The case for the long first cheque

Every fund we have raised has held roughly the same number of companies. Fund I, at $85 million, backed 24. Fund IV, at $480 million, backed 34. The funds grew more than fivefold and the portfolio barely moved. That is deliberate, and worth explaining.

What we mean by a long first cheque

When we lead a seed or Series A round, we aim to own between 12 and 20 per cent of the company afterwards. We write that cheque expecting to write two or three more. For a typical company, the first cheque is between a third and a half of what we expect to invest over its life.

So the cheque is long in two senses. It is large enough to matter on day one, and it is written by people who expect to hold it for a decade. Fund I sold its last holding eleven years after its first investment.

The arithmetic of ownership

Venture returns come from a handful of companies. In Fund I, three companies returned more than the other twenty-one put together. The question is how much of those few you own when they turn out to be the ones.

Suppose a fund holds 3 per cent of a company that later sells for $2 billion. After dilution that might be 1.5 per cent at exit, or $30 million: a fine result for a $50 million fund and a rounding error for a $650 million one. Hold 15 per cent at entry, defend part of it through later rounds, and the same sale returns well over $100 million. Nothing about the company changed. Only the stake did.

A portfolio of many small positions can be right about a great many companies and still produce an ordinary fund.

We would rather be right less often and own enough of what we are right about.

Reserves are most of the work

Across our recent funds we have held back between 55 and 60 per cent of committed capital for follow-on investment.

Reserves matter because the best information we ever have about a company arrives after we invest. We sit on the board. We see the numbers every month. We know whether the team does what it said it would. By the time a Series B comes round, we know more about the business than a new investor can learn in a six-week process, and it would be careless not to act on that.

Stackwell is a fair example. We led its seed round, then invested again at the Series A and again at the Series B, when usage was growing much faster than revenue and the round was harder to price than it looked from outside. That third cheque was the largest we wrote in the company. It was also the easiest decision of the three.

Reserves give a founder something else that is hard to price: a lead investor who can underwrite part of the next round if the market turns. In 2022 and 2023, several of our companies raised insider-led rounds that bought them a year. Parallax was one. It would have survived without that round, but it would have been a smaller company, sold sooner.

What it costs us

We see a great deal and say yes to very little. In a typical year the partnership meets more than 2,000 companies and leads eight or nine new investments. Some of the companies we pass on do very well, and we read about them like everyone else.

We also concentrate risk, and a large position that fails hurts. We manage that through spread across sectors and through the follow-on decision itself, which we treat as a new investment rather than a loyalty payment. About a third of the time we decline to take our full allocation in a later round. That is why the reserves are still there for the companies that need them.

And the pace is slow. A partner here joins two or three new boards a year, which limits how fast the firm can grow and is part of why our funds have grown more slowly than the market.

Why many small cheques cost more than they look

The opposite approach, many small cheques with little held back, is attractive for reasons we understand. It feels like diversification, and it keeps a firm in many conversations at once.

But a small cheque buys little influence and less information. It rarely comes with a board seat, so the investor hears about trouble at the same time as everyone else. When the follow-on round arrives there is often no money set aside, and the best companies in the portfolio dilute the firm out of its own winners. The diversification is real. It is diversification away from the outcomes that make a fund.

What founders get

For a founder, the trade is easy to describe. You get a lead investor who owns enough to care, who has money set aside to back you again, and who will still be around when the company is ten years old. In return we ask for a larger share of the round and a seat at the table.

If that sounds like the partner you want, our pitch page explains how to reach us, and the funds page shows how the approach has worked out so far.