Whenever proportional rights involved, you can always smell the drama. When a company initiates a funding round, new and old investors often compete for the largest stake they can get. While this process can be competitive enough to be considered cutthroat, during the bull market of the past decade it has become more or less predictable – new investors usually get their fair share while existing backers fight for what they can.
If you’re new to all this, here’s a brief explanation: In investing, proportionality is a legal right that allows investors to retain their ownership interest in a company when it raises capital after they’ve invested. This is critical for early-stage investors and smaller funds, as they can avoid dilution and retain significant stakes in their portfolio companies. It has not always been easy for existing investors to exercise this right, as new investors often have a fundraising advantage and may be hungry for a bigger piece of the pie. (If you want to know more, here is a more detailed explanation.)
However, this year is starting to look very different.
These seed funds went from “No, too bad, you’re not getting your proportion” to “You’d better shell out.” Lauren Straub, CEO of Bowery Capital
Venture funding slowed downas many investors are spooked by the current public market volatility or taking a breather after Financial Madness 2021. Some startups may still see the same excitement from new top investors when they are looking for fundraising funds, but most won’t.
This means less fortunate startups are more likely to rely on their existing sponsors to use most or all of their apportionment. But will their investors be willing to do so? It will depend on who they are.
For firms like the upfront and seed investment firm Hustle Fund, which is still investing as usual despite market challenges, this is a welcome change. Eric Banthe firm’s co-founder and general partner, said the Hustle Fund is delighted to be able to increase its share of the projected winners, something it often failed to do until this year.
Credit: techcrunch.com /