Tuesday, August 6, 2013

You Are Your Fund Size

I've been spending a lot of time meeting with new boutique VC funds raising capital right now. I think there has been a fairly quick shakeout between the haves and the have-nots in the seed stage space as the early entrants have 100+ deal track records, exits (yes exits) and good performance to show LPs.  As a result, they've been able to raise the same amount of capital as their first fund(s) or raise slightly more.  

Every seed fund raising more capital for Fund II than Fund I says they are doing it because they "could have put so much more to work in their previous winners".  You don't say...! This is really the only real explanation for increasing fund size.  It's relatively unheard of for a seed fund to increase its fund size because it is adding a partner.  

If you are a seed fund and are raising $20M, you are going to have a much different strategy and portfolio construction than a $50M or $100M fund.  Moreover, if you have a $100M fund, I would find it hard to call yourself a seed fund.  More likely, you're an early stage firm that puts down call options at the seed stage and buys its ownership at the Series A.  Otherwise, how can you possibly put $100M to work over a 3-4 year investment period if you're writing $500-750k checks?  

When you put out a pitch deck, declaring your intentions to raise a $50M seed fund, make sure you understand how you're going to be able to put that amount of money to work and make sure that you're honest with yourself and your prospective investors about your ability to write larger checks.  It's easy to be a nice guy and be invited into party rounds, it's not so easy to lead/co-lead the majority of your deals and politely yet sharply build ownership and selectively squeeze out the lemmings.  

Either the collapse or evolution of seed funds today is going to come as they increase fund sizes and react to the reality of the day that party rounds are popular and you have to be a nice guy to keep getting invited to the party, but you are your fund size and can't write $250k checks out of a $65M fund. Those funds that over time will evolve to larger lifecycle venture capital funds, will likely do so by being great sourcers at the seed stage and are able to lead/co-lead A rounds and retain board seats. If you know you're not a lead investor yet and are just getting your feet wet after having left an exited startup, be honest about this and raise a small fund, so that if you get lucky or are a quick learner, those 1-2 companies will be able to return the fund off your $100-250k check. Smart small, learn quickly and grow as your experience does. Those seed funds that are intellectually honest with themselves about what they need to be and how they need to do it, based on their fund size, will evolve and are more likely to excel as the haves in the seed stage market, and potentially emerge as the next go-to Series A funds given their networks as seed investors. In ten years when these fund are close to winding down, hopefully we'll all be able to say "they are who we thought they were".  

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