One of the unique things about early stage investing is the ability (and in my view, the need) to continue to invest in the companies for multiple rounds of investment.
Late stage, public market, private equity, real estate, and most other popular forms of investing typically involve a single or a time limited series of investments.
But at USV, we typically will make four to six investments in a “name” over five to seven years.
And we do this style of investing with a fixed pool of capital.
So we have gotten very analytical about modeling out our reserves for our follow on investments.
What we do is maintain a spreadsheet of every investment in a given fund and the likely amount and timing of future follow on investments as well as the probability of us having the opportunity to make those investments.
We then run a Monte Carlo simulation 1000 times and draw a distribution curve of outcomes and then manage our funds against that.
We have a “cushion” for error which is our ability to recycle roughly 20% of our funds and that has come in handy on every fund we have managed at USV.
I think the proper allocation of follow on capital into the portfolio and making sure you can follow your winners and defend your position in certain situations is absolutely critical to producing top tier returns.
It is not as important as portfolio selection (which comes from our thesis) or our work on the boards of our portfolio. Those two things are the most critical factors in our performance.
But I think capital allocation/fund management is third on the list and is a missed opportunity for many early stage investors.
