Thread by @Beezer232

To reserve or not to reserve, that is the question… and a question we are asked frequently by #VCs.

The answer? It depends on your investing strategy, but TBD on results.

😉

#VCs take a couple different approaches in their initial check vs follow on strategies. Here’s what we see in our database ➡️

#OpenLP

First off - what is the rationale for optimizing for initial dollars into a company vs saving follow on dollars in ‘reserve’?

Initial $: More shots on goal + buy ownership early when ‘least’ expensive.

Thesis being, more $ allocated towards net new investments = more at-bats for your portfolio. Presuming an early stage portfolio, each new company in a fund should be a potential fund returner.

Follow on (ie. reserves) $: Thesis here is to funnel reserve dollars into portfolio co’s experiencing momentum as they scale.

Theoretically, these co’s are “de-risked,” increasing the chance of outperformance. End goal - put more $ into winners.

In terms of fund portfolio construction the inputs are zero sum. There are only so many dollars in a fund (even with recycling).

$ held for reserves is not being used for net new investments. $ put into net new investments is not doubling down on strong preexisting portco's.

So how are firms of different sizes navigating these conflicting choices?

Let’s look to the data 👀

What stands out here?

Interestingly, both smaller (sub $50m) and larger ($200m+) funds have a wider range of strategies employed than midsize funds.

$50-$200m sized funds are more consistent with reserve dollars restricted to the 41%-55% range.

Behind the scenes we also see a higher tendency for sub $50m funds to concentrate capital into initial checks and take ownership early (i.e., less reserves, less ‘buying up’ later).

Side note: Interesting question on how smaller funds concentrating capital in 1st checks later use SPVs or Opp Funds. Funds in our database sometimes use SPVs but not often. We know industrywide they are prevalent - esp FTFs/nano/micro funds. Question for @AngelList + @cartainc?

It’s too early for the numbers to bear out in terms of which strategy proves optimal (reminder - it takes ~10 years for the average venture fund to return meaningful $).

1 trend we have our eyes on is how protecting ownership in winners (ie. more reserves) will play out in the market of the last few years where “buying up” became much harder/expensive vs saving reserve $’s for add’tl net new investments.

Also remaining to be seen is how current market and global turbulence will impact portfolio strategy.

As you all are - we’re seeing valuations soften and deal pace slow. Potential opportunity for VCs to follow on at less heady prices or make a few net new investments. Or both?

Ultimately there is no one-size-fits-all best approach to reserves strategy.

Opinions on the topic vary widely … see this relevant thread from @galeforceVC

https://twitter.com/galeforceVC/status/1447632787738185736

).

.@KauffmanFellows also has this fun modeling tool to test out different reserve scenarios.

kauffman-fellows.medium.com/strategies-for…

For more fund management strategies, check out the “Firm and Fund Management” page on OpenLP:

openlp.sapphireventures.com/firm-and-fund-…

Reserve strategy is only tip of the iceberg 😉