Part 3: Sacrifice Dilution for Diversity
M25 Group

Victor, this is a great set of posts raising some very important portfolio management issues for small funds. The follow-on decision is a huge one and the lowering of weighted return across the total investment in one startup is a key concern of the follow-on round.

I am wondering about a few points, though:

  1. Spreading the investments widely and not following on with reserves implicitly assumes some things. You are assuming that all 70 startups have equal chances of making it big, which means the available deal flow is large enough, which means you have to have a broad enough funnel to populate your portfolio with 70 startups of the same average quality as the portfolio of 25. Question is how wide do you have to go to find that kind of deal flow and is it feasible for a small seed fund team to do efficiently?
  2. If you follow on is there a better chance of not getting as buried under later stage preferences? Maybe not, but that could change the game if participating in follow-ons improves your chances of not getting stuck under the stack.
  3. Fundamentally there is also a question of whether the VCs involvement in the company at the board level can change the path of the startup. If so, then in theory by concentrating the investments in a smaller number of portfolio companies you should be able to raise the value of that portfolio. After all, time spent looking for new deals is 100% a trade-off vs time spent helping the existing portfolio. At Change Ventures we think we can make a noticeable difference in the prospects of the portfolio companies. Of course, maybe that is hubris, only time will tell. But if we can, surely that will skew your numbers and at least somewhat change the conclusion?
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