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Some Thoughts on Ownership
When I started out in VC, there was a strong consensus around early stage investors that the “right” level of ownership was 20%. Pretty much every firm was targeting at least 20% ownership. And I found that pricing, check sizes, and deal sizes were strangely shaped by the 20% target as much as the actual needs of the company.
As someone who was new to venture at the time, I understood that more ownership of a good company was better. Like Andrew Yang, I’m Asian, and I’m good enough at math to figure that out but I didn’t understand why 20% seemed to be such a magic number. I also didn’t get why firms with very different fund si zes all targeted that same 20%.
Of course, it turns out that there is nothing magical about 20%. What actually matters is a) investing in great companies and b) having a meaningful level of ownership relative to fund size at exit. I think that funds that were less dogmatic about ownership and focused on the priorities above tended to do better. One of the tactical moves that I observed USV employ during the mid 2000’s was targeting a relatively lower percentage than their peers. If I recall, USV was often targeting 15% in their series A investments at a time when 20% was the norm. This ended up working really well for them because 15% was still really strong ownership for a fund of their size (USV I was $125M), and because they made a bunch of other really smart investing decisions consistent with their core thesis.
Fast forward 12 years or so and I’m seeing early stage funds exhibit some of the same dynamics around ownership. A few thoughts:
First, as seed VCs have become institutionalized, most have gotten much more dogmatic about ownership. Similar to the 20% ownership targets of series A and B firms of the past, seed funds of all sizes and flavors seem to be gravitating around a 10% ownership target. There is nothing wrong with this in isolation, but the level of consistency around such an arbitrary number makes little sense to me.
Second, I’ve noticed that most series A funds are still targeting some sort of a range between 15-20%. This hasn’t changed all that much from 10+ years ago, but the fund sizes have increased dramatically. So today, you have larger and larger funds targeting less ownership, which is probably a recipe for weaker performance. At the same time, I’ve noticed a few funds that are much more fluid about ownership in their series A and B investing (and are usually investing out of smaller funds). I actually think that being less mechanical about ownership makes sense if you are a <$300M fund competing against $1B+ funds for series A and B opportunities.
Third, as seed funds have become more focused on ownership, they are also becoming much more focused on pro-rata rights. That may not seem like a big deal in the moment, but at the next financing round, the pro rata rights of all the prior investors may add up to a pretty big number, creating a fistfight for allocation. Remember that the new investor will want to hit their ownership target as well, which may put the founder in an awkward place of having to either take much more dilution than they want or fully honor all the pro-rata rights of their early investors. Even in a very successful fundraise, it’s possible for multiple parties to end up feeling less than thrilled about the outcome.
My POV is that ownership is really important for a VC fund, but it’s dangerous to be overly dogmatic about a specific number. What matters is having meaningful ownership at exit for great companies. This means:
- Investing in the right companies. It’s more important to have only “ok” ownership of a great company than great ownership in an “ok” company.
- Having disproportionately high ownership relative to fund size, especially compared to your competitive set. This may mean NOT having higher absolute ownership.
- Being able to have high ownership at exit. This could be because you have earned the ability to keep investing in the company over time because of the value you have added to the founder (and thus, the founder is more likely to fight for your downstream pro rata rights). It could also mean investing in companies that avoid significant downstream dilution due to capital efficiency or very rapid value creation. It could also mean doubling down on companies to build your position beyond your ownership at the initial stage, which is doable but very difficult to pull off consistently.
One thing I’ve really come to appreciate in recent years is how much one’s business model drives everything else about a company. For a VC fund, ownership strategy is probably one of the main drivers of our business model. So it’s strange that there isn’t more variability around ownership strategy given the variability in fund sizes in the market.