Looking backwards this is good work. However, the research shows there is a '3rd way' which combines the best of both; $500MM to$1B can be depoloyed and deliver compelling DPI & IRR, with more confidence and repeatability. See 'Process Alpha: How to Construct and Manage Optimized Venture Portfolios' - https://bit.ly/3UoRYDF & 'The Impact of Optimized Venture Portfolio Construction - Optimized DPI & IRR' - https://bit.ly/3Xniz3V. Take the lessons learned from past successes (broad diversification at the seed round, then proper follow on with the emergent winners). This can be done with as little as $50M invested across Seed/A/B, and not dilute the expected returns up to about $1B across all 3 rounds.
Great post! Consistent with our strategy to pick the category/strategy leading small cap managers and then pool them in a hybrid vehicle which takes the capital entry point for LPs way down with the benefit of diversification.
How can a small cap deploy 100% at seed/Series A and not expect to be diluted out of a return. Maybe my perspective is different coming from biotech which is very capital intensive (large rounds) and almost always requires multiple rounds to exit…
Dilution is expected for these funds. The rule of thumb for seed funds is that you get your 5-15% ownership at seed, maintain at the A with some portion of positions, and then expect ~50% dilution by exit. In other words, if I have 10% at seed, I need to underwrite to 4-6% ownership at exit.
I see - so under the rule of thumb you describe funds following the strategy need to be prepared to write a larger check at the Series A.
Example: Maintaining Ownership Through a Larger Series A and Exit
1. Seed Round
• Fund’s Investment: $1.5M
• Seed Round Valuation (Post-Money): $15M
• Ownership Acquired: 10%
At the seed stage, your fund secures a 10% ownership stake in the company.
2. Series A Round
• New Investment Required: $6M (pro-rata)
• Series A Valuation (Pre-Money): $40M
• Series A Round Size: $60M
• Post-Money Valuation: $100M
In this larger Series A, the fund must invest $6M to maintain its 10% ownership. Without participating, the fund would dilute to 4% (ownership = 40% of the original stake, as the $60M raises the total shares outstanding significantly).
With the fund maintaining its 10% ownership post-Series A, dilution to 50% results in 5% ownership at exit, aligning with the target of underwriting to 4-6% ownership at exit.
4. Fund Returns
• Ownership at Exit: 5%
• Exit Value: $1B
• Proceeds to the Fund: $50M
5. Investment Summary
• Total Capital Invested: $1.5M (Seed) + $6M (Series A) = $7.5M
Great post! It made me realize that LP strategically selects not only the GP but also the fund sizes to effectively manage their risk. Thanks :)
Looking backwards this is good work. However, the research shows there is a '3rd way' which combines the best of both; $500MM to$1B can be depoloyed and deliver compelling DPI & IRR, with more confidence and repeatability. See 'Process Alpha: How to Construct and Manage Optimized Venture Portfolios' - https://bit.ly/3UoRYDF & 'The Impact of Optimized Venture Portfolio Construction - Optimized DPI & IRR' - https://bit.ly/3Xniz3V. Take the lessons learned from past successes (broad diversification at the seed round, then proper follow on with the emergent winners). This can be done with as little as $50M invested across Seed/A/B, and not dilute the expected returns up to about $1B across all 3 rounds.
Great post! Consistent with our strategy to pick the category/strategy leading small cap managers and then pool them in a hybrid vehicle which takes the capital entry point for LPs way down with the benefit of diversification.
How can a small cap deploy 100% at seed/Series A and not expect to be diluted out of a return. Maybe my perspective is different coming from biotech which is very capital intensive (large rounds) and almost always requires multiple rounds to exit…
Dilution is expected for these funds. The rule of thumb for seed funds is that you get your 5-15% ownership at seed, maintain at the A with some portion of positions, and then expect ~50% dilution by exit. In other words, if I have 10% at seed, I need to underwrite to 4-6% ownership at exit.
I see - so under the rule of thumb you describe funds following the strategy need to be prepared to write a larger check at the Series A.
Example: Maintaining Ownership Through a Larger Series A and Exit
1. Seed Round
• Fund’s Investment: $1.5M
• Seed Round Valuation (Post-Money): $15M
• Ownership Acquired: 10%
At the seed stage, your fund secures a 10% ownership stake in the company.
2. Series A Round
• New Investment Required: $6M (pro-rata)
• Series A Valuation (Pre-Money): $40M
• Series A Round Size: $60M
• Post-Money Valuation: $100M
In this larger Series A, the fund must invest $6M to maintain its 10% ownership. Without participating, the fund would dilute to 4% (ownership = 40% of the original stake, as the $60M raises the total shares outstanding significantly).
3. Exit Scenario
• Total Valuation at Exit: $1B
• Exit Dilution: ~50% (due to additional rounds, option pools, etc.)
With the fund maintaining its 10% ownership post-Series A, dilution to 50% results in 5% ownership at exit, aligning with the target of underwriting to 4-6% ownership at exit.
4. Fund Returns
• Ownership at Exit: 5%
• Exit Value: $1B
• Proceeds to the Fund: $50M
5. Investment Summary
• Total Capital Invested: $1.5M (Seed) + $6M (Series A) = $7.5M
• Return Multiple: $50M ÷ $7.5M = 6.67x
Data for 200-2010 missing
Thank you - Added in.