get your product out in the wild. The tortoise doesn’t always win the race.

We’re doing our best to toe the line between writing a first check and getting it early, while also balancing the desire to see what founders can do without needing capital over the next few weeks.

We’re trying to meet somebody when they're still tinkering with an idea, so we can see the execution velocity they have, because that's one of the most important things in building a company.

We used to spend a lot of time in the pre-product and idea stage, but the times have changed. There is no excuse to wait to start building before asking investors to have conviction. The R&D time is nearly zero with prompt engineering.

We have fallen into the trap of getting overly excited about an opportunity because of its valuation, which usually does not pan out. There are certain biases you always have to set aside, stripping the opportunity down to what’s important– team, team, team.

Investors must stay true to going through the mental models of investing. We try hard to remove bias from investments: pedigree bias, industry bias, recency bias, and staying true. There are so many factors that make an entrepreneur successful, and if they're missing too many, we cannot do the deal. The trap is when one is really strong and clouds one's judgment for what is not.

We’ve learned to be ruthless around our mental models. We don’t make exceptions for certain things, like teams that don't have the technical talent or skill sets to execute quickly.

TL;DR

How have your investing opinions changed?