Founders, Capital, Supply, and Demand
Is Inception Structurally Mispriced?
TLDR: The demand for inception-stage capital vastly outweighs the availability of it. That’s why inception funds are able to create meaningful diversification that statistically outperforms traditional venture. It’s venture at a structural discount, driven by a supply and demand imbalance.
Is Inception-Stage VC Structurally Mispriced?
Inception-stage venture funds, and some accelerators, may represent one of the most structurally mispriced asset classes in venture capital. By investing in 100+ startups per fund at systematically low entry valuations ($1M–$3M post-money) and achieving graduation rates of 40–80% to priced seed rounds, these funds enjoy benefits that are largely inaccessible to traditional early-stage investors:
Exceptional diversification (100+ investments per fund)
Significantly discounted entry valuations (50–70% lower than industry norms)
High graduation rates to priced rounds
Fast markups and early TVPI
Scaled exposure to Power Law odds
Despite smaller ownership percentages in each company, inception funds often outperform traditional VC funds on a MOIC and IRR basis due to efficient capital deployment and early entry economics. Crucially, this inefficiency persists because the demand by founders at inception stage far outweighs the supply of institutional capital necessary to fund them all. That simple supply and demand imbalance allows inception-stage investors to provide a structurally advantageous product to investors while creating access for many more founders to start companies.
The Hypothesis
If inception-stage funds can:
Deploy 100+ checks per fund of $100K–$300K each
Enter at $1M–$3M post-money valuations
Graduate 60–80% of their companies to priced seed rounds
Then:
They have more shots on goal
They achieve meaningful ownership for far less capital
They are better positioned to capture power law outliers
The inefficiency here is not theoretical—it’s systemic. Inception-stage companies are not funded through competitive auctions but through constrained supply. Because very few investors are structured to write $100K checks at incorporation, the price of equity is dictated by capital scarcity rather than expected value. The result? Inception investors get to buy options on unicorns (and hectocorns) at napkin-stage prices.
Entry Price Advantage: A Structural Discount
The traditional range for an inception-stage fund or accelerator program ranges from $1m - $3m on a post-money SAFE. This represents a 50–70% discount relative to even modestly priced traditional funds. And it compounds. When these companies raise seed rounds at $8M–$20M post-money, early investors may see 3–6x markups within 12 months.
Owning 2–3x more equity for the same capital lets funds win with smaller exits or accumulate optionality on future mega-winners.
Graduation Rates: Systematic Arbitrage
One of the most overlooked strengths of inception funds is their “systematic alpha” driven by graduation rate, or as we call it: “fund-through rate” (FTR). When you compare Entry Price to FTR, you can quickly determine if an early stage fund is creating a statistically advantageous fund or not.
This is the equation you need to know:
Entry Price / FTR = Price of Risk
Seed Valuation - Price of Risk = Systematic Alpha
A typical inception fund:
$2m Entry Price / 50% FTR = $4m Price of Risk
$14m Average Seed Valuation - $4m Price of Risk = $10m Alpha
If you look at this example, and you assume the inception fund is making 200 investments, then you can compare the inception fund to a seed fund apples to apples:
Inception Fund
200 starting positions at 50% FTR = 100 remaining seed positions
Fund MOIC at Seed = 2.5x
Average Ownership = 10%
Odds of $10B+ Outlier = ~63%
Seed Fund
30 starting positions = 30 seed positions
Fund MOIC at Seed = 1x
Ownership = 10-15%
Odds of $10B Outlier = ~36%
As graduation rates increase, so does systematic alpha and number of resulting seed positions, providing more opportunities to find a $10B+ mega-winner.
As we discussed last week, the odds improve with diversification:
Power Law Amplification: More Bets, Bigger Upside
Venture outcomes are not Gaussian, they’re Pareto. The top 1–2% of deals return most of the capital. The more bets you make, the more likely you are to catch one.
Everything you need to know is in last week’s post on mega-winners, but for the TLDR, while inception-stage investors own less per deal, they hit more total winners, and those winners are becoming larger than ever.
Ownership and Dilution: The Underappreciated Math
Ownership often looks modest:
YC: 7% entry ($1.78m valuation) + MFN → ~3.5% post-dilution
Antler: 8% entry ($2.5m valuation) + ARC → ~5.5% post-dilution
But think about what that means:
4% of $10B = $400M → return entire $200M fund 2x
And, 199 companies still in play
Traditional seed funds may own 10–15%, but they enter at 3–5x the valuation. Their fund strategies are often about concentration in the winners, putting more capital to work in fewer companies in order to maximize upside, despite the lower odds.
By comparison, and due to risk, inception-stage investing a volume-sensitive strategy. It’s not about controlling the cap table—it’s about being in the right companies before anyone else knows they’re right.
The counterforce to all of this, and maybe we will see more of it, is mega funds coming down into the accelerator landscape. It’s still post-team, post-idea, post-product, but funds like a16z who run programs like Speedrun, TalentX, and Crypto Startup School, can both offer higher valuations, and do it at volume while protecting their positions for a long time. That said, there are risks to this strategy too:
Entering at $7m-$20m greatly reduces the entry price arbitrage, and the resulting opportunity to exit early for meaningful returns
It’s still unclear if founders will be ok with the potential signaling risk of the mega fund not following on
Other legendary firms have tried, and struggled to follow-on effectively as founders often want new value on their cap table and in their board rooms
I think if these firms can get to reasonable diversification, a systematic follow-on, and protect their ownership for 2+ decades, then entry price is less of a concern for a full-stack multi-decade fund strategy. However, I would not be surprised if mega funds started more aggressively investing directly into the inception funds with an “affiliated pro rata” strategy, or maybe even attempting to acquire them rather than running their own opex-intensive services businesses.
Exits and Liquidity: Secondaries > IPOs
The traditional VC liquidity model depended on IPOs. That’s no longer realistic:
Median time to IPO: ~10 years (YC’s average unicorn is 12+ years old)
45% of unicorns are 9+ years old
Many never exit—stuck as perpetual late-stage private companies
But the rise of secondary markets has unlocked liquidity:
Uber SoftBank tender: $8B
Airbnb tender offer (pre-IPO): $500M+
Stripe secondary sales in 2021–23
Inception investors benefit the most:
They hold high-demand equity
They can sell earlier at meaningful returns
They are less dependent on IPO timing
The exit strategy isn’t IPO anymore—it’s coming in extremely early and partially selling out of a position starting with Series C liquidity while retaining enough equity to realize power law returns on the ones who really make it t $10B+.
Risks, Limitations, and Execution Complexity
It’s not foolproof. Risks include:
Dilution risk if follow-on access isn’t protected
Preference stack, and liquidation preferences in particular
Loss of signal as scale increases
Fund admin complexity with countless SAFE’s, KPI tracking, and audits
Reputation risk if program quality drops
And most importantly: selection matters.
A bad sourcing and talent business leads to poor co-founder matching, poor graduation rates, and a weak community culture. Both this, and the opposite, are compounding forces. Nothing else matters if you don’t find the absolute best people.
A Mispriced, Misunderstood Opportunity
Inception-stage investing isn’t just early—it’s structurally different. It sits where the capital markets are weakest but the founder supply is strongest. And that gap creates pricing leverage for VC’s and their LP’s.
So is inception stage VC mispriced? The answer is nuanced.
It’s not for founders, because the price is dictated by the supply and demand of capital. Currently that supply is limited at inception relative to the ever-growing number of founders competing for capital.
But, there is absolutely a systematic arbitrage for investors due to selection process and graduation rates. If inception funds can:
Attract top-tier founders
Filter effectively
Graduate successfully
Exit intelligently via secondaries
Maintain quality while scaling
Then, this is arguably the best risk-adjusted place in the venture stack today for LP’s. The fact that more LPs and GPs haven’t embraced it is not a warning sign—it’s the opportunity.
Inception investing is venture indexing at 70% off, and innovation has always outpaced inflation.
And in a world where the tails keep getting bigger and longer—$10B+ and $100B+ outcomes are not uncommon—it’s a bet worth making.
See you Monday.