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A lot of people understand that corporate investors tend to invest for strategic reasons rather than financial. It’s great if they make money on the investment, but they are primarily looking for some other benefit that supports the goals of their organization.
It may surprise many to find out that venture capitalists also write strategic checks. Here are some of the scenarios that come to mind:
Logo Shopping Checks: The VC is just getting started, and they want a recognizable logo to put on their portfolio page. In many cases they are only writing a small check within a large round, or they are investing in a later stage than they usually do so that they can say that they invested.
Option Checks: Conversely, sometimes VCs will participate in earlier stages than they usually invest. In most cases this is because they are impressed with the deal, but don’t have conviction to write a larger check yet. The most common example is when a Series A investor writes a check for a couple $100K into a seed round. This is not an investment for them. They are buying 1) an option to invest in the Series A, and 2) information rights to get to the know the company over time.
Educational Checks: Sometimes investors will write small checks into an area that they want to learn more about, with the goal of eventually investing a larger check in that area. Recent examples might be cryptocurrency or AI.
Marketing Checks: In a lot of ways, a VC’s portfolio is his or her brand. If someone writes a lot of checks into SaaS companies, they will be known for SaaS and therefore more SaaS companies will come to them. Sometimes VCs will write a lot of checks into an area that they want to invest in so that more of those deals will come to them. Like Educational Checks or Option Checks, the intention is usually to write a larger check later.
Some of these may seem irrational, but the reality is that in a lot of cases these strategies actually work. A VC may lose money on these checks, but just like anything in venture there will be some that pay off handsomely.
I know some of our founders are thinking, “am I one of those strategic checks?!” We have never written an initial check beyond a Series A, so Logo Shopping doesn’t apply. We don’t focus on particular sectors, so Educational Checks and Marketing Checks don’t apply either. However, Option Checks arguably do. We invest in very early stages, sometimes in just an idea. Betting small early gives founders a chance to build out the product and the team, while it gives us a chance to get to know them throughout their journey. When there is trust and conviction on both sides, we follow on heavy by writing $500K – $1.5m checks –or in rare cases, putting together a JPY 1.5 billion ($~13.3m) SPV for them 🙂