🤝 This week’s edition is sponsored by Mercor

Your company’s data could be worth more than you think.

Mercor pays companies to license the operational data they already generate across tools like Slack, GitHub, Drive, and more. There’s zero engineering lift or dilution, just payouts that scale with the depth and quality of your data.

Get a free valuation with no commitment at data.mercor.com.

Know a founder sitting on valuable operating data? Refer them and earn up to $100K if the deal closes.

📰 Today's topic: Can this check return the fund?

Shiyan Koh, GP of Hustle Fund, sits on the investment committee of a small university venture fund. Last week, two deals came up on the same agenda and side by side, they make the cleanest portfolio construction lesson I've seen all year.

The fund is about $10M. It writes $100–150K first checks. Pretty standard small-fund setup.

Deal one: a follow-on into an early portfolio winner, raising at about $16M pre.

Deal two: a new check into a much later-stage company at $300M post.

Similar check sizes. Both real companies with real progress. Now play both forward to the same happy ending, each one becomes a $1.5B company.

The $16M entry returns about 90x. On a $120K check, that's roughly $12M back. That one slice returns the entire fund.

The $300M entry returns about 5x. Call it $1M back. On a $10M fund, that's a rounding error.

Same outcome for the companies, wildly different outcome for the fund. For a small fund, entry price is destiny. To return a $10M fund from a $300M entry, you'd need a $20B outcome. Try naming five of those.

Why smart people do it anyway

The late-stage deal feels safer. There's real revenue. A name people recognize. Often a relationship the institution cares about.

But look closer and it's the worst of both worlds: a growth-stage price with seed-stage risk. In our case the company was still burning cash, and the price was set by insiders. No external lead, no real price discovery. You're paying a safe-feeling price for an unsafe thing.

Three rules for small funds

1. Returns come from the tail, and the tail only pays if you entered cheap. Set a price ceiling for new checks and hold it.

2. Reserves exist to defend proven winners at still-reasonable prices. Every dollar that goes into a late, expensive round is a dollar that can't defend your actual fund-returner.

3. Some deals are really about a relationship — a professor, an alumni network, an ecosystem. That can be fine. But name it, cap it, and give it its own bucket. A strategic bet dressed up as a return-seeking one can never clear the bar, and it drains the reserves your winners need.

The one question

Whether you're an angel or running a small fund, ask one question before every check: if this works, can it return my portfolio?

If the answer is no, that's allowed. Just know which bucket you're in: on purpose, not by accident.

– Brian from Angel Squad

📕 Startup term you should know

Ever heard of Contribution margin?

The profit remaining from each customer after subtracting variable costs directly attributable to serving that customer. This metric helps understand the true profitability of customer acquisition.

My insider scoop: Contribution margin reveals unit economics at the customer level. David Skok explains that "contribution margin must be positive and substantial enough to cover fixed costs and provide profit." For angel investors, declining contribution margins often signal pricing pressure or rising service costs. Aim for 60%+ contribution margins in SaaS businesses.

Overheard in SF…probably

“We don't have a CTO, we have a very promising computer science sophomore with strong opinions.”