Why a Seed VC Should Care More About Ownership Than Valuation on Each New Investment, But Understand the Fund Impact of Paying Too Much Too Often

My friends at Weekend Fund recently put out a round-up newsletter of some investor responses to the question “ Do Valuations Matter? “ It’s all worth reading but I’ll excerpt my thoughts here since it’s a discussion Satya and I have often with new VCs.

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How Hunter Walk @ Homebrew approaches valuations

Homebrew is an evergreen fund investing primarily in pre-seed, seed and Series A rounds.

Like NEA, Homebrew takes an ownership-driven approach to investing. They view valuation as an important guardrail in evaluating an investment opportunity. Hunter also breaks down their framework for evaluating an investment opportunity when achieving their target ownership exceeds their maximum check size, and the “opportunity cost” of doing so resulting in less diversification.

More from Hunter:

“In our historically concentrated approach to seed stage investing, hitting our ownership target mattered more than valuation *but* valuation was an incredibly important guardrail in evaluating an opportunity, for it has great impact on the company and our portfolio management overall.

We set a ‘max check size’ for our initial investments which was meant to get us, on average, 10–15% ownership and if held to, would overall guide us to an investment period that provided both time and company diversification for the fund. It also drove our reserves strategy. So in any negotiation, whether we wrote our ‘max check’ to get the target ownership was a factor of round size, company stage, and so forth. But we would rarely walk away from an opportunity based on valuation if it fits within that target ownership and check-size box.

In situations where targeting the 10–15% ownership would have required a commitment larger than our ‘max check size’ we had to decide whether (a) the opportunity here was worth 1.5 or 2 slots — ie are we going to make one fewer investment out of the fund in order to do this one or (b) would we stick with our check size but take lower ownership as a result or © walk away. Of these three, © was the most common…