Make Dhanteras 2024 your Fundteras! Understand the average check size of VCs

So think beyond gold – invest in knowledge to secure the future of your startup. Just as people judge the value of precious metals on Dhanteras, venture capitalists (VCs) carefully evaluate startups to determine the size of their investments. It is important for entrepreneurs to understand how VCs calculate their average check size to raise funds effectively.

VCs don’t just write checks – they balance strategically Fund size, management fees, portfolio strategy, And Follow-up investments to maximize returns. This guide breaks down these critical factors and explains them with a real-world example, giving entrepreneurs the insight they need to approach fundraising with confidence.

What is the fund size?

Fund size refers to the total amount of capital a VC firm raises from limited partners (LPs) – such as institutional investors, pension funds and high net worth individuals. This pool of capital is typically deployed over a period of 7 to 10 years with the aim of generating significant returns by investing in high-growth startups.

How fund size affects investment strategy

• Large funds: Focus on late-stage startups (Series B, C, and beyond) and offer larger checks, but favor lower-risk, high-traction companies.
• Smaller funds: Specialize in early-stage companies and place smaller bets with higher risk but potentially higher returns.

Key concepts related to fund size

• Diversification vs. concentration: Some VCs invest across multiple sectors and stages to spread risk, while others focus on a small number of high-potential companies and acquire larger stakes.
• Fund life cycle: A typical VC fund has a term of 10 years. Investments occur in the first 4-5 years, followed by management and exit from portfolio companies.
• Co-investments and syndicates: VCs can partner with other firms to increase their check size, access deals, or spread risk.

How VCs Calculate Their Average Check Size: A Step-by-Step Example

Scenario: A $100 million VC fund

Let's say a VC firm has raised $100 million with the intention of deploying it over 10 years. However, not all capital is available for direct investment due to management fees and strategic allocations.

Step 1: Adjust the fund size to the management fees

VC firms typically charge a 2% annual management fee to cover operating costs. Over the 10-year term of the fund, the total fee is:

• Administrative fee = 2% × 10 years = 20% of the fund
• 20% of $100 million = $20 million

After these fees are taken into account, the remainder is 80 million dollars is available for investment.

Step 2: Allocation of capital between initial and follow-up investments

VCs divide their available capital between initial and follow-on investments.

What is a follow-on investment?

Follow-on investments are additional funds provided to portfolio companies in subsequent rounds (Series A, B, etc.). By reserving follow-on capital, VCs can double their commitment to startups with the greatest potential.

Assignment example

• 50% for initial investments: $40 million for new startups.
• 50% for follow-up investments: $40 million is reserved for subsequent rounds.

This allocation ensures that the VC can back the most promising companies over time.

Step 3: Calculate initial average check size

Suppose the company is planning an investment 20 startups with the $40 million earmarked for initial investments.

• Initial average check size = $40 million ÷ 20 startups = $2 million per startup

Although each startup receives an initial investment of around $2 million, the actual amount may vary depending on the startup's needs.

Step 4: Develop a follow-on investment strategy

VCs typically focus follow-on investments on companies with the highest potential for success. If the company a 2x follow-up strategyit would reinvest twice the initial check size in high-performing startups.

Follow-up example

• Initial investment: $2 million per startup
• Follow-up investment (2x strategy): $4 million per high-performing startup

When the VC firm reinvests 10 of the 20 startupsThe follow-up capital used would be:

• 10 startups × $4 million = 40 million dollars

Step 5: Adjust the average check size for all investments

Since not all startups receive follow-up funding, the average check size must be recalculated to reflect the actual capital deployed.

Investment overview

• Initial investments: 20 startups × $2 million = 40 million dollars
• Follow-up investments: 10 startups × $4 million = 40 million dollars
• Total capital employed: 80 million dollars

Adjusted average check size

• Total investments: 30 investments (20 initial investments + 10 follow-up investments)
• Adjusted average check size = 80 million US dollars ÷ 30 = $2.67 million per investment

This adjusted check size reflects the balance between initial and follow-on investments, ensuring capital is focused on the most promising startups.

Important insights for entrepreneurs

1. The size of the fund shapes the VC strategy

• Large funds: Write larger checks to late-stage companies, but prefer fewer follow-on checks.
• Smaller funds: Offer smaller initial inspections with more opportunities for follow-up financing.

Tip: Align your fundraising strategy with the right VC – early-stage VCs offer room for growth, while late-stage VCs expect significant success.

2. Management fees reduce the investable capital

Although a fund can raise $100 million, only a portion is available for investment after management fees.

Tip: Adjust your expectations by understanding a VC’s actual investable capital.

3. Follow-up investments are selective

VCs carefully allocate follow-on investments to high-performing startups based on metrics such as revenue growth, market traction, and competitive position.

Tip: Use your initial funding to demonstrate traction and position yourself for follow-up.

4. Portfolio size affects check size

A VC that spreads investments across many startups offers smaller average checks, while concentrated portfolios allow for larger individual investments.

Tip: Ask VCs about their portfolio strategy to tailor expectations to your needs.

5. Early-stage vs. late-stage investment behavior

• Early stage VCs: Offer smaller initial inspections with higher follow-up potential.
• Late-stage VCs: Offer larger checks but expect significant traction and growth.

Tip: Tailor your fundraising strategy to the size of your startup and target the right type of investors for each stage.

How entrepreneurs can use this knowledge

When entrepreneurs understand how VCs calculate their check sizes and allocate capital, they can plan their fundraising more effectively:

• Target the right VCs: Choose companies with fund sizes that are tailored to your growth phase.
• Demonstrate progress early: Achieving milestones increases your chance of follow-up financing.
• Prepare for selective follow-up: Manage cash flow carefully as not all startups receive additional capital.
• Ask the right questions: Inquire about the VC's check size, follow-up strategy, and portfolio focus to align your expectations.

Make Dhanteras your Fundteras 2024: Leverage VC knowledge to secure funding

These Dhanteras invest in wealth while others invest in wealth Knowledge and strategy to grow your startup. Understanding how VCs allocate their capital – balancing fund size, management fees and follow-up – will help you target the right investors and secure funding at the right time.

With the right insights, you can build long-term investor relationships and position your startup for sustainable growth. Do this Dhanteras, make a strategic move – make it yours Fundteras and unlock the potential for future success!