The article discusses the challenges faced by venture capitalists (VCs) in exercising their pro rata rights, which are an essential part of their investment strategy. Pro rata rights allow VCs to invest more money in a company they already own a stake in, thereby increasing their ownership percentage and potential returns.
According to the article, as much as 95% of the time, investors fail to do their pro rata. This is because VCs often focus on finding new investments rather than doubling down on their existing winners. However, exercising pro rata rights can have significant benefits, including:
- Increased ownership percentage: By investing more money in a company they already own a stake in, VCs can increase their ownership percentage and potentially gain greater control over the business.
- Improved returns: Pro rata investments can result in higher returns for VCs, as they are able to capitalize on the growth and success of the company.
- Better relationships with founders: Exercising pro rata rights can help VCs build stronger relationships with founders, who may be more willing to work with investors who have demonstrated a commitment to their business.
The article highlights several reasons why VCs struggle to exercise their pro rata rights, including:
- Risk aversion: Many institutions and family offices are risk-averse and prefer to focus on investments that offer more predictable returns.
- Duration: The duration of investments can be a significant concern for VCs, as they may not have 10-15 years to prove the worth of their investment.
- Lack of communication: VCs often fail to communicate effectively with founders about the importance of exercising pro rata rights.
To overcome these challenges, VCs need to adopt a more proactive approach to exercising their pro rata rights. This includes:
- Double down on winners: VCs should focus on identifying and investing in companies that are showing strong growth and potential.
- Communicate with founders: VCs should engage with founders to understand their needs and concerns, and to explain the benefits of exercising pro rata rights.
- Educate LPs: VCs can educate limited partners (LPs) about the importance of pro rata investments and the benefits they offer.
Overall, the article highlights the need for VCs to adapt their investment strategies to take advantage of the opportunities presented by pro rata investments.
