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Kasia Sawko

Early Stage VC Funds: A Deep Dive

August 26, 2025

Following up on our recent overview of investor types, today we examine early stage VC funds. Understanding how early stage funds operate and how to approach them can significantly impact your fundraising success.

Understanding Early Stage Funds

Early stage funds operate primarily in pre-seed and seed stages. In markets like the UK, tax breaks make these funds attractive to individual investors seeking startup exposure without direct deal flow.
Due diligence rigour varies considerably. Some funds apply thorough assessment processes, while others face structural incentives that prioritise capital deployment over optimal allocation. Funds with longer deployment timelines can wait for deals meeting their criteria rather than rushing deployment.
Most early stage funds adopt sector specialisation, regional concentration, or business model expertise. This concentration stems from the belief that focused knowledge enables better investment decisions and risk assessment.

Knowledge Arbitrage

Investors seek areas where their expertise provides an advantage in assessing opportunities other investors might miss or undervalue. This knowledge arbitrage directly influences investment behavior—funds leverage specialised understanding to maximise returns, but demand greater involvement in portfolio companies.

Fund Involvement and Control

Larger investments typically require greater oversight: regular board meetings, monthly updates, and often board seats or observer rights. However, passive investors often participate in rounds led by credible lead investors with stronger sector expertise, creating a hierarchy where leads drive terms while passives follow.

Finding the Right Fund

The most effective approach leverages warm introductions through existing investors or advisors—these referrals provide third-party validation that cold outreach cannot match.
For sector-specific expertise, platforms like shipshape.vc help identify funds investing at your stage, cheque size, and sector focus. Approaching generalist funds with specialised businesses often results in suboptimal outcomes.
Sector specialists offer advantages beyond capital:

  • More accurate valuations, reducing unfavourable terms due to investor uncertainty
  • Generalists may apply higher risk premiums to unfamiliar sectors, leading to lower valuations
  • Greater flexibility regarding geographical constraints and incorporation jurisdictions

The Marketing Challenge

Fundraising is a marketing exercise—you’re selling equity to suitable buyers. Success requires identifying both the right funds and the right individuals within those funds who understand your sector.
Approaching the wrong person at the right fund can be as ineffective as approaching the wrong fund. However, connecting with sector specialists, even at funds that cannot invest, often opens doors through their networks of investors, customers, and strategic partners.

Key Takeaways

Strategic investor selection is crucial. Specialised investors who understand your sector and provide value beyond funding often represent the best long-term partnerships. While trade-offs between capital and control are inevitable, choosing investors with relevant expertise and aligned incentives makes these trade-offs more valuable for your growth trajectory.

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