What’s worse for a Seed VC: 

  • Losing 100% of a $2m investment on a seed start-up that never closes a Series A?


  • Losing 50% of a $2m investment on a seed start-up that ended up being a unicorn but then later stumbled?

The latter. By far.  Even though you’re losing $1m more!

Here’s why:

In the first scenario, the seed VC has to write off a $2m check valued at … $2m. The value has never increased because they were never able to raise again. A bit painful, but let’s say it’s a $50m fund. You’ve lost 4% of the fund. That hurts, but you can make it up with a winner

In the second scenario, the seed VC invests $2m at, say, a $20m post, for 10% ownership. This one became, say, a $1B unicorn in 2021. Now VC, on paper, owns $100m for its $2m investment! That’s 2x the entire $50 fund right there! And the Seed VC is now carrying 2m investment at $100m.

Now in the second scenario, the unicorn stumbles, and is later sold for $150m. Sounds great, except they raised $100m, and the seed VC gets back maybe 50% of its $2m investment. Now its $100m position is worth … $1m. That’s a paper loss of $99,000,000. Or 99%.

So as a seed VC, you can easily write off losing a first check into any one deal that doesn’t go anywhere. Not that big of a deal. But once that deal gets marked-up by several rounds? It’s really, really painful to lose that same investment. Just why you’ll see … stress here.

I’ve talked with several founders that raised at high valuations recently who didn’t understand why their seed investors were stressed “Worse case, they just lose a few million. The later guys invested so much more.” Well, above is the reason why.

Put differently, a seed investor that writes off a $2m investment that went nowhere loses 4% of a $50m fund. But a $2m investment that goes to $100m and then back to $1m? You’re writing off $99m. That’s ~200% of a $50m fund.

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