A Seed Strategy for LPs

I was speaking with a great entrepreneur recently about our seed strategy. We lead the majority of our seed investments with a goal of establishing a working relationship in which we can demonstrate our value and earn the opportunity to lead the Series A. To do so we spend as much time on these investments as we would with a larger round.

This strategy is shared by others, including many of the hiqh quality seed stage venture funds that have entered the market over the past few years. As the entrepreneur and I discussed, today’s best founders include many of these seed funds in their list of preferred partners.

Entrepreneurial interest in seed funds seems to outweigh that of LPs to invest in them.  While progressive LPs are making bets in these funds, many avoid them in large part due to the inability to efficiently invest across the class.

However, LPs can apply VC seed strategy to fund investing. While VCs cannot efficiently bet entire funds on seed opportunities, we can allot a portion of our capital to this riskier asset class with a goal of getting in very early to the biggest winners. LPs don’t have pricing issues, but they are at risk of getting completely shut out if they do not commit to emerging managers that drive significant returns in their first fund.

So they can take one of the larger checks typically given to a larger fund and allot it to a handful of smaller, emerging seed funds in the anticipation of aligning themselves with a big winner or two. These funds would likely raise a larger pool of capital the next time around and enable early backers to get a bigger allotment in a top performing fund.