Seed VCs are turning to new 'pro rata' funds that help them compete with the big firms | TechCrunch
Title: Supporting Seed VCs: The Rise of Pro Rata Rights Investment
Introduction:
The world of venture capital (VC) investing is getting more challenging, especially for seed investors trying to exercise their pro rata rights. Pro rata rights allow VCs to buy additional shares in a portfolio company during subsequent funding rounds, maintaining their ownership percentage and avoiding dilution. However, exercising these rights can be expensive, and new lead investors often prioritize their preferred allocation. As a result, seed investors are sometimes pushed out of the round or forced to pay more if they want to protect their pro rata rights. This is where investment companies like Alpha Partners, SignalRank, and SaaS Ventures step in. They provide capital at the Series B level and later rounds to support seed-stage and Series A VCs in exercising their pro rata rights.
The Challenge for Seed Investors:
Often, new investors in later rounds want to take as much of the round as they can and may ask founders to waive their pro rata rights. In such cases, it falls on the earlier investors to negotiate and push back against these requests. Success in this depends on the value earlier investors provide to the company and their ability to advocate for their rights. However, exercising pro rata rights is not always feasible for venture capitalists. Eye-popping valuations in recent years have made many early-stage funds reluctant to exercise pro rata rights in later-stage rounds.
The Role of Pro Rata Rights Investment Firms:
Alpha Partners, SignalRank, and SaaS Ventures have emerged as key players in helping seed investors exercise their pro rata rights. These firms deploy capital in later-stage rounds to support seed-stage and Series A VCs, enabling them to participate and protect their ownership percentage. SaaS Ventures partner Jesse Bloom explains that their role is to provide funds to invest in the pro rata rights of existing investors, ensuring they have a stake in subsequent funding rounds. In return, the investment firms receive 10% of the carried interest.
Focus on Access and Advantage:
To maximize their chances of success, investment firms like SaaS Ventures focus on investments led by top-tier VC funds. Bloom believes that access to deals led by these funds outweighs the need for extensive diligence. Partnering with the right funds provides an unfair advantage and helps secure better returns. This approach allows smaller funds and existing investors to participate in bigger and more lucrative deals.
Success in Pro Rata-Targeted Investments:
Investment firms targeting pro rata opportunities have seen impressive results. SaaS Ventures has closed a new $24 million fund, while SignalRank and Alpha Partners are also raising significant funds for pro rata investments. These opportunities benefit early investors and founders by providing access to quick and affordable capital, allowing them to exercise their pro rata rights and prevent dilution.
The Pro Rata Game Heats Up:
The pro rata game is heating up due to the decreasing number of deals in later stages. As a result, gaining access to big-ticket deals has become more challenging. VC funds raised only $9.3 billion in Q1 of 2024, representing a small portion of the overall funds raised in 2023. According to Steve Brotman from Alpha Partners, up to 95% of the time, investors are not exercising their pro rata rights. Brotman draws a parallel with playing Blackjack, emphasizing the importance of taking advantage of opportunities when they arise.
Conclusion:
Pro rata rights investment firms are playing a crucial role in supporting seed VCs and early-stage investors. Their capital infusion enables these investors to exercise their pro rata rights, ensuring they maintain their ownership percentage and have a say in subsequent funding rounds. While the pro rata game may be challenging, these investment firms offer a lifeline to VCs, providing access to quick capital and allowing them to ride the wave of their successful investments. As the VC landscape evolves, pro rata rights investments are becoming an essential tool in the arsenal of early-stage investors.
Introduction:
The world of venture capital (VC) investing is getting more challenging, especially for seed investors trying to exercise their pro rata rights. Pro rata rights allow VCs to buy additional shares in a portfolio company during subsequent funding rounds, maintaining their ownership percentage and avoiding dilution. However, exercising these rights can be expensive, and new lead investors often prioritize their preferred allocation. As a result, seed investors are sometimes pushed out of the round or forced to pay more if they want to protect their pro rata rights. This is where investment companies like Alpha Partners, SignalRank, and SaaS Ventures step in. They provide capital at the Series B level and later rounds to support seed-stage and Series A VCs in exercising their pro rata rights.
The Challenge for Seed Investors:
Often, new investors in later rounds want to take as much of the round as they can and may ask founders to waive their pro rata rights. In such cases, it falls on the earlier investors to negotiate and push back against these requests. Success in this depends on the value earlier investors provide to the company and their ability to advocate for their rights. However, exercising pro rata rights is not always feasible for venture capitalists. Eye-popping valuations in recent years have made many early-stage funds reluctant to exercise pro rata rights in later-stage rounds.
The Role of Pro Rata Rights Investment Firms:
Alpha Partners, SignalRank, and SaaS Ventures have emerged as key players in helping seed investors exercise their pro rata rights. These firms deploy capital in later-stage rounds to support seed-stage and Series A VCs, enabling them to participate and protect their ownership percentage. SaaS Ventures partner Jesse Bloom explains that their role is to provide funds to invest in the pro rata rights of existing investors, ensuring they have a stake in subsequent funding rounds. In return, the investment firms receive 10% of the carried interest.
Focus on Access and Advantage:
To maximize their chances of success, investment firms like SaaS Ventures focus on investments led by top-tier VC funds. Bloom believes that access to deals led by these funds outweighs the need for extensive diligence. Partnering with the right funds provides an unfair advantage and helps secure better returns. This approach allows smaller funds and existing investors to participate in bigger and more lucrative deals.
Success in Pro Rata-Targeted Investments:
Investment firms targeting pro rata opportunities have seen impressive results. SaaS Ventures has closed a new $24 million fund, while SignalRank and Alpha Partners are also raising significant funds for pro rata investments. These opportunities benefit early investors and founders by providing access to quick and affordable capital, allowing them to exercise their pro rata rights and prevent dilution.
The Pro Rata Game Heats Up:
The pro rata game is heating up due to the decreasing number of deals in later stages. As a result, gaining access to big-ticket deals has become more challenging. VC funds raised only $9.3 billion in Q1 of 2024, representing a small portion of the overall funds raised in 2023. According to Steve Brotman from Alpha Partners, up to 95% of the time, investors are not exercising their pro rata rights. Brotman draws a parallel with playing Blackjack, emphasizing the importance of taking advantage of opportunities when they arise.
Conclusion:
Pro rata rights investment firms are playing a crucial role in supporting seed VCs and early-stage investors. Their capital infusion enables these investors to exercise their pro rata rights, ensuring they maintain their ownership percentage and have a say in subsequent funding rounds. While the pro rata game may be challenging, these investment firms offer a lifeline to VCs, providing access to quick capital and allowing them to ride the wave of their successful investments. As the VC landscape evolves, pro rata rights investments are becoming an essential tool in the arsenal of early-stage investors.