Prioritize possession over valuation on any given deal, however worth drives your portfolio development. This was principally how we managed Homebrew throughout its first decade, once we have been investing out of three institutional funds, all sub $100m. The guideline modified in 2022 given our evergreen private capital mannequin (as I detailed in Why I No Longer Care About Startup Valuation After I Make investments (Apart from These 4 Causes)), but it surely served us effectively once we have been deploying in a extra typical lifecycle.
Our technique for Funds I, II, and III have been principally to guide/co-lead seed rounds with a 10-15% possession goal. Our third fund averaged 11.6% but it surely was actually extra bimodal – a bunch of 8-12% mixed with a roughly equal variety of 15% – throughout 31 startups. The focus of {dollars} (expressed in possession) was primarily about having the ability to additionally focus our time working with the portfolio and conserving our funds modestly sized the place $1b outcomes might make an actual distinction to returns.
So our considering was principally one thing like this in Fund III [2018-2021, $90m, 31 companies]:
- For any given seed funding goal 10-15% possession for what was then often a $1-2m value.
- If the pricing drifted north of that and we maintained our conviction, nonetheless favor at the least minimal possession goal and go over $2m preliminary test for it if needed.
- BUT too lots of these and it begins to actually impression the variety of corporations we’d have the ability to again within the fund. Principally, get too far above the $1-2m vary per preliminary funding and also you begin to successfully say ‘this funding is healthier than having the ability to do 1.5 or 2 different investments.’
- We believed we finally wished 28-34 corporations within the fund (and *some* reserves, possibly ~25-30%).
Did we ever say ‘no’ to an funding alternative primarily based on pricing? Positive, but it surely was extra usually a perform of the general spherical measurement turning into too massive for us to write down a lead test, quite than the distinction between, say, $1.5m and $1.8m to get 15% possession.
Very like the Mike Tyson quote “everybody has a plan till they get punched within the mouth,” each agency has a mannequin that then will get hit by actuality (aka The Market). You’ll be able to determine what you set in a spreadsheet cell a yr in the past is gospel, or you should use it as a guidebook, and behave extra dynamically given what happens over your deployment interval. However for those who make each funding determination with out some framework to grasp what it means for the fund itself, you may discover the entire turns into lower than the sum of its elements.
Footnote: One of many enjoyable elements in backing new enterprise companies through Screendoor, is speaking with them about portfolio development and seeing the totally different methods/playbooks they implement to win.
