#58 VC Growth: Angel to Fund 3+

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VC Growth: Going From Angel to Fund 3+

We meet a lot of angel investors, VCs, and folks somewhere in the middle. Going from angel investor to VC is a journey, one that will require a whole new set of skills and mindset. But it can be done well with the right approach and tools!

Most angels take a passive approach. As a VC, you'll be expected to offer strategic guidance and help your portfolio companies grow and succeed.

The competition also increases with this move. You'll be competing with other VCs for the best deals, the hottest startups, and the most promising returns. How will you convince these companies to take your money vs. others?

Chia Jeng Yang (Pantera Capital) recently shared the following visual from an earlier post at Saison Capital. Many of these still hold true today.

From Chia: “As a bunch of friends have been raising Fund 1 & 2's this year, throwback to a piece of work I did 3 years ago while LP investing in funds at Saison Capital. Still relevant as we think about proving out the GPs ability to scale the management of capital over increasing fund sizes. The only amendment I'd probably make looking back is decreasing the range of fund sizes for Category # 2 and # 3 investors.”

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The Three Bucket Approach

Prior to becoming a VC fund CFO, I spent more than a decade investing in VC funds of all types. I also spent a lot of time talking to other VC investors at endowments, foundations, and fund of funds.

Most of these investors are taking the “barbell" approach, meaning they’ll invest in small, specialist managers at the early-stage and then have their big, later stage VCs to take the rest of their allocation.

I thought Chia’s approach was an insightful one as well. At his prior firm, he approached it with the following framework for LP investments:

  1. Category #1: Mass portfolios (“Spray & Pray”)— w/ 1–3% ownership — typically 100k-200k ticket sizes, with 20 to 80 companies per fund

  2. Category #2: Large Coinvestor — w/ 5–7% ownership — typically 500k — 1m ticket sizes, with 15 to 30 companies per fund

  3. Category #3: Lead Investor capabilities — w/ 10–20%+ ownership targets — typically 750k — 2m ticket sizes, with 15 to 25 companies per fund

(Actually 20%+ was historically the target but that’s now been seriously pressured downwards and a topic for another day)

Additional Insights

GP’s are optimizing for meaningful ownerships at exit for great companies. As articulated by Rob Go from Nextview, this means:

  1. Investing in the right companies. It’s more important to have only “ok” ownership of a great company than great ownership in an “ok” company.

  2. Having disproportionately high ownership relative to fund size, especially compared to your competitive set. This may mean NOT having higher absolute ownership.

  3. Being able to have high ownership at exit.

This is accepted truth. The remaining question is how one gets there.

For a VC fund, ownership strategy is probably one of the main drivers of our business model. So it’s strange that there isn’t more variability around ownership strategy given the variability in fund sizes in the market — Rob Go, Nextview

That’s all for today folks! Thanks for your support and spreading the word! Share this on Twitter or LinkedIn to help grow “the crew!”