Why Venture Capital Firms With “Tons of Money” Can’t Write Little Checks

I often talk with frustrated founders in the middle of a seed or pre-seed raise, and at some point they say a version of the same thing: “they have so much money, why can’t they just give me $50k?” On the surface it tracks. General Catalyst, for example, has something like $7bn in assets under management, so wouldn’t it make sense for them to throw $50k to $100k seed checks around like confetti?

No. But yes. But really, no.

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A few forces are at play in any venture investment, and they simplify down to (1) time and opportunity cost, (2) prospectuses, mandates, and business models, and (3) firm and investor type. Here’s how each one works.

Time and opportunity cost

This is the easiest one to explain, and I remember a lightbulb going off the first time someone walked me through it. I was 20 years old and genuinely frustrated that a fund with billions under management couldn’t write a $50k check and see what happens.

Some very large funds spin out a smaller vehicle for early-stage investment and even brand it, but then you’ve suddenly got a whole new venture fund, which brings its own constraints (more on that in the next section). The core problem is simpler than that. If you’re a giant fund writing a $50k to $500k check into a small company, you can’t justify spending time on that company when you have $30m in another one. Investors are people with a finite number of hours, so they have to be careful about where those hours go. You also have a fiduciary duty to your limited partners, the people and institutions whose money you’re investing. It isn’t financially responsible to spend time on an investment where so little is at stake when you have 600x that amount in another company.

Beyond partner time, there’s back-office work, meaning the legal work to get the investment done. Every investment carries closing costs, and it’s not unusual for the back-office spend to exceed the check itself. That’s exactly why convertible notes and the YC SAFE became popular. The benefit of the SAFE, or Simple Agreement for Future Equity, is that you skip engaging a legal team to execute a stock purchase agreement and run a full priced round. SAFEs carry other risks, though, because the investor doesn’t technically own the stock at signing.

Prospectuses, mandates, and business models

There are entire books on venture capital business models, so I won’t go deep here, just into the parts that matter for this question.

Venture funds have to raise money too, and to do that they need a business model with a mandate and a prospectus established for each fund. One firm can and usually does invest out of multiple funds, and the partners hold a financial interest in those funds. Generally a single fund, meaning a single bucket of money, runs a 60/40 split: roughly 60% of available capital goes to new investments and the remaining 40% goes to pro rata, meaning follow-on investments in later rounds of existing portfolio companies to maintain a target ownership percentage.

Side note: if you want to go deeper on pro rata rights, read my post on how to model ownership and dilution and how pro rata works.

When an investor raises a fund, they file a prospectus with the SEC detailing the investment security and the offering, meaning how the fund will function and how investors make money. Funds also establish a mandate, which determines how the money gets invested and drives the decisions of the investment committee.

Here’s a concrete example. In 2020, a Series A firm might have a business model that mandates a 15% to 20% ownership target with an average check size of $5m to $6m, investing out of a $300m fund, with up to $10m total into a company over the life of the investment. If you’re raising a Series A at a $60m pre-money, that investor is priced out of your round. They can barely get to 10% ownership, which is too little for their return math and outside their mandate.

Flip it around. If you’re raising $1m on a $5m valuation, they could easily hit a 20% ownership target, but now you’re back to the time and opportunity cost problem, plus the mandate that the LPs actually bought into. Investing outside your mandate creates legal exposure with your LPs, because partners have a fiduciary duty and that duty is about risk management and returns. A seed investment carries a different risk profile than a Series A.

Some funds have a single limited partner that is itself a business, investing off that company’s balance sheet. Amex Ventures is a good example. They’re less valuation sensitive and do carry ownership targets, but their mandate requires the company to hold specific strategic value to Amex. Other investors have multiple LPs, like private family offices, university endowments, or pension funds, and those funds tend to have less flexibility because it’s truly other people’s money. Mandates can also specify a vertical focus, like marketplaces or B2B SaaS.

One interesting exception: some funds write carve-outs into their prospectus or mandate for accelerator programs like YC or 500 Startups. Instead of the typical $5m to $6m check at a set ownership target, they set aside a percentage of the fund for $100k to $200k seed checks into YC or 500 companies only. That’s one reason to do one of those programs. Partners generally won’t manage those investments, and the relationships get handled by associates or principals.

The other exception is an established fund writing a small check into a company they intend to write a $5m to $6m check into later, usually because they have high conviction in a second-time founder they’ve worked with before, or they’re seeing exceptional early traction or strategic value. That situation often comes with term sheet language guaranteeing pro rata rights, or aggressive liquidation preferences to offset the extra risk the fund is taking.

Firm and investor type

The last thing to consider is the type of firm. An angel or super angel can do whatever they want with their own money, which is why founders get encouraged to go the angel route for their first tranche of capital, or get told they’re raising too little for an institutional investor to care. The challenge is that angels are active sporadically, so finding them or maintaining any meaningful database of them is hard.

Then there are firms and investment managers just starting out, building a track record to show they can get into meaningful deals and make LPs money so they can raise larger funds later. Picture a $10m fund getting into the Series B or C of a brand-name company (think Lyft or Stripe). At that point it isn’t about the dynamics of that specific investment. It’s about establishing a track record and showing you have access to good deals. Access is the biggest challenge in this business, and having the network to avoid getting iced out of growth rounds matters, because that’s where investors have more data to manage risk and make a lot of money.

The questions to ask an investor instead

Hopefully this explains some of what’s driving a large firm not to write small checks. More usefully, it tells you what to ask an investor when you meet them, so you can figure out whether they can invest in you at all:

1. What is your average check size, and what ownership target are you looking for?
2. What stages do you invest across, seed, A, B?
3. Who are your LPs, and is there anything we should know about your investment mandate?
4. What does your investment committee process look like?

The answers give you what you need to build a strategy for working with that investor and closing your round.