The decision for an early-stage VC fund to maintain a reserve strategy is highly debatable. A fund should only reserve capital for follow-on rounds if it possesses a distinct information advantage, such as deep operational involvement that provides superior insight into a company's unit economics.
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Mega-funds can justify paying "stupid prices" at the seed stage because they aren't underwriting a seed-stage return. Instead, they are buying an option on the next, much larger round where they'll deploy real capital. This allows them to outbid smaller funds who need to generate returns from the initial investment itself.
Successful concentration isn't just about doubling down on winners. It's equally about avoiding the dispersion of capital and attention. This means resisting the industry bias to automatically do a pro-rata investment in a company just because another VC offered a higher valuation.
The fundamental risk profile shifts dramatically between venture stages. Early-stage investors bet against business failure, an idiosyncratic risk unique to each company. Late-stage investors are primarily betting on public market multiples and macro sentiment holding up—a systematic risk affecting all late-stage assets simultaneously.
Small funds and solo GPs can gain an edge by not reserving capital for follow-on rounds. This strategy enforces discipline, avoids cognitive biases like sunk cost, and recognizes that the skill set for pre-seed diligence is fundamentally different from that required for later-stage investments.
A large, multi-stage VC firm's growth fund serves as a risk mitigation tool. The ability to concentrate capital into late-stage winners covers losses from a higher volume of early-stage mistakes, allowing the firm to be more "promiscuous" and take more shots at Series A.
Seed-focused funds have a powerful, non-obvious advantage over multi-stage giants: incentive alignment. A seed fund's goal is to maximize the next round's valuation for the founder. A multi-stage firm, hoping to lead the next round themselves, is implicitly motivated to keep that valuation lower, creating a conflict of interest.
While multi-stage funds offer deep pockets, securing a new lead investor for later rounds is often strategically better. It provides external validation of the company's valuation, brings fresh perspectives to the board, and adds another powerful, committed firm to the cap table, mitigating signaling risk from the inside investor.
'Gifted TVPI' comes from consensus deals with pedigreed founders who easily raise follow-on capital. 'Earned TVPI' comes from non-consensus founders whose strong metrics eventually prove out the investment. A healthy early-stage portfolio requires a deliberate balance of both.
When evaluating follow-on opportunities, the conventional wisdom is to look for a Tier 1 VC leading the round. However, a specialized fund with deep industry expertise leading a Series A can be an equally powerful, or even stronger, positive signal for a company's potential and market fit.
True alpha in venture capital is found at the extremes. It's either in being a "market maker" at the earliest stages by shaping a raw idea, or by writing massive, late-stage checks where few can compete. The competitive, crowded middle-stages offer less opportunity for outsized returns.
