For the record, my micro fund invests at Seed with almost no reserves.
However, in defense of those managers who keep significant reserves, information has value. They might have much more information about their portfolio companies as existing investors at A than they get from diligence before picking at Seed. You could reframe a Seed fund with 30% reserves as a Series A fund that spends 70% of its capital to gain useful information before picking.
Having invested in seed for 18 years, and back testing against my history before starting my first LP funded fund of my own, it’s clear to me one and done maximizes multiples. But when you have a large enough fund there is a desire to also optimize dollars out against target irr. My fund is one and done with no reserves but it is always tempting to raise an opportunity fund for the lower, but still high, multiples among my winners and a irr for folks that seek that. Of course it’s also a ten plus year hold for the first investment and later rounds can get liquid earlier.
This is an interesting take suggesting to place more money in the first check, which I subscribe. Still, I would like to keep some in reserves since Use of Funds never capture all the eventualities a startup faces and you often need to bridge to get the startup to the next value-accretive milestone.
I think a lot of managers structure it this way because they do not have the capacity (even with AI tools) to deploy all of the capital they have raised (and take a fee for). Reserving 50% for 'follow on' defers the issue.
So it sounds like responsibility and discipline but its actually a failure to right size the fund.
For the record, my micro fund invests at Seed with almost no reserves.
However, in defense of those managers who keep significant reserves, information has value. They might have much more information about their portfolio companies as existing investors at A than they get from diligence before picking at Seed. You could reframe a Seed fund with 30% reserves as a Series A fund that spends 70% of its capital to gain useful information before picking.
Having invested in seed for 18 years, and back testing against my history before starting my first LP funded fund of my own, it’s clear to me one and done maximizes multiples. But when you have a large enough fund there is a desire to also optimize dollars out against target irr. My fund is one and done with no reserves but it is always tempting to raise an opportunity fund for the lower, but still high, multiples among my winners and a irr for folks that seek that. Of course it’s also a ten plus year hold for the first investment and later rounds can get liquid earlier.
Love this take! Go James. So difficult to back your winners much better to go "all in" with the first cheque and then run an SVP
This is an interesting take suggesting to place more money in the first check, which I subscribe. Still, I would like to keep some in reserves since Use of Funds never capture all the eventualities a startup faces and you often need to bridge to get the startup to the next value-accretive milestone.
I think a lot of managers structure it this way because they do not have the capacity (even with AI tools) to deploy all of the capital they have raised (and take a fee for). Reserving 50% for 'follow on' defers the issue.
So it sounds like responsibility and discipline but its actually a failure to right size the fund.