Should a fund follow on in every company that gets marked up, or be selective?

Harry Stebbings · Apr 28, 2023

Reserves are bullshit because they rest on the false assumption that you can identify your winners within an eighteen-month window

His own winners have often been slow burners while apparent winners turned into losers quickly; Figma took years to show signal

36:43 20VC: In AI Who Wins? Startups or Incumbents? What Happens to Wealth Inequality? Why Will $10BN+ Companies Only Have 10 People | Why Defensibility in Startups is BS & Speed is Everything? Why Large Groups Worsen Decision-Making with Sarah Guo

Harry Stebbings · Jul 14, 2023

Follow-on investing is inherently hard because it assumes you can identify your winners far earlier than is actually possible

In his own portfolio the eventual winners were ones he would not have picked, and the ones he picked as winners were not

10:03 20VC: Why Fund Sizes Should Be Smaller, Should Founders Also Have Their Own Funds, Is Emerging Markets Investing Gone, Is Fintech Investing Dead & Who Will Be The Winners and Losers in VC in the Next 10 Years with Sheel Mohnot, Co-Founder @ BTV

Harry Stebbings · Sep 18, 2023

Reserves are fundamentally financial mismanagement because reserve decisions are driven by immediate post-investment traction data, which can mislead.

Reserve deployment is predicated on six-to-twelve-month traction; by that logic you would have skipped later rounds of a company like Docker whose early traction was misleading

31:10 20VC: Benchmark General Partner, Miles Grimshaw on The Five Pillars of Venture Capital, Why Data Can Be a Trap When Early-Stage Investing, Investing Lessons from Missing Figma and Plaid & The New Business Model for AI & Why Co-Pilot is an Incumbent Strate

Harry Stebbings · Mar 27, 2024 · hedged

You cannot accurately pick your winners early, which is the basis for a no-reserves model

Startups go through a trough of sorrow, so early signals don't reliably identify the eventual winners

9:07 20VC: a16z's Chris Dixon on Who Will Win the Next Generation of Venture, The Two Ways to Make Great Venture Investments and Find the Best Entrepreneurs & Why AI Will Strengthen the Position of the Incumbents Moving Forward

Harry Stebbings · May 1, 2024

Reserves are of questionable effectiveness, especially for funds with high ownership, because rocket ships are not sustainable value generators and investors overestimate their ability to pick winners early between seed and Series A

Rocket ship companies have huge downside/'trash can' value and early winner-picking ability is overrated

Scope: particularly between seed and Series A; particularly when you already have high ownership

43:17 20VC: Mark Suster on The Biggest Fundraising Lessons for VCs, Why the Correction in Venture is Still to Come, Why Private Equity Will Replace IPOs and M&A as the Exit Path & The Woke Left and a Trump Administration; What Happens?

Harry Stebbings · May 8, 2024

Reserves models don't work because investors systematically overestimate their ability to predict which portfolio companies will be the winners

If forced to stack rank a portfolio early, as Tom described, the ranking would not match the eventual outcomes

14:47 20VC: GV's Tom Hulme on Why Investing in Foundation Models is like Investing in "Power Stations", The Conventional Wisdom in VC that is BS & Lessons from a 24x Angel Track Record, 255x on Robinhood and Making Billions on Uber

Ophelia Brown · Mar 17, 2023

Follow-on investing can damage fund returns; a fund is better off buying its ownership at the lowest possible cost up front

Pro rata done at four or five times the entry valuation raises the blended average cost of ownership versus simply having bought the position at the lower initial price

Scope: especially in the growth-inflated market of recent years, where follow-ons are priced at 4-5x the initial round

0:00 20VC: Why Growth Investors Ruined the Venture Market, Why Marketing in Venture Has No Substance, Why Follow-On Investing Can Damage Returns and The Mistakes VCs Made in the Last 18 Months with Ophelia Brown, Founder @ Blossom Capital

Ophelia Brown · Mar 17, 2023

Follow-on investing can materially damage fund returns; investors should buy their ownership at the lowest possible cost, at seed or Series A, rather than reserving heavily

Following on at a 4-5x markup only partially de-risks the investment, so adding capital at a much higher valuation worsens your blended average entry price versus just buying ownership at the initial low cost

Scope: Blossom keeps a very small follow-on allocation for companies that need help getting to an exit or struggle to raise; 95% of capital goes to initial investments; framed against the growth market environment of recent years

11:50 20VC: Why Growth Investors Ruined the Venture Market, Why Marketing in Venture Has No Substance, Why Follow-On Investing Can Damage Returns and The Mistakes VCs Made in the Last 18 Months with Ophelia Brown, Founder @ Blossom Capital

Terrence Rohan · Feb 5, 2024

Reserves and follow-on capital actively hurt seed investing

Scope: specific to seed-stage investing

0:15 20VC: The Biggest Misconceptions & Hardest Truths About Seed Investing Today; Why The Best Founders Don't Need You, Why Uncapped SAFEs Are Good, Why Reserves Are Bad, Why Signalling is BS, Why Price Doesn't Matter with David Tisch & Terrence Rohan

Terrence Rohan · Feb 5, 2024

Reserves and follow-on capital hurt seed investing on balance; a single-check strategy would produce higher total DPI

Follow-on dollars face adverse selection at Series A — you get haircuts on the best companies just like everyone else — and a hot Series A isn't a reliable signal, since sleepers that were nothing at Series A can explode at Series B; the pro rata game is a different, landmine-filled game

Scope: 'on balance'; he does make an exception noise about opportunity funds

44:05 20VC: The Biggest Misconceptions & Hardest Truths About Seed Investing Today; Why The Best Founders Don't Need You, Why Uncapped SAFEs Are Good, Why Reserves Are Bad, Why Signalling is BS, Why Price Doesn't Matter with David Tisch & Terrence Rohan

Harry Stebbings · Sep 12, 2022

Taking pro rata by default is lazy — you should either be aggressive about putting more money into a company or not invest more at all

Same logic as never being in 'hold' mode: a default position is a weak position

33:27 20VC: Why 95% of Venture Capital is Not Really "Venture Capital" | The Five Core Levers Needed To Assess Risk and Price a Startup | The Future of Venture; Who Wins, Who Loses, What Happens to the Crossover Funds with Will Quist, Partner @ Slow Ventures

Trae Stephens · Apr 3, 2024

Reserves should be held to double, triple or quadruple down where conviction is justified, but promising portfolio companies structural pro-rata reserve checks is a mistake

Doing your pro rata is lazy and carries no information; doing more than pro rata is a real signal, so if you lack high conviction you should do nothing at all

Scope: requires fund-level access to capital rather than striping across funds

31:37 20VC: Founders Fund's Trae Stephens on Why The Most Competitive Deals are the Worst, Why No Company is Successful Because of their VC, Why We are Making ZIRP Mistakes Again Today, Why Loss Ratio is BS and Upside Maximisation is Everything

Harry Stebbings · Oct 14, 2024

Funds relying on pro rata are being lazy — it's an easy get-out, and investors should instead be all in or all out on a follow-on

18:59 20VC: Investing Lessons from FC Seeding Uber, Airtable and Coupang | Why Pro Rata is the Original Sin in VC | Why Liquidity Has Died in 2024 | Why LPs are Pissed with VCs | The Hard Truth About Seed Fund Economics with David Frankel @ Founder Collective

Taavet Hinrikus · Apr 28, 2025

Simply taking pro rata is a cop out — you should either do nothing or triple down — but in practice a fund needs a more uniform, systematic approach to follow-ons.

Rounds happen a year later when circumstances have changed and there is a signaling dynamic to manage, so pure case-by-case conviction isn't workable across a fund.

Scope: still being worked out at Plural; he is unsure whether signaling risk is real

23:39 20VC: VCs are Spreadsheet Monkeys and are Commoditised | Why Fees and Carry Misalign GPs and LPs | Why Founders Will Realise Multi-Stage Funds Damage Seed Rounds | Why We Need European Sovereignty More Than Ever with Taavet Hinrikus

Miles Grimshaw · Sep 18, 2023

Benchmark does not reserve with a future-investment orientation: either it is fully in as a whole commitment at first partnership or it is not in at all.

They don't invest with the mindset of establishing ownership now and buying more later; reserves exist only for tough times

Scope: they do hold reserves for tough times

31:38 20VC: Benchmark General Partner, Miles Grimshaw on The Five Pillars of Venture Capital, Why Data Can Be a Trap When Early-Stage Investing, Investing Lessons from Missing Figma and Plaid & The New Business Model for AI & Why Co-Pilot is an Incumbent Strate

Harry Stebbings · Apr 28, 2025

Uniform reserve policies — always writing a follow-on check when a company raises a good round — are wrong; investors should be all in or not at all.

23:28 20VC: VCs are Spreadsheet Monkeys and are Commoditised | Why Fees and Carry Misalign GPs and LPs | Why Founders Will Realise Multi-Stage Funds Damage Seed Rounds | Why We Need European Sovereignty More Than Ever with Taavet Hinrikus

Immad Akhund · May 12, 2025

He does maintain reserves but deploys them selectively rather than automatically writing a pro-rata check into every portfolio company, and his strategy also includes occasional larger high-conviction initial checks.

He has never believed in doing a pro-rata check for every company just because that's the default; he'd rather be selective, and he'll put a larger check (e.g. $1M) into a seed when he has known the founder for years.

33:29 20VC Exclusive: Mercury Founder Launches First $26M Fund | Why Founders Should Take the Highest Price | Why Serial Entrepreneurs are Better | Why AI Is So Overhyped | The Future of Venture Capital with Immad Akhund

Mo Koyfman · Aug 8, 2022

Holding a single fund-level reserve bucket rather than attaching reserves per company at the time of investment produces better follow-on discipline

Follow-on is a haves-and-have-nots game; a shared bucket applied as companies perform forces rigor about who deserves capital and prevents throwing good money after bad

Scope: background modelling still done with the CFO

18:45 20VC: Investing Lessons from Fred Wilson and Why Small Funds Outperform Large Funds | Why the Secret to Winning in Venture is Splitting Deals |Learnings From the Biggest Hits and Biggest Losses | Why Anyone That Always Does Their Pro-Rata is Wrong with Mo

Satya Patel · Jan 30, 2023 · hedged

Investing your own money without a fixed fund size makes reserve and pro rata decisions purely situational rather than model-driven

There is no fixed pool of capital to allocate and no market expectation that you are leading the round and therefore a signal

Scope: still an open internal debate; depends on the situation

33:21 20VC: Homebrew's Hunter Walk and Satya Patel on Why $100M is Not Enough To Execute a Seed Strategy Today | Why They Decided not to Raise New External Funds | Where Are We in the Cycle & What is Truly F***** | Why Founders Should Take Secondaries Earlier

Adam Fisher · Jan 22, 2024

Reserves are a fund-management tool, not a commitment to a company or team, and allocations should be set but constantly adjusted.

To manage a fund's resources properly you must assume some companies will be abandoned; you always have to decide which are not good enough relative to the others.

48:44 20VC: Why Small Markets are Better Than Big Markets, The Biggest Delusion of Early Stage VC, Why AI Investing is like a Horserace and Why The Most Ambitious Companies Growing the Fastest are not the Best Investments with Adam Fisher, Partner @ Bessemer

Sarah Guo · Apr 28, 2023

Not holding reserves is a deliberate and focusing choice for a very early stage fund

It means leaving money on the table later but avoids the distraction of constantly underwriting your own portfolio and keeps the fund aligned with the entrepreneur

Scope: specific to being a very early stage fund

37:15 20VC: In AI Who Wins? Startups or Incumbents? What Happens to Wealth Inequality? Why Will $10BN+ Companies Only Have 10 People | Why Defensibility in Startups is BS & Speed is Everything? Why Large Groups Worsen Decision-Making with Sarah Guo

Harry Stebbings · Jun 23, 2023

A no-reserves model is preferable to holding reserves

He doesn't believe he is a good enough picker on trajectory — picking on momentum would have led him into hyped companies that were not good sustainable investments

Scope: stated as his own preference for his fund

7:49 20VC: How to Raise a Venture Fund from Deck to First Meetings to Final Close, Why Venture is a Young Person's Game and Why Multi-Stage Funds Have Not Ruined Seed with Rob Go, Co-Founder @ Nextview

Harry Stebbings · Oct 14, 2024

He does not do reserves, because reserves would have been deployed into the three fast-traction consumer companies rather than the slower enterprise companies that turned out to be phenomenal investments.

Consumer companies show traction early and enterprise companies show it late, so reserve decisions systematically favor the wrong companies.

11:37 20VC: Investing Lessons from FC Seeding Uber, Airtable and Coupang | Why Pro Rata is the Original Sin in VC | Why Liquidity Has Died in 2024 | Why LPs are Pissed with VCs | The Hard Truth About Seed Fund Economics with David Frankel @ Founder Collective

Will Quist · Sep 12, 2022 · hedged

A firm that gets genuinely disciplined at underwriting follow-ons can increase the total capital it returns, versus the no-reserves 'maximise call options at low cost basis' approach

Both extremes are coherent; which is right depends on your own opportunity cost of capital — your 'cost of a bullet' — and which skill set you have actually refined

Scope: manager-, fund- and firm-specific answer; requires LPs who support that cost of capital

34:06 20VC: Why 95% of Venture Capital is Not Really "Venture Capital" | The Five Core Levers Needed To Assess Risk and Price a Startup | The Future of Venture; Who Wins, Who Loses, What Happens to the Crossover Funds with Will Quist, Partner @ Slow Ventures

Chris Dixon · Mar 27, 2024 · hedged

He now leans toward holding reserves and doing pro rata follow-ons rather than a no-reserves seed model

Being involved with a company and watching an entrepreneur handle things over a multi-year process gives you real information, and the winners can be so big that you want the pro rata

Scope: calls it a hard question; the informational edge only holds if you're good at it; acknowledges the counterarguments: full alignment with founders on valuation, and averaging up cost basis dragging returns

9:27 20VC: a16z's Chris Dixon on Who Will Win the Next Generation of Venture, The Two Ways to Make Great Venture Investments and Find the Best Entrepreneurs & Why AI Will Strengthen the Position of the Incumbents Moving Forward

Mike Maples · Jan 6, 2025

The right follow-on reserve is above zero — Floodgate settled on 70% upfront and 30% reserves with a single partner accountable for that basket

Going to zero means giving up a right that is worth something, so the real question is not whether but how much above zero, and accountability keeps reserves from being used to prop up failing companies

Scope: 70/30 is Floodgate's specific settlement, not a universal number

9:21 20VC: How To Do a 10x Seed Fund in 2025 | Three Frameworks to Evaluate Startups an Founders | Lessons from Losing Billions Missing Airbnb and Pinterest & Investing Lessons from Charlie Munger with Mike Maples @ Floodgate

Brad Gerstner · Oct 10, 2022

Missed milestones only matter if they bear on the original big bet; when the facts of the business, the product's relevance and the world have radically changed, supporting a pivot is a totally new underwriting rather than a continuation of the old one.

With Snowflake, the early miss had no bearing on the big bet so more money was an easy one-minute decision; in the software company that missed plan by 70%, the underlying facts and the product's relevance genuinely changed, so you must accept the market feedback.

16:01 20VC: Altimeter's Brad Gerstner on Why Supercycles and the Powerlaw is the Most Important Thing In Investing, Why Portfolio Diversification is the Opposite of Risk Mitigation and The #1 Question Brad Asks All New Recruits

David Schneider · Sep 11, 2024

Follow-on should be continuous across rounds rather than one-and-done, but you should skip rounds where the risk-adjusted return no longer justifies the price

A large fund gives plenty of powder to layer in when prices are right and the business is executing, but the required returns still have to be there

45:17 20VC: Scaling ServiceNow to $5BN in ARR | Leadership Lessons from Doug Leone, Frank Slootman and Bill McDermott | VC Value Add: Is it Real and Why the Worst VCs are "Seagull VCs"

Peter Singlehurst · Mar 19, 2025

Doubling down on an existing portfolio company requires re-underwriting the case and seeing a fresh 5x upside from the new entry point

A reinvestment is a new investment decision, so the investment case and five-times upside case get revisited from scratch

Scope: applies to meaningful follow-on checks, not small pro-rata

48:59 20VC: The 10 Question Framework a $217BN Manager Uses to Make Investment Decisions | Lessons from Turning Down Stripe, Coinbase and Losing Money on Northvault | The Bull Case for Bytedance | How Anduril Could Be a $200BN Company with Peter Singlehurst

Harry Stebbings · Sep 6, 2023

Reserves are fundamentally hard dollars to deploy well

You deploy them based on traction, but the fastest-spiking companies are often not the sustainable value creators, even though the logic pushes you to concentrate capital into them

52:40 20VC: Why Small Funds Outperform Large Funds & AUM is a Vanity Metric | Why 99% of Investments in AI Startups Will Go To Zero | Being a "Traction First" VC & Investing Lessons from Investing in Canva and Missing Figma with Nikhil Basu-Trivedi

Harry Stebbings · Jan 22, 2024

Concentrating reserve capital into the fastest-growing seed companies would have been a mistake, because that growth often proved unsustainable and winners can't be predicted.

Several of his seed investments grew unbelievably fast but the growth was not sustainable, particularly in consumer.

Scope: Drawn from his own seed portfolio, especially consumer companies

49:17 20VC: Why Small Markets are Better Than Big Markets, The Biggest Delusion of Early Stage VC, Why AI Investing is like a Horserace and Why The Most Ambitious Companies Growing the Fastest are not the Best Investments with Adam Fisher, Partner @ Bessemer

Adam Fisher · Jan 22, 2024

He would rather forgo upside from not doubling down than risk doubling down into a company growing unsustainably with too much burn.

He is risk averse by temperament: losing $20M on an unsustainable company worries him far more than missing another $30M of gains.

Scope: Presented as personal style, not a recommendation for everyone

49:38 20VC: Why Small Markets are Better Than Big Markets, The Biggest Delusion of Early Stage VC, Why AI Investing is like a Horserace and Why The Most Ambitious Companies Growing the Fastest are not the Best Investments with Adam Fisher, Partner @ Bessemer

Harry Stebbings · Jan 20, 2025

Reopened M&A markets are phenomenal for seed funds because they enable recycling and getting more dollars to work

Exits allow seed funds to recycle capital

73:20 20VC: Why Large Seed Rounds Increase the Chances of Success | When to Sell in Venture | Why Multi-Stage Firms Do Not Do The Work | Is Europe Totally F****** and Why AI Means London Can Compete with the US with Hussein Kanji

David Frankel · Aug 8, 2026 · hedged

Once a position has captured roughly 80% of its value, a small fund is better served hunting new seed rounds than chasing the remaining 20% at Series A prices

With a smaller fund, the question is where else you can multiply ownership rather than take a 5x or 10x on an existing position

Scope: acknowledges the current environment makes this look silly in retrospect; depends on how long this environment lasts

32:35 20VC: The AI Boom Will Create Enormous Roadkill: Who Wins & Loses | Why Founders Should Never Take Multi-Stage Money at Seed | Why Triple, Triple, Double, Double is Good Enough

David Tisch · Feb 5, 2024

If you have follow-on capital, the answer is to be great at follow-ons rather than to structurally rule them out

The job is to make a great decision on every check at every step and get as much money as possible into the best opportunities available in a given fund cycle; you shouldn't pre-commit to saying no

Scope: concedes Terrence's critique is accurate to a good level; their opportunity fund deliberately slants early to stay a venture rather than growth investor

47:18 20VC: The Biggest Misconceptions & Hardest Truths About Seed Investing Today; Why The Best Founders Don't Need You, Why Uncapped SAFEs Are Good, Why Reserves Are Bad, Why Signalling is BS, Why Price Doesn't Matter with David Tisch & Terrence Rohan

Harry Stebbings · Jan 6, 2025

The data show investors grossly overestimate their ability to pick their own winners, but a fund that does no follow-ons throws away the asymmetric information it has from knowing the company

The data on follow-on selection does not support investor confidence

8:12 20VC: How To Do a 10x Seed Fund in 2025 | Three Frameworks to Evaluate Startups an Founders | Lessons from Losing Billions Missing Airbnb and Pinterest & Investing Lessons from Charlie Munger with Mike Maples @ Floodgate

Harry Stebbings · Aug 8, 2022

In a capital-constrained fund, every dollar allocated to a merely okay company is a dollar taken from a significantly higher-performing one

Reserve capital carries a real opportunity cost inside a small fund

24:54 20VC: Investing Lessons from Fred Wilson and Why Small Funds Outperform Large Funds | Why the Secret to Winning in Venture is Splitting Deals |Learnings From the Biggest Hits and Biggest Losses | Why Anyone That Always Does Their Pro-Rata is Wrong with Mo

Harry Stebbings · Jan 6, 2025

At today's round prices, exercising pro rata from a small fund can cost several million dollars, making it impractical

Scope: applies to small fund sizes

9:13 20VC: How To Do a 10x Seed Fund in 2025 | Three Frameworks to Evaluate Startups an Founders | Lessons from Losing Billions Missing Airbnb and Pinterest & Investing Lessons from Charlie Munger with Mike Maples @ Floodgate

David Tisch · Feb 5, 2024

Over-reserving is a bigger mistake than under-reserving

The priority is getting as much of the fund as possible into companies, and in a scaled model the right switch point is genuinely unknowable

Scope: admits he doesn't know the right answer

53:19 20VC: The Biggest Misconceptions & Hardest Truths About Seed Investing Today; Why The Best Founders Don't Need You, Why Uncapped SAFEs Are Good, Why Reserves Are Bad, Why Signalling is BS, Why Price Doesn't Matter with David Tisch & Terrence Rohan

Mark Suster · May 1, 2024

His biggest investing mistake was piling money into fast-growing winners, and the underlying driver of the mistake was ego rather than analysis

Piling in worked twice so he assumed it was the right playbook; the fastest-growing company he'd ever seen had a $350M offer, the founder refused, the market changed and it sold for zero — the motive was not wanting a new investor to own more than him

46:33 20VC: Mark Suster on The Biggest Fundraising Lessons for VCs, Why the Correction in Venture is Still to Come, Why Private Equity Will Replace IPOs and M&A as the Exit Path & The Woke Left and a Trump Administration; What Happens?

Jake Gibson · Jul 14, 2023

A one-check, no-follow-on strategy doesn't make sense for a lead seed investor, because you end up following on only into companies that must have capital rather than into your best ones

The companies that are killing it raise easily; it's the ones doing well but not well enough that need more capital, and some of those become very successful — he cites putting a little more into a company that then raised at $100M from Andreessen

Scope: for lead investors / funds like BTV

9:18 20VC: Why Fund Sizes Should Be Smaller, Should Founders Also Have Their Own Funds, Is Emerging Markets Investing Gone, Is Fintech Investing Dead & Who Will Be The Winners and Losers in VC in the Next 10 Years with Sheel Mohnot, Co-Founder @ BTV

David Frankel · Oct 14, 2024

A strict no-reserves policy breaks down in practice because of negative correlation bias: the companies that need more capital are the ones not getting there fast enough, and sometimes you must fund them anyway.

In Fund One with zero reserves, Trade Desk would have run out of money if the firm hadn't invested, so even the most disciplined partner broke his own rule.

Scope: describes Fund One specifically

12:05 20VC: Investing Lessons from FC Seeding Uber, Airtable and Coupang | Why Pro Rata is the Original Sin in VC | Why Liquidity Has Died in 2024 | Why LPs are Pissed with VCs | The Hard Truth About Seed Fund Economics with David Frankel @ Founder Collective

Tomasz Tunguz · Apr 21, 2023

In a radically different capital markets environment, founders need a financial partner with the wherewithal to support them across multiple rounds

Companies go up and down — Snowflake's middle round almost didn't happen because it was burning too much with poor gross margins, and insiders had to step up before it became the fastest growing software company in history

23:37 20VC: Who Wins in AI; Startup vs Incumbent, Infrastructure vs Application Layer, Bundled vs Unbundled Providers | From 150 LP Meetings to Closing $230M for Fund I; The Fundraising Process, What Worked, What Didn't and Lessons Learned with Tomasz Tunguz

Saam Motamedi · Jul 15, 2024

Reserves should be sized for defense as well as offense, because great companies hit air pockets and need insider-led rounds

Many of the great companies they've backed hit air pockets and Greylock led inside rounds out of defense; without a high reserve ratio they wouldn't have had the capital to do it

Scope: no formulaic model; managed at the portfolio level; driven by investing very early so positions can compound

37:12 20VC: Why We Are in a Bubble & Now is Frothier Than 2021 | Why $1M ARR is a BS Milestone for Series A | Why Seed Pricing is Rational & Large Seed Rounds Have Less Risk | Why Many AI Apps Have BS Revenue & Are Not Sustainable with Saam Motamedi @ Greylock

Harry Stebbings · Jan 30, 2023

During the recent boom, declining your pro rata carried no consequence because founders had a surplus of other interested capital

There was so much capital available that saying you weren't participating simply meant someone else took the allocation and nobody cared

33:02 Declining pro rata carried no consequence during the recent boom due to capital surplus

Hunter Walk · Jan 30, 2023

Pro rata should be treated as a money-making opportunity and the mechanism for getting paid for work already done, not as something that changes how you work with a company

They already work harder than their ownership percentage warrants relative to the value they bring, and pro rata is how you double down on the winners

33:45 Pro rata is how you get paid for already delivered value not a relationship changer

Ophelia Brown · Mar 17, 2023

A decision not to reinvest should never come as a surprise to a founder; if it does, the investor has misled them

With a budget, business plan, KPIs and monthly or more frequent discussion of what is and isn't working, founders already know when it's working or not

14:48 Founders should never be surprised by a non follow on decision since ongoing communication already signals it

Harry Stebbings · Oct 16, 2024

Advice that early-stage investors should use reserves to drive DPI only works for exceptional pickers; most investors are not good pickers and end up concentrating capital into the wrong companies.

Reserve strategies depend entirely on picking ability, and only a handful of investors like Fred Wilson have it.

21:06 Reserve driven dpi strategies only work for exceptional pickers most investors arent

Jason Lemkin · Jan 4, 2024

The biggest surprise of 2023 was that multi-billion-dollar funds stopped doing their pro ratas even in strong up rounds for very good companies

He grew up in a world where any company that doubled or tripled revenue got the big fund's pro rata automatically, and he watched a multi-billion-dollar fund put in zero on a very good deal

23:35 Mega funds increasingly skip pro rata even on genuinely good up rounds

Jason Lemkin · Jan 4, 2024

The sheer number of unicorns minted in the work-from-home boom broke VC reserve models

Reserves earmarked for hundreds of overvalued unicorns that will never raise again consumed the models, so funds started declining to fund even genuine winners to preserve dry powder for struggling unicorns

26:09 Unicorn glut from 2020 21 consumed reserve models crowding out genuine winners

Kevin Ryan · Apr 10, 2024

Stopping follow-on investment once companies reach $100-200M valuations, and capping exposure at roughly $10-15M per company, is what produces the highest returns even though it means leaving money on the table.

They want the highest-return investments, and once a company is worth a billion it is no longer that; the results bear this out.

39:02 Cap follow on investment once valuation passes 100 200m to maximize return multiple

Ed Sim · Oct 27, 2023

In enterprise software the second check into a company is likely to be bigger than the first, and firms need pockets deep enough to fund bridges themselves rather than relying on outside signal

Enterprise companies take a long time to build technical product and reach product-market fit, often requiring a bridge or two, and Snyk raised three rounds from Boldstart alone before its Series A

16:56 Enterprise companies often need internal bridge rounds so funds must carry deep reserves not rely on outside signal

Julio Vasconcellos · Sep 23, 2022

To maximize multiple on invested capital, a fund should concentrate more capital into the first check and operate with much thinner reserves than the industry norm — roughly 25% of the fund rather than the typical 50%

Highest multiple on capital, the Benchmark-style objective, requires more bets with more capital deployed at first check once you have conviction

31:08 Concentrate into first check with thinner reserves maximizes multiple on invested capital

Dharmesh Shah · Jun 13, 2022

Never doing follow-on investments is economically suboptimal but eliminates the signaling problem, since founders know in advance that 100% of his companies get no follow-on.

Selective follow-ons force him to spend time evaluating companies and create a damaging signal for the ones he skips

56:24 Never following on eliminates the signaling problem though economically suboptimal

Mamoon Hamid · Oct 21, 2024

A board investor should almost always put something into a follow-on round because doing nothing sends a damaging signal

Signaling risk from a board member abstaining is severe, whereas doing a small amount lets you get away with less than pro rata, especially in oversubscribed rounds where everyone is happy

22:34 Board member abstaining from follow on sends a damaging signal

Mike Maples · Jan 6, 2025 · hedged

Exercising pro rata in a company you own and believe in is playing offense with your money, even at bid-up prices, because it's a right nobody else has

Pro rata is an exclusive right worth something, and in the occasional case where you just know the company is great, using it is offense rather than defense

8:28 Exercising pro rata in conviction companies is offense not defense

Nikhil Basu Trivedi · Sep 6, 2023

It is still worth reserving capital to do pro rata in the round following your own, especially for a newer firm

Founders sometimes need extra support to reach the next round, and in today's tighter market next-round leads treat insider participation as a signal, so a firm needs to be able to say it can support the company

51:11 Reserves for pro rata in the immediate next round remain valuable especially for newer firms

Harry Stebbings · Sep 12, 2022

The environment around reserves is about to change materially, with future investors scrutinising whether a fund actually deployed its reserves

In the prior era capital was so abundant that no one cared whether you took your reserves

33:49 Future lp scrutiny on whether reserves were actually deployed will increase post abundant capital era

Harry Stebbings · May 12, 2025

A fund like Immad's should skip reserves entirely — deploy the largest initial checks it can get into rounds across many companies, then back the winners through deal-by-deal SPVs with deal-by-deal carry.

He has access to great later-stage capital that would happily do SPVs, so reserves are unnecessary and deal-by-deal economics are better for his personal finances.

33:52 Skip reserves entirely use deal by deal spvs to back winners later

David Tisch · Feb 27, 2023

How a firm manages follow-on reserves can't be usefully debated in the abstract because it depends on the specific decisions in the room.

You have to be inside each yes/no decision to understand it; abstract discussion of the mechanics isn't important.

18:46 Follow on reserve management cannot be usefully debated in the abstract only case by case

Mark Suster · May 1, 2024

Every VC should sort portfolio companies into three buckets — clear failures to starve, clear winners to back heavily, and believable companies the market hasn't accepted yet where getting them over the hurdle matters

42:50 Triage into fail win and market underappreciated believers guides follow on

Mark Suster · May 1, 2024

Follow-on decisions should turn on three tests — belief in the market, belief in the team, and belief in the valuation — and it is right to pass on a great company purely on price when traction doesn't support the round

One of their best companies went 15M to 90M to 500M and will be worth billions, but at $500M it lacked the traction to support the price, so they didn't write the check — opportunity cost matters

44:26 Three tests market team valuation justify passing on price alone

Mark Goldberg · Oct 25, 2024

Peanut-buttering reserves across every pro-rata round is bad for both founders and LPs; a light reserve model with selective double-downs is better

Supporting companies early matters, but spreading reserves indiscriminately across all pro ratas serves neither founders nor LPs

16:31 Peanut buttering reserves across every pro rata harms founders and lps

Tom Hulme · May 8, 2024

As an angel he should not follow on into later rounds

He had companies that marked up 50x and then went to zero, pro rata allocations would have been $1M+, and following on means competing with VCs in a completely different game; a full follow-on strategy would have made his portfolio far inferior

15:04 Angels should avoid follow on since they cannot compete with vcs in picking winners

Frank Rotman · Aug 26, 2021

Selectively leading follow-on rounds does not create signaling risk

The signals are mixed rather than singular: the best portfolio companies grow beyond the fund's ability to fund them, and at the other end there are companies where not leading simply reflects comfort with existing ownership

32:44 Selectively leading follow on rounds does not create signaling risk

Harry Stebbings · Aug 8, 2026

Peter Thiel has argued that simply doing every follow-on round priced up by a good-brand investor would have produced much better returns

31:20 Index every marked up follow on beats selection

David Frankel · Aug 8, 2026 · hedged

Following on in every investment would have produced better absolute returns for the fund

The data over this golden era would probably show it works, but you'd have had to follow on in everything, which drags the multiple even as absolute dollars rise

31:30 Follow on everything raises absolute dollars but drags the multiple

Jake Gibson · Jul 14, 2023 · hedged

There are companies where he knows there is very little chance he will put in more capital, so losers are identifiable even if winners aren't

Signals like a founder lacking a sense of urgency, or the market not developing as originally believed, make continued support hard to justify

10:17 Losers are identifiable via founder urgency and market signals even when winners are not

Harry Stebbings · Jul 14, 2023

You cannot reliably identify losers either, because the losers look the same as the slow burners that end up returning 0.5x to 1x

10:25 Losers cannot be reliably identified either since they look like slow burners that return 0 5x to 1x

Terrence Rohan · Feb 5, 2024

The follow-on model does work if you build the founder relationship at day zero

Founders never forget the people who bet on them early, so a seed investor who did the job well at the A can knock on the door at Series B and get a reasonable slice, over yet another growth fund cold-knocking

48:32 Follow on access is earned through early relationship building not guaranteed by capital

David Tisch · Feb 5, 2024

The right reserves strategy is to put capital in right before the market realizes how good a company is

Some companies work from the beginning and you should lean into those; others take a long time to find product-market fit and you want to sense they're moving toward the great outcome before outsiders or other insiders do

50:03 Reserve capital right before the market recognizes a companys quality

Adam Fisher · Jan 22, 2024

Investment decisions are path-dependent, so counterfactuals about 'what if I had invested more' are unanswerable.

Doubling down on one company and hitting trouble would have dented his confidence on the next investment — each decision affects the following one.

50:35 Follow on decisions are path dependent making counterfactual what if analysis unanswerable

Gokul Rajaram · Mar 16, 2026

Doubling down on your existing winners via reserves is the better philosophy than maximizing initial lines, because you have far more insight into a company you've worked with than into a random company you meet

A huge part of Founders Fund's success comes from doubling down on the companies that matter, run through their growth practice; working closely with founders gives you insight into the company and its future opportunity that new deals can't match

55:35 Reserves into known winners beat more initial checks

Danny Rimer · Jun 17, 2024

Signalling risk from multistage investors is largely a thing of the past

There is so much money sloshing around and so many investors run multiple funds; power has shifted decisively from investors to entrepreneurs over the last two decades, so a capable founder can raise regardless of who was in prior rounds

26:02 Double down when you see superior signal versus peers and founder accepts

Rob Go · Jun 23, 2023

Follow-on decisions should be made on a scheduled basis, decoupled from any live financing opportunity

When a fancy firm comes in to lead a Series B you convince yourself it's the best opportunity in the world; a quarterly ranking of the portfolio forces you to justify why a company you weren't bullish on a quarter ago now deserves capital

8:15 Follow on decisions should be made on a scheduled quarterly basis decoupled from live financings

Harry Stebbings · Aug 8, 2022 · hedged

He doubts firms that tell founders they will blindly do pro rata regardless of performance actually behave that way

20:38 Claims of blind pro rata policies are not credible in practice

Mo Koyfman · Aug 8, 2022

An investor should do pro rata whenever the company deserves it or the situation warrants it, including cases where the company hasn't earned it on the merits but the investor's participation is needed to get a round done

He will never hurt a company by withholding pro rata; if another investor is willing to pay forward and his participation is essential to closing the round and to correct signaling, he participates

21:08 Participate in pro rata even without merit when needed to close the round or correct signaling

Mo Koyfman · Aug 8, 2022

In the coming downturn, a company's ability to attract a quality outside VC check itself makes the company better positioned, so doing your pro rata alongside it becomes an easier decision

More capital buys more time to achieve objectives, which raises the likelihood of success — and with round sizes and valuations coming down, a small pro rata check into a company funded by a good firm at a rational price is cheap risk reduction

25:20 Downturn quality lead at rational price eases pro rata decision