One of the most difficult things about being in a small fund is how much capital to allocate to an investment. Many funds put the exact same amount in each deal. That doesn’t seem right to me because the valuations of each deal are always slightly different. Cap tables are different. The capital needs of the company to get to exit will almost certainly be different.
Others are very random in their approach. They might put more in one deal because either they understand it better or they trust the lead investor more. Perhaps something clicks between them and the team so they feel more comfortable putting more money in.
When you are a small fund, the math gets really difficult. You try to forecast the future, but of course that only usually plays out well on a blackboard. There will only be a limited number of checks that you can write, so there is really no diversification through an entire portfolio. You will have a limited amount of dry powder to follow on invest which means you will have to raise a backup fund to invest in later rounds.
We have thought about this a lot with our fund. We have decided that we don’t want to write smallish checks. We have both a downward limit on our check size and upward limit. The downward limit is roughly $250,000. We know that sometimes limits us. We could have a really nice looking tombstone of a bunch of companies but the reality is we don’t think we would be doing our LPs any favors because none of us would make money with smaller checks. On the upside, if we lead the round we like to put in $500,000. That’s a good solid lead for a round that is likely to be between $750,000 and $1,500,000. It sends a good signal to the market and it gives us the ownership percentage that we like at seed.
If either of those two investments exit where we think they could we would pay for our entire fund and make our LPs very happy.