June 14, 2005

Why a VC firm's fund size matters to entrepreneurs

Jeff Bussgang explains:
Well, a critical thing for an entrepreneur when fundraising is to find a firm that's going to fit their capital profile. After all, if a VC is trying to force too much money down the entrepreneur's throats, it will mean more dilution than they'd like. And not having deep pockets means there's a risk of getting caught short just at the moment when a few extra million might be needed to get to the next level. Thus, the Goldilocks Rule applies to VCs and fund size: not too big, and not too small, but just right.

How much capital does fund X really want to put in behind each company? The marketing materials may say one thing (I once saw a VC claim they would do deals from $50K to $50M!), but the reality is there's a sweet spot that every firm has and if you are in their sweet spot, you're better off than if you're not. The nature of that sweet spot comes down to the size of their current fund, not their total capital under management, for all the reasons discussed above. Thus, always ask a firm what their current fund size is, not what they have under historical management.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.