The article discusses how venture capitalists (VCs) are struggling with "pro rata rights," which allow them to maintain their investment stake in a company even after subsequent funding rounds. The issue is that VCs often fail to exercise these rights, resulting in lost opportunities and returns.
According to the article, up to 95% of VCs don’t do their pro rata rights, and this phenomenon has been exacerbated by the decline in VC fundraising activity in recent years. Institutional investors and family offices are increasingly risk-averse and focused on short-term returns, making it difficult for VCs to justify holding onto underperforming investments.
Experts quoted in the article emphasize the importance of VCs exercising their pro rata rights to maximize returns. Jason Calacanis, a well-known angel investor, said that if he had utilized his pro rata follow-on rights in his first fund, he could have tripled the returns. Steve Brotman, managing partner at Alpha Partners, noted that failing to do so can result in missed opportunities and lost returns.
The article highlights several key points:
- Pro rata rights are underutilized: VCs often fail to exercise their pro rata rights, resulting in missed opportunities for growth and returns.
- Risk aversion is on the rise: Institutional investors and family offices are increasingly focused on short-term returns and risk-averse, making it difficult for VCs to justify holding onto underperforming investments.
- Duration is a major concern: Many institutional investors have a shorter time horizon (typically 3-6 years) to prove their worth, rather than the traditional 10-15 years associated with venture capital investing.
- Riding unicorns is crucial for VCs: VCs need to double down on their winners and maintain relationships with founders to maximize returns.
Overall, the article highlights the challenges faced by VCs in exercising their pro rata rights and emphasizes the importance of doing so to maximize returns.
