- Short Description:
- As opposed to Double Down on Winners, this strategy emphasizes the vast majority of a VC funds capital being allocated for investments in the original investment in a company rather than later rounds after buying some ownership. While there may be capital reserved for follow-on rounds in the later stages of portfolio companies, those investments are for reputation, signaling, or other exceptional circumstances rather than for returns.
- Benefits:
- Higher Ownership: if done well, you can end up with high ownership in winners for the same amount of dollars.
- Stage Clarity: You invest the vast majority of money in the entry stage of the company and therefore have more clarity internally and with LPs about the type of investing you are doing with the risk/reward trade-off that comes from that stage.
- Chasing Winners Can be Hard: some argue that investing in later rounds of truly outstanding companies in order to maintain ownership percentage can be hard for two reasons: (a) they may have a lot of demand for later rounds and may not want to make room for existing investors and (b) the amount of ownership purchased is so much lower that, even risk-adjusted, you are better off investing in the first round as much as you are willing to allocate to an individual company.
- Trade-offs:
- Signaling: If the company seeks additional capital and other investors see that the existing investors are not continuing to invest further dollars, they can interpret that as a negative signal. If they don’t know the fund’s strategy of not investing further in portfolio companies, they may wonder if existing investors, who know the company best, maybe holding back because there is something negative or risk about the company.
- Reputation: If a portfolio company goes out of business and founders/management believes the role of the investors was to keep adding new capital into the business, they can be upset and feel the VC was not supportive, constructive or helpful. This can hurt the reputation of the VC fund. Also, some VC funds worry that having more failed companies in itself is bad for reputation so it may keep funding a company in order to postpone or hopefully reduce the likelihood of the company going out of business.
- Relationships: Founders or management of a portfolio company may put a lot of pressure on the VC for additional investment and it may hurt relationships if they don’t understand or agree with the strategy.
- Examples:
- Ulu Ventures
Portfolio Construction: Buy Your Ownership Upfront
