Investor Reserves Didn’t Go to the Expected Companies

This post is by David Cummings from David Cummings on Startups

One of the most common adages in the venture and growth equity world is that you should reserve a meaningful percentage of the fund to participate in follow-on rounds. This usually translates to reserving between a quarter and half of the fund to double down on companies that are winning and performing the best, as well as providing a bit of runway for those making good progress but still needing to prove more.  Recently, I was reminded that the venture and growth equity world has adopted a completely different approach over the last 24 months, due to the downturn in the software industry. Investors paid such high valuations to enter companies that, when churn rates began to spike and new sales failed to materialize, effort, time, and attention shifted to the worst-performing startups. These startups still carried premium valuations but were struggling even more. Consequently, investors opted to try and salvage these businesses in a much more dramatic fashion than they historically would have. Historically, they would double down on their winners and invest a little into those that were performing adequately. However, with a dramatic fall in performance over the last 24 months, more of these reserves went to underperforming startups in an attempt to salvage something or to get them to a point where they could be self-sufficient. Reflecting on this, it makes sense how it played out, but it’s also interesting to reconsider the industry assumptions. The expectation that if you have a startup doing well, you’ll (Read more…)