Reserves is the term VCs use to describe funds they “reserve” for follow-on financings of their portfolio companies.

Here are some things entrepreneurs should know about VCs and reserves:

  • One very important thing that separates a strong VC firm from all other sources of capital is that the best VC firms reserve capital for follow-on financings for their portfolio companies and can be counted on to participate in subsequent financing rounds. This is not true for angel investors, seed funds, growth funds, and strategic investors.  I don’t mean to be disparaging of these other sources of capital. They all are important at various stages of development. But if you want someone you can count on in your cap table, that would be a VC firm, particularly a top tier VC firm.
  • Most top VCs will choose to take their “pro-rata share” of follow-on rounds. That means they will invest enough capital to avoid being diluted by the follow-on financing round. If a VC owns 15% of your company, they most likely are going to want to take 15% of follow-on rounds. That means that you can’t raise your next round from your VC investors, but you can count on them for a material part of the round. There are exceptions to this rule, and they are called “inside rounds”, but entrepreneurs should not count on inside rounds. It is generally preferable to raise an outside round, although there are exceptions to that rule.
  • VCs raise money in discrete funds. These funds are pools of capital that are capped at some number. That number could be $100mm, $500mm, or $1bn, or more. VCs generally do not like to, and are often prohibited from, “cross investing” between these discrete funds. That means if your company raised money from USV 2004, LP (the name of our first fund, a $125mm fund), it will be hard for us to invest in your company out of USV 2008, LP (the name of our second fund, a ~$150mm fund).
  • For this reason, experienced VCs have learned to create large reserves in their funds for supporting their portfolio companies. That means that a firm like USV might go back to its investors for a new fund (USV 2008) after only investing a portion of a fund (USV 2004). At USV, we generally go back to our investors for a new fund after investing about half of a fund. That means that we reserve roughly half of a fund for follow-on investments.
  • VCs also have a tool called “recycling” at their disposal to supplement these reserves. At USV, we have the right to take some of our realized proceeds in a given fund and reinvest them in the portfolio companies of that fund. That recycling capability is typically capped in the agreement between the VCs and their investors. At USV, that recycling cap is roughly 25-30% of our funds.

So, given all of this, here is what entrepreneurs should understand:

  • VCs, particularly top VCs, can be counted on to support a portfolio company from round to round, particularly for their pro-rata share.
  • But VCs don’t have unlimited resources to invest in your company. If they are investing in your company out of a $150mm fund, that is the total amount of capital they have at their disposal as far as you are concerned.
  • And a typical VC fund will have 20, 30, 40 portfolio companies in it, so those funds are allocated to the entire portfolio, not your company.
  • If a VC invests $3mm in your company, they likely have another $3mm reserved for your company and may have as much as $6mm (2x the initial investment) reserved for it. Don’t expect more than that.

At USV, we take reserves very seriously. We know that early stage companies require a fair amount of capital to grow into profitable sustainable businesses and we work hard to make sure that we have the staying power that our portfolio companies require from us. Specifically, we have done two things to help us manage this reserves issue:

  • For each fund we raise, we build a model of the portfolio that lays out all future financing rounds as far as we can predict them. We estimate the timing, size, and probability of that financing round happening. We then run a “monte carlo simulation” of that portfolio to develop a statistical distribution of outcomes. That looks like a normal distribution and we make sure we have a 95% probability of being able to participate in all of these future funding rounds. Practically speaking, this tool allows us to determine how many portfolio companies we should put in each fund before we go back to our investors for another fund.
  • We have raised two Opportunity Funds which allow us to continue to participate in funding rounds for our most successful portfolio companies that start raising very large growth rounds. We also use these Opportunity Funds to occasionally participate in later stage rounds of companies that we did not invest in at the early stage.

One of the most common mistakes I see new “emerging VC managers” make is that they don’t sufficiently reserve for follow-on investments. They don’t go back for a new fund until they have invested 70 to 80% of their first fund and then they run out of money and can’t participate in follow-on rounds. They put too many companies into a portfolio and they can’t support them all. That hurts them because they get diluted by those rounds they can’t participate in. But it also hurts their portfolio companies because the founder and/or CEO has to explain why some of their VC investors aren’t participating in the financing round.

Most people think that VC is all about the initial portfolio construction, selecting the companies to invest in. But the truth is that is only half of it. What happens with the portfolio after you have selected it is the other half. That includes actively managing the portfolio (board work, adding value, etc) and it includes allocating capital to the portfolio in follow-on rounds, and it includes working to get exits. And it is that second part that is the harder part to learn how to do. The best VC firms do it incredibly well and they benefit enormously from it.

#VC & Technology

Comments (Archived):

  1. JimHirshfield

    Who said keep your powder dry?”Trust in God and keep your powder dry” is a maxim attributed to Oliver Cromwell, but which first appeared in 1834 in the poem “Oliver’s Advice” by William Blacker with the words “Put your trust in God, my boys, and keep your powder dry!”

    1. John Revay

      Recently quoted – Elon Musk

      1. JimHirshfield

        Not surprised

    2. Michael Tedesco

      Thanks Jim. Always enjoy the history behind the idiom and that’s the first I’ve heard this one.

      1. JimHirshfield


  2. William Mougayar

    Could you elaborate on the exceptions for inside rounds- what causes them to occur, and how do you decide?

    1. fredwilson

      they either occur because the company can’t get an outside investor and the insiders want the company to keep going or because the investors are so excited about the company that they want to take the entire next round. it’s a barbell of reasons.

  3. Kent Karlsen

    Fred, thanks for sharing insights how USV invest. Really helpful. Having an experienced strategial discussion partner with superior tech and market knowledge is really very helpful and I think many entrepreneurs are willing to sell some more equity for that long-term support. Specially if you as an entrepreneur start a company with a life time mission (open source community etc). Fred, how does USV plan (and later exit) board work for new fundings?

    1. fredwilson

      we don’t plan for it. we just roll with it.

  4. David C. Baker

    This kind of insight is why I read your blog every day. Thank you! Learned a lot today.

    1. fredwilson

      thank you

  5. pointsnfigures

    The math changes as companies fail as well. The reserve that was applied to that company now goes back into the general fund I presume.

    1. fredwilson

      yes and we update our monte carlo models quarterly and the probabilities change as companies’ fortunes rise and fall

      1. markslater

        where can we find a generic example of a monte carlo?

        1. Richard

          Monte Carlo simulation is a fairly well known valuation method. Think of it as a sampling approach where your sample pool is a probability distribution. Monte Carlo simulation performs risk analysis by building models of possible results by substituting a range of values—a probability distribution—for any factor that has inherent uncertainty. It then calculates results over and over, each time using a different set of random values from the probability functions. Depending upon the number of uncertainties and the ranges specified for them, a Monte Carlo simulation could involve thousands or tens of thousands of recalculations before it is complete. Monte Carlo simulation produces distributions of possible outcome values.

      2. kbb

        Thank you for this post, particularly illuminating to me is how you manage the reserves with the Monte Carlo. The updating to reflect success/failure/financial needs probabilities must have the impact of reducing drag, right? Because you can allocate reserved capital away from companies that you have recently “downgraded” so to speak. Another question I have is whether the opportunity funds are able (unlike the original funds) to invest across funds. E.g., are they set up as a “side” fund per original fund, or able to invest flexibly across all/some subset? Thanks so much – this is such helpful insight for an angel investor like me.

      3. Twain Twain

        It’s hard to Monte Carlo political, legal, language and culture risks.Those are the “black swans” that haven’t been measured or measurable.

      4. David Semeria

        And therein lies the paradox. The more successful the early stage investments, the less capital is available for follow-on rounds. I assume you follow your own 1/3 1/3 1/3 rule when setting up the initial simulation….

      5. Jamie Lin

        How do you know the exact probability % to adjust for based on their latest status changes? Historical data? But many events might not have good historical comps to reference? Some might require subjective guesstimate?

  6. Brian

    To be clear, when you say a common mistake of emerging VC managers is not to engage in preserving follow on capital, i assume you emerging VC managers with large funds. Earlier you say that a follow on strategy differentiates traditional VCs from angel and seed stage VCs. So those VCs are more likely making a choice to stretch their capital to a broader portfolio than going smaller and deeper with a follow on strategy. However, in a sub-$50M fund (or even sub-$100M fund), it’s hard to engage in a true follow on strategy and as a result not doing so is a conscious choice. All things equal, they’d probably prefer to do it like USV but lack sufficient total capital.So back to the original point, I assume you mean emerging traditional VCs who are starting with large pools of capital out of the gate and not those angel/seed stage VCs who are emerging and attempting to matriculate upwards over time – at which point they’d begin to reserve capital when the opportunity allows. After all, many angel/seed VCs opportunistically follow on anyway.

    1. fredwilson

      well i believe you need to do it in every sized fund or you get diluted on your best investments. but that is not what everyone believes

      1. PhilipSugar

        I respectfully believe there is another reason as well. That is you don’t believe that any of your investments are doing really well.I’d love to know how many successful investments you have had that you’ve had doubts about. Not serious doubts but not just a rocket ride of success.I’ve been successful and I’ve had moments where I thought I was invincible, but I have always been brought back down to earth.I always say the high’s are higher and the low’s are lower on my ride than if I was in a different profession, but just like the Gartner chart, every company I’ve dealt with has had a “trough of disillusionment”

        1. LE

          Fred made a comment that USV had never missed a follow on round in an investment even when they probably should have. In other words they stayed to ‘the bitter end’ (you know what that term means in boating). This would seem to be almost solely a benefit to USV but a detriment of the LP’s as well as the companies that are doing well (because less capital for them in theory). I mean at a certain point you are being paid for your judgement and expertise to make the best bets not to worry about your firms reputation (with all due respect to Fred and Charlie’s opinion).This reminds me of my attorney years ago telling me that we were going to pay to Fedex some documents to someone overseas at our expense. Why? That’s what attorneys do for each other he said. Great, not on my dime though.

          1. PhilipSugar

            I think it’s a short term versus long term return issue.It’s the same when Brad describes how you treat companies that fail.It’s the same for putting quality materials in a product that will make it last, but you won’t notice on the initial purchase.All of these maximize return on the short term. They come with a long term price and that is reputation.You build that with and eye dropper and lose it by the bucket.I know of a Washington DC VC that at one time was very popular (raised a ton of money) he had really, really, sharp elbows.Couldn’t do a second raise because nobody wanted to deal with him.

  7. Tom Labus

    How do you plan on escalating valuations and do you try to figure that out when doing an opportunity fund?

    1. fredwilson

      i am not sure i understand the exact question you are asking

      1. Tom Labus

        In the amount of the money set aside for an add on investment?

        1. fredwilson

          if the valuation rises dramatically, it means that the demand for shares in the company is very strong and that the dilution will be minimal and we will often scale back our participation as a result. but we would only do that if the company is comfortable with it and if it won’t get in the way of a round getting done

  8. aminTorres

    Actually, some angel investors invest with a reserve too. I once asked tgg what was her investment thesis, she said she does not have one (at least not then, 2014) but she said this that stuck with me:”I want to own 1% of the business from the get go and continue to put money in as the company grows and keep that stake”

    1. LE

      Actually this post from the other day:Of course there will be outliers but my thesis has always been geared toward areas that are just starting to change.

    2. fredwilson

      That would be The Gotham Gal. We developed that strategy together

      1. ShanaC

        It’s an unusual strategy. Where did it come from

    3. Semil Shah

      Today, most don’t have the opportunity to follow-along.

  9. LE

    At USV, we generally go back to our investors for a new fund after investing about half of a fund. That means that we reserve roughly half of a fund for follow-on investments.What I am wondering is this relative to what I’ve quoted. When, if ever, do companies that you are investing in ever do due diligence on the VC firm?Other than reputation, how would they know if this was in fact a true statement ‘reserve roughly half of a fund for follow-on investments’ and that the money would be actually there and available from the LP’s when it’s needed (in the case of the 2004 fund, 12 years later)?Much of what happens in business is trust goes w/o saying but VC’s do due diligence on who they are investing in [1]. Vice versa?[1] Love to see a post on that.

    1. Aaron Klein

      That’s a question to ask the fund and then ask them for specifics on which companies they’ve done that for. Which you can then double check with references.

      1. LE

        Well to me though that part is implied. They will obviously be able to come up with good references for past investments. I am thinking a bit deeper than that. [1] Assuming it matters for all I know it doesn’t ever even get to that because companies are simply glad to have the initial funding.Here are two examples in another type of investment (condo purchase):a) “How often do you have special assessments”?b) “Show me the last 5 years of meeting minutes and let me speak with your accountant”.”a” is what most people would do. “b” is quite difficult to do but provides a better answer (in conjunction with “a”). Some places have low fees and hit you with special assessments.Example for illustration purposes only for my point. Not saying practical or that in many cases you’d be able to get the info very easily (from a vc firm or otherwise).[1] Things that the fund probably wouldn’t do and potential investments most likely wouldn’t think is even necessary.

    2. Richard

      there does seem to be a very little sunshine on the inner workings between the VC and the LP.

    3. fredwilson

      rarely, very rarely. i have written about that and its a problem. there should be way more of it.

      1. ShanaC

        What is the best way for founders to do due diligence on firms

        1. fredwilson

          they should ask the firms a set of questions (including the reserves and follow on questions) and they should also ask around (particularly other entrepreneurs we have worked with) about us

        2. bfeld

          The most important diligence is to do “off sheet references.” Go find companies that have failed. Then find the founders. Then ask how things went. For example, you’ll find some people in the world who think I handled particular failure situations horribly; others will think I handled them well. You are looking for the next layer down – what did I do that they thought was horrible? Then, bring the story back to me to understand my view on it. You’ll learn a lot about your prospective investor this way – not just the happy talk of how awesome they were.

          1. Rob Larson

            Great comment

          2. PhilipSugar

            Yes, yes, yes. As I said I accidentally found a great reference for Seth (I was not checking references, just happened to have a beer with an entrepreneur)

          3. ci5er

            Every time I’ve tracked down the founding CEOs that were fired (or met them at a bar, complaining about having been fired) by their VC(s), I’ve almost always been amazed that they weren’t fired earlier. People come up with crazy personal narratives – about both their successes and their failures. I’ve never really learned how to extract the really real reality from it.How would you go about separating the wheat from the chaff, when listening to tales from an (often bitter) failed entrepreneur? Talk to the VC afterwards to get their take on the tale I’d heard?

          4. bfeld

            Yes. Get the entrepreneurs view. Then, get the VCs view. Then, if wildly inconsistent (and not sortable), check with co-investors and/or ex-employees.

          5. ShanaC

            thank you brad!

    4. Semil Shah

      It’s usually the case the founder doesn’t have tons of choices. Some do, yes, and that’s where this information becomes valuable — in a competitive situation. For the rest, they’re searching for just one firm to believe in them.

      1. PhilipSugar

        Yes this is a very good point.

  10. Jeremy Campbell

    I’ve read information here and there about this topic, but this is most complete piece I’ve read. Always enjoy your articles, thanks for educating us all Fred.

    1. Semil Shah

      agreed, this is a bible entry.

  11. Twain Twain

    To create a “disruptive” technology takes minimum 5-7 years to lay the tech foundations and bake+bed in the business model.The established companies, e.g. Apple, stockpile huge reserves of cash for strategic reasons so it makes sense that VCs do too.

    1. Richard

      This was not Steve Jobs view and Apple has paid a huge price due to Tom Cooks capital allocation approaches. https://uploads.disquscdn.c

      1. Twain Twain

        Apple’s WACC is out of whack.They could invest more of those $R+D in AI and making Apple TV voice-UX rather than that iPod wheel and swipe left/right functionality.In fact, if Apple & Twitter’s strategy teams had any sense they’d figure out how to make that NFL text-tweeting into voice+video with AI.

  12. Richard

    What finanial instruments do VCs invest their U invested cash into ? If it is bond funds, what is the average duration of the bonds funds they invest into? How do VC hedge interest rate risks?

    1. fredwilson

      we don’t. we call the capital from our investors as we need it.

      1. Girish Mehta

        From the LPs standpoint, there is a cost of un-called capital ? (i.e. they would need to keep the un-called money in money markets/cash rather than deployed elsewhere for higher returns, and meanwhile pay management fees on the committed capital rather than the called capital ?)

        1. Jake Chapman

          When I did VC fund formation work I saw a lot of management fee structures. Not a single one was based on called capital vs. committed capital. As mentioned above, it would introduce negative incentives into the system to deploy ASAP. There were some structures however that recalculated management fees once the investment period closed based on how much capital had been invested or reserved for follow on. The idea being that if you reasonably only project to use 80% of committed capital, that is what your management fee should be based upon for the remainder of the fund.

          1. Girish Mehta


        2. bfeld

          LPs are constantly redeploying capital from various assets. They likely aren’t holding it in a money market / cash account, unless that is their current allocation strategy. This is especially true of very large institutions.

      2. Semil Shah

        and as your funds are relatively smaller (compared to the mega funds), this means if you don’t call, you don’t charge those fees, correct?

        1. Girish Mehta

          I referred to it below….I don’t know about USV, but I guess many funds would charge on committed capital rather than what has been called.If you charge only on the called capital, you might create a risk of incentive-caused bias ? (Munger). (Again, speaking structurally and not about USV, or anybody else).

          1. Semil Shah

            Interesting dynamic, not something I fully understand so would appreciate wisdom from you and/or the crowd here.

          2. Girish Mehta

            No personal experience/wisdom here, don’t assume I know what I am talking/asking about. Am guessing a dynamic based on Munger’s idea of incentive-caused bias.It would seem that tying mgt fees to called/invested capital creates a incentive caused bias to invest more of the fund early in the fund’s life…

          3. bfeld

            During the investment period, management fees are charged on commitment capital. Outside of the investment period, management fees are charged on cost basis (whatever capital is deployed). The default investment period is five years, although when a new fund is raised, it almost always ends the investment period on the prior fund.

          4. Semil Shah

            Thanks, this is super helpful!

      3. Richard

        Interesting, so annual ROIs are likely understated!

        1. Rob Larson

          The capital call dates are taken into account when measuring ROIs, so they are in fact accurate. In fact one of the reasons for calling capital only as needed is that it yields a higher ROI this way.

      4. ShanaC

        What if they say no?

        1. fredwilson

          they are penalized financially

          1. ShanaC

            What if there is a big crash and downturn and there is a mass no

          2. TeddyBeingTeddy

            “A bird in hand is worth two in the bush.” And visa versa. I agree with your concern/comment

          3. Rob Larson

            Shana, think of it this way: if the LP investors don’t make good on their financial obligations, that’s a black mark against them when it comes to participating in the next VC fund. A top tier VC co. like USV will have many times more LP’s wanting to invest in their funds than space for them, so they want to preserve the relationship. Fred has never passed on a follow-on round, even when financially it wasn’t a good move resulting in a short term hit, but long term this sends a strong signal to future entrepreneurs in future funds that you can count on USV to come through in tough times. Similarly, LP investors in Fred’s funds have an incentive to maintain a reputation as someone you can count on, because of future funds coming down the pike.

      5. Salt Shaker

        And what do you then use as a basis for mgt fees. Fees only calculated off of called capital?

      6. TeddyBeingTeddy

        Is it a bigger risk to have a little bit committed capital on hand, or slightly more but that must be called? I’m not a VC, just s curious party!

  13. jason wright

    A glass half empty… is a glass half full.The word ‘cannibalism’ popped into my head. Do VCs eat their own?

  14. Semil Shah

    I wish you had wrote this 3 years ago! On your second to last paragraph, a huge caveat is that even with reserves ready and pro-rata rights, often earliest VCs don’t get to take their pro rata b/c if it’s a great growing company, there often isn’t room — so part of the issue is also structural.

    1. bfeld

      This varies widely by reputation and market power of the VC. I’d expect that USV can get pro-rata in any round it wants if it commits early and pushes hard for it as part of the deal.

      1. Semil Shah

        For sure, at Series A, but my comment was more about the micro and institutional seed funds.

  15. Scottfauver

    Shouldn’t the value your investment be split into 2 parts: the value of the underlying equity, and the value of the option (premium) in you pro rata rights to follow on rounds? How would you price that, and do you assign a value to that option when pricing your investment?

  16. Frank W. Miller

    This is a good explanation of the nuts and bolts. What it doesn’t tell the entrpreneur is that while all these are good intentions there are any number of things that can cause them not to happen, market conditions, poor performance in the portfolio company during previous rounds, undesirable partners entering a new round, in some cases, how the VC feels when they wakeup in the morning, and on an on. VCs protect themselves and have lots of little escape hatches for when things go bad and lots of levers (e.g. convertible debt) to take things from the entrepreneurs when things go well. While this explanation gives you a guide to how things should go if the portfolio company continues to perform, its definitely not a guaranteed path.

  17. AngelSpan

    The growing tide of interest and activity from family offices will provide a pool of capital emerging vcs and angels don’t have, for initial and follow on investing…as long as the startups understand the importance of proper engagement; transparency PRIOR to the financial ask, respectful and on-topic progress reports (not just newsletters). If there was more awareness and use of Sec. 1244 and Sec. 1202, the $4T to $10T (according to CapGemini) family offices intend to invest over the next 25 years would get accelerated to fill the early funding gap, and for follow on investing in those that ARE transparent, report properly, and execute.

  18. Jake Chapman

    Great post Fred, really helpful. Does USV ever take a super-pro-rata in subsequent rounds? How often?

  19. David Pethick

    Thank you Fred. Great post. Bookmarked.I’d love to hear your perspective on cap-table red flags. What mistakes should a founding team avoid in raising capital in earlier rounds?Cheers.Dave P.

  20. Lawrence Brass

    Very interesting indeed.I am curious about what “working to get exits” means and implies from a VC point of view. VC critics often mention that for the inexperienced entrepreneur, taking VC capital may feel like riding a rollercoaster and that it can even get addictive. You have written before about giving investments enough time to grow and mature, but it is obvious that sooner or later an exit will be sought, wether it is through an IPO or an acquisition or other means.I hope you write about this in a future shop talk post.Thanks.

  21. Mike Cautillo

    Interesting to see the correlations between managing a VC fund and trading a trend following system. Money and trade management are key and exits are the craft most often overlooked.

  22. Nawal Roy

    Fred: this is what differentiates top 1% performers from the rest “amateurs”. thanks for articulating it so brilliantly.

  23. JaredMermey

    Would love to hear from smaller funds who might not have the reserves themselves but will eithe defer to LPs to make follow-one directly or create some sort of SPV for their LPs to funnel money into companies that are trending in the right direction?Would also love the hear from LPs as to which approach they’d rather take? Commit more to a traditional VC or spread across seed funds then follow on directly when possible.

    1. bfeld

      Many seed funds are now creating SPVs to participate in follow on rounds. These SPVs are offered to the LPs on a deal by deal basis. In general, In general, I’m not a huge fan of the SPVs that charge management fees, although there is a cost to an SPV so it’s logical to charge expenses (e.g. the SPV can call 105% of the capital invested – using 5% to cover expenses over the life of the SPV – audit, tax, stuff like that.) Most SPVs have a carry component, so it ends up being deal by deal carry for the VC, which is good for the VC but not great for the LP. Some SPVs don’t have carry – these are the ones that are most aligned between LPs and VCs.

  24. bfeld

    Fred – phenomenal. The only thing I noticed missing was a comment on fund cash flow. To recycle, you have to have the cash flow. If you don’t have the exits to generate funds to recycle, you can hit a cash flow wall where your reserve model breaks (since you don’t have the cash to fund the reserves.) There are several solutions to this, including recalling capital, having an annex fund, and suspending management fees, but the best is having the cash in the first place …

    1. Rob Larson

      Brad – thanks for the insight. When you hold back $ after exits in order to keep it on hand for recycling purposes, these funds act as a dead weight on your IRR while it is sitting in cash, unless I’m overlooking something. So how do you think about balancing that?

      1. bfeld

        Correct – holding the cash back lowers the IRR. However, you can blend this by recycling the cash early (when you have an exit) and delaying calling down other cash. Ultimately, cash flow planning in an important, and often overlooked thing in fund management. It’s hard – because you can’t predict the exits – and becomes more important as the fund becomes fully called.

        1. Rob Larson

          Thanks.”delaying calling down other cash” – makes sense, hadn’t thought of that approach.

        2. Girish Mehta

          Cash flow planning is important. But is IRR important for VC ? IRR is affected a lot by cash flows timing.But, in the end, venture performance is about cash on cash multiples…?

          1. bfeld

            Cash on cash is what matters. However, a lot of firms report IRR and many LPs pay attention to it. I’ve always felt it was a terrible metric to track off of for venture. But, since so many asset classes comp of IRR, it survives. If you are an LP, make sure you are paying attention to Net, not Gross …

          2. Girish Mehta

            Ok, Thanks.

          3. Vladislav Tropko

            Brad, do you use debt bridges instead of capital call to increase irr?

          4. bfeld

            Not really. We use short term debt to smooth out capital calls since our timing on doing investments is inconsistent but we rarely have the debt outstanding for 60 days.

  25. Brock Saunders

    @fredwilson:disqus one of the best posts i’ve read in a long time. thank you. and @bfeld:disqus and @ccrystle:disqus, i found your facilitating of the discussion below to be quite additive as well. great stuff guys.

  26. Milan A. Račić

    I have followed you for several years. You have great insight, deep experience and uncommon candor. Thank you for letting us in on it all.

  27. Steven Kane

    thank you brother wilson. as usual so… lucid. and its so great to see that you have not stopped educating founders about startup financing, even after all the years. there’s always a new crop!

  28. Frederic Lauchenauer

    Great blog. Very insightful. Always a good read and lots of learning.

  29. Farrin Katz

    @fredwilson:disqus legend. are you and Gotham Gal looking to adopt at all in the near future? I’m 26 so if that’s too weird I’m open to accepting apprenticeships and/or mentors.

  30. Tom Labus

    Thanks, Charlie.

  31. LE

    Yes. But most likely we can safely assume that if arbitrary 50% is set aside then its implied that not all of the animals are created equal and that is factored in with that type of fuzzy math.. Of course 3x means that many will be left off the boat. The stars get the follow ons in other words.

  32. fredwilson

    thanks. i understand now and will reply to Tom

  33. markslater

    also prevents a nasty set of events that can occur in deleware associated with insider / self dealing.

  34. awaldstein

    really information Charlie–thanks~

  35. fredwilson

    our pass rate is zero. never happened. not once in the history of USV. in many cases, we should have, but we did not.we have passed on late stage rounds where our participation was not required and the round was oversubscribed.but when our participation has been necessary, we have always done it

  36. Lawrence Brass

    I would love to read about your financial adventures founding Chilisoft. I read one interview once, but I think it would be interesting to know what has changed since then and what would you change if confronted with the same situations today, taking into account your experience.

  37. Semil Shah

    that’s a remarkable stat.

  38. Leo Polovets

    That’s an amazing statistic. Is there anything that would make you pass on a round, like an unusual lead (e.g. foreign entity or family office) that mispriced the round, or a founder that wasn’t behaving ethically, or etc.? Or would you always put something in, even if it’s not your full pro rata share?

  39. TeddyBeingTeddy

    It seems more complex than this. If you have a big reserve and 2&20, won’t your investors be concerned you’re not putting their money to work? If the investment is doing well, seems like you could do an SPV with fresh capital from existing investors to support growth. And if the company is burning cash because it’s not a good business… Isn’t that Darwin’s way?If VC investments are binary, very good or very bad. Why is the reserve so critical? If I’m an inventor, I’d want you to fund all the best opportunities you find… And those great investments can always find more money. No?

  40. Mike Nicholls

    Does this approach mean you are more risk adverse at the earlier stage because you want to avoid the chance of backing a startup that might not make it and the fact you will kill them if you don’t follow on (given your public position is to back every new round, they are probably dead if you don’t).

  41. bfeld

    One of the many awesome things about working with y’all.

  42. ci5er

    Wow. I almost never comment here – but I’ve got to say that this says a lot about you and your commitment to the companies/teams you’ve committed to…

  43. fredwilson


  44. markslater

    Charlie – there is an issue that a company can face in delaware around how to classify “disinterested common” on the cap table if the round is flat / inside and the optics might be to a judge that interested parties are conducting pricing preference. Angels tend to be disinterested to a flat financing – management and new investors are interested. (in theory). Having a majority of disinterested explicitly approve the transaction is a must – and even then a bad actor can cause problems by claiming that the interested parties were self dealing…..This is a very loose example (legally) but hopefully you get the gist…..

  45. LE

    The ‘bitter end’ comes from in part the concept of letting the last of the anchor line go through your hands because you failed to tie it off.