Some tough questions VCs and founders need to address out in the open

There were a few topics to tackle in this week’s edition so I created one larger VC focused post.

The first essay is from a new guest author, Health Velocity Capital’s Saurabh Bhansali, who wrote about why founders should care a lot more about fund size. As it turns out, size does matter… a lot. From there, I delved into a question that is very rarely discussed in any public forums related to founders taking money off the table in the form of secondary: The when, the how and the why.

In our next edition, I’ll share more thoughts on the two upcoming digital health IPOs: Hinge vs. Omada. Stay tuned!

Bhansali, you’re up…

Founders, AUM matters more than you might think

By Saurabh Bhansali

As a co-founder and partner at a $500 million AUM growth investment firm, I have spent countless hours helping entrepreneurs raise capital. Along the way, I’ve learned that not all capital is created equal. I’ve seen how the size of a lead investor’s fund can shape a company’s journey, which might not be obvious when you're signing the term sheet, but definitely becomes more tangible down the road.

As a founder, why does the fund size matter? As an aside, this is an excellent explainer from VC legend Josh Kopelman. Once you’re done skimming this piece, I highly recommend giving it a listen.

Fund size makes a huge difference. The size of the fund backing your company will influence your experience in ways that go far beyond the check size and stage at which the firm invests. It may seem obvious that big funds can write big checks. But it’s more than that. It shapes incentives, defines success metrics, and decision-making in the boardroom.

Because I’m a bit of a finance nerd, let’s explore the implications of raising from smaller vs. larger funds, with some simple math and stories to bring it to life. Keep in mind that these are hypothetical and illustrative scenarios. In reality, there’s a whole lot more nuance.

The Initial Investment

VCs aim to return a multiple of their fund size, often 3x, to be considered top-tier performers. This math drives their behavior because if they don’t meet those expectations, they’re unlikely to successfully raise another fund from their limited partners (LPs).

Let’s take two hypothetical funds:

• Smaller Fund: $200M
• Larger Fund: $1B

Assuming funds reserve roughly 50% of their fund for follow-ons (plus it makes the example math easy!), the initial capital allocated for new investments is:

• $200M Fund → $100M for initial investments
• $1B Fund → $500M for initial investments

Assuming both funds target 20 companies:

• $200M Fund → $5M average first check
• $1B Fund → $25M average first check. Of course, this could be $5M initial checks in 100 companies or anything in between, but let’s keep the math simple for the purposes of this illustration

That scale impacts what kind of deals they can prioritize. The larger fund needs to deploy more capital into each company to move the needle. That has implications for the raise. If you, the founder, is seeking a $5M Series A and a $1B fund is leading, they may either try to write a bigger check (pushing you to raise more) or pass because the check size is too small. So what’s my takeaway? If you don’t want to raise more than $5M for a variety of reasons – dilution, the lack of necessity to do so, and so on – then perhaps spend far less time in your capital raise talking to funds with $1B under management. That math on those check sizes doesn’t sense for these firms, so it’s unlikely to be a great investment of time - unless you’re doing it for the expressed purpose of relationship building ahead of the next round.