When we started Homebrew in 2012/2013 the conventional wisdom was that early stage funds hold 20-50% of their total capital for follow-on pro rata. Mostly to ‘double down’ on their winners [offense!] and sometimes to help bridge promising companies to their next financing or maintain ownership in pay-to-plays [defense!]. This ‘best practice’ was based on a few core assumptions/truths about the way the venture industry used to work.
- Picking Insight. Being an insider with 12-24 months of data on company performance the outliers would start to show themselves.
- Pro Rata Advantage. You have contractual pro rata and/or ‘a relationship’ so you’ll get to double down across the board.
- Pricing and Market Discipline. The next financing is most likely being led by a Series A firm who (a) has similar return goals as your firm, and (b) experience reviewing and pricing companies as this stage. It’s as close to an ‘independent’ valuation as you’ll get. Similarly, weak companies won’t be able to raise a Series A and they’ll just shut down/exit.
- Data Proof. Looking backwards across all available historical data, firms that invest in 100% of their pro rata outperform at least marginally if they didn’t do any of those checks. Or something like that.
- Brand and Signaling Risk. If you don’t do your pro rata it looks bad or hurts the bond with the founders and co-investors.
In the year of our lord 2026, and having now lived in the early stage venture world for 13+ years, I’m calling bullshit on basically every piece of this.
- Picking Insight. Follow-on financings are often done weeks or months after an early stage round, with not that many ‘cards turned over.’ The increased velocity means you have less durable information to suggest something is a true outlier vs just quick out of the gate.
- Pro Rata Advantage. Crowded cap tables, sharp elbows, lack of information flow – I’ve seen many firms ignored by founders and new investors in a subsequent round (“you should just be happy to be in this company already”) or pressured to not do all their pro rata in order to minimize company dilution. So this does raise the adverse selection question – are you not able to get additional dollars into the best companies?
- Pricing and Market Discipline. EVERYTHING has changed here. Dozens and dozens of new VCs. Multistage firms with billions and billions of dollars underwriting to a lower target, often with GPs who have minimal experience in the industry who are also trying to grow their personal brand by being in hot deals. The dynamics start to look more like auctions, not valuations.
- Data Proof. The venture market has changed too much in the last 5-10 years to make historical data relevant – and the historical data is always incomplete anyways. Garbage in, garbage out.
- Brand and Signaling Risk. Minimal and overblown. You end up throwing capital into not just the 95% percentile companies but anyone who can raise an institutional round – and there are so many new firms/funds that I consider neutral to negative signal when they lead a round. Why would I want to follow their lead with a second check?
Ok, so am I saying early stage funds of modest size ($100m or less) should *never* follow on? NO, I’m saying you should minimize reserves so that you are not thinking about it as a second pool of dollars to only use for second checks. Instead evaluate any pro rata opportunity vs a net new investment, and assume you will not use a significant amount of your fund capital for follow-on. Get more shots on goal, so to speak, and see if you can catch more true outliers.
But HUNTER,
WHAT ABOUT DILUTION? If exits for winners are truly bigger than ever, your dilution won’t matter as much from a fund model perspective -AND- the wild growth in early stage valuations means you will be taking LESS dilution than has historically been.
WHAT ABOUT COMPANIES I REALLY REALLY BELIEVE IN? Three answers:
a) You believe in them equal to the market. The round is likely fairly priced and you think there’s real growth ahead – not ‘risk adjusted’ stage specific multiple, but another 50x, 100x from here? Do your pro rata from the fund.
b) You believe in them less than the market does. That is, you’re excited but the financing terms are CRAZY. Don’t do your pro rata and/or do a SPV/take money from one of the many firms that now exist to back your winners. And then if the financing trend continues to exceed your confidence, think about some secondary selling from your fund over time. These options are also a new phenomena that historical ‘best practices’ didn’t consider.
c) You believe in them way more than the market does. Great, double down, maybe even ahead of a round. This is where getting a few hundred thousand or couple million more can make a real different in preserving/increasing ownership ahead of an inflection in their valuation curve. You just need to be correct 🙂
WHAT ABOUT WHAT MY LPs EXPECT TO SEE IN MY FUND MODEL? That’s why I’m writing this – show them the post. And make sure you can recycle – one way to ‘solve’ the reserves question is by getting to 100%+ invested. We got to 120%+ in each of the first two Homebrew funds!!
[i’m sure there are some typos here and i’ll edit as you point them out or ideas/concepts i should expand on]
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Most recent savings from my friends
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