The article discusses a shift in venture capital (VC) strategy, with many VCs failing to exercise their "pro rata" rights, which allow them to maintain their stake in successful portfolio companies. Pro rata rights give investors the opportunity to double down on their winners and increase their returns.
Key points from the article:
- Pro Rata Rights: Investors who fail to exercise their pro rata rights are missing out on potential triple-digit returns. Jason Calacanis, a well-known angel investor, mentioned in an interview with Steve Brotman that if he had utilized his pro rata follow-on rights in his first fund, he could have tripled the returns.
- Risk and Duration: Many institutions and family offices are affected by risk and duration, particularly when it comes to their investment horizon. They don’t have the luxury of 10-15 years to prove their worth; instead, they need to see results within a shorter period (3-6 years).
- Venture Capital Strategy: The article suggests that VCs need to double down on their winners and speak with their founders about why it’s essential to do so. This approach can help early VCs maintain their stake in the company and provide ongoing support.
- Impact of Pro Rata Rights: Brotman emphasizes that exercising pro rata rights is crucial for venture capitalists, as it allows them to "stick around" on the board and continue to contribute to the company’s growth.
The shift in VC strategy highlights the importance of careful investment decisions and a willingness to adapt to changing market conditions. By exercising their pro rata rights, VCs can potentially generate significant returns and maintain their influence within successful portfolio companies.