If all Seed & Pre-Seed funds shift just 5% of their allocation from first checks to follow-on checks, there will be $3 billion fewer available for first checks.
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Rich:
Let's shift gears and talk about the VC allocation shift. We need a quick sidebar just to understand VC portfolio strategy. Every venture fund goes out to investors and says, we're going to allocate a certain percentage for first checks and a certain percentage for follow-on checks. Some funds do 0% for follow-on and that's their strategy. Other funds will do a really heavy they'll reserve 50% or more than 50% for follow-ons. A typical seed fund, especially an emerging manager fund, you're going to put, let's say 75% of your capital towards first checks. Which leaves 25% for follow-ons. If you're a hypothetical$50 million fund, You've got 37,500,000 reserve for first checks and 12,500,000 for follow-on checks. Now you take this strategy across the entire seed market and every single seed investor has their portfolio companies coming back to them to raise more capital because they are doing okay, but haven't quite reached escape velocity yet. And what do you get? You get a massive allocation shift across the whole industry. A 5% shift just in seed and pre-seed takes$3 billion out of first checks and moves it into follow on checks. That's 3 billion less dollars that you have access to for a next round. This leaves less capital for new checks. And one last data point for today that's important to note, markups for venture funds have slowed down. There's a great chart from Aumni that the post money valuation markups from Seed to Series A is down across the board. PitchBook calls these step-ups and they show similar data that the step-ups are way down. Everything is slowing down.