Reserves for venture funds can hurt more than they help.
Walk down memory lane with me for a second.
It's 2018. Venture is healthy and happy (well, we think so anyway). 547 startups using Carta raised a Series B this year.
So here's the question: If you led the seed round for one of those 547 startups, should you be layering in more capital to the company at the Series B?
We all talk about the winners, like Figma from this cohort, that end up having their IPO day. Probably the right call to pour some more dollars into Figma at Series B, no debate.
But 39% of companies in this analysis never became more valuable than they were at B. 66% remained within 2x of their Series B valuation.
So if you re-upped your commitment to the company at B and it stalled out from there...you're stuck.
Perhaps instead you should sell a portion of your original stake in a secondary? Or simply let the position ride and cross your fingers?
and look, I get there are non-monetary reasons to follow-on into companies. Relationships matter, founder referrals matter, all of that is true.
But simply getting to a Series A or Series B is not much of an indicator of eventual outcomes. And the cash needed to continue investing just keeps getting higher!
Tricky position for many seed funds that have set aside 40%-50% of their capital in reserves. If I started a fund tomorrow, I'd probably reserve...10% or so. But hey, I'd probably be a middling VC 🤷
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