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Making Follow On Decisions

Ritesh Banglani takes us through some of the hard decisions a VC has to make on a day to day basis. This session was done for the pi fellows 2020 programme

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Making Follow On Decisions

  1. 1. THE HARDEST DECISION IN VENTURE CAPITAL 0 Ritesh Banglani Stellaris
  2. 2. AGENDA Why portfolio construction is crucial Why there’s no right answer How rules can help But not too much: why culture eats strategy for lunch 1
  3. 3. CAPITAL ALLOCATION IS WEALTH CREATION 2 Investment judgment is continuous Democracy is death Cost of mistakes keeps escalating Case 1: Equal allocation Case 2: Identify losers Case 3: Identify losers AND winners 10% 40% 50% 15% 60% 25% 43% 40% 17% 1.8x 3.0x 7.3x
  4. 4. RETURN THRESHOLD 3 0.5x 0.7x 1.0x 20% 15% 10% Probability of winner Bar for 3x gross return Can’t triage at first investment – all companies need to meet same bar Earlier stage = higher bar Larger funds can increase ownership 1x for smaller fund < 0.5x for larger fund Syndication is key decision
  5. 5. RESERVE RATIO 4 Extreme 1: Deploy everything at seed Extreme 2: Support company in every round When do you stop supporting a company?
  6. 6. TRADE OFFS Portfolio size vs reserve ratio Backing your winners vs having more winners Multiple vs IRR Return vs reputation 5
  7. 7. RULES CAN HELP Return bar Investment pace Progressively harder decision-making Max allocation/company No individual incentive But nothing replaces trust and intellectual honesty 6

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Ritesh Banglani takes us through some of the hard decisions a VC has to make on a day to day basis. This session was done for the pi fellows 2020 programme

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