If I was raising a VC fund in the UK right now (not my current plan btw!) I would be solely focussed on single round investing at pre-seed, with zero capital held back for follow-on – and here’s why.

We all know the UK suffers from smaller exits than our US counterparts.

We can argue on why and how to solve it but it won’t change overnight, it’ll take a 10 year cycle to change in my opinion.

The majority of the VC market is software and there’s a very small amount of UK-based software businesses that exit for £100m+.

Therefore, if you wait until seed or Series A, and valuations are £10m-£20m it’s almost impossible to make venture level returns.

You’d need >20 per cent success rate just to return the fund. That’s extremely difficult in my view.

However, if you’re investing at pre-seed, you’re talking valuations in the £1m-£3m range.

That means you can realistically get 10x returns even on exits in the £10m-£50m region.

You also have a chance of a runaway, of that £2m valued pre-seed deal doing 30x-40x.

Can you raise venture capital and have a work-life balance?

But why no capital held back for follow-ons though?

  • Sunk cost fallacy can your kill returns. I wouldn’t want the ability to be able to follow-on. I’d want to do one cheque, right out the gate and live and die with the company being strong enough to attract external capital;
  • You will never ever get a better price than the first round, therefore every round you follow-on is depleting your ability to hit the big returns;
  • If you’re not following on, you don’t need as bigger fund and therefore your own fundraising cycle should be quicker.

Do you agree or disagree? Let me know your thoughts.