Targeting VCs For Seed Money Is Generally A Waste Of Time
The issue of larger venture capital firms getting involved in seed deals is, in a way, an old issue. I remember well-known and famous angels and VCs were tweeting and blogging about this years ago. For me, my own thoughts on this trend went back and forth. For a while, I thought, “Why not, it’s a free market, so early-stage founders should pitch VCs who were willing to be pitched,” and for VCs, I thought, “Well, you never know where the next big thing will come from, so look at more things, even earlier, so make sure you get in.”
There are, of course, arguments for and against this, usually made by those with market knowledge tinged with a bit of their own bias. I’ll briefly summarize the main argument against having VCs in seed rounds and the main counter-argument to this below:
- Argument Against: Taking seed funds from VCs creates a signaling risk during any Series A financing discussions if even just one of the seed VCs declines to participate or lead the next round. An external investor evaluating your company for Series A may, in the absence of perfect information, feel skittish about investment because he or she may take the fact that your existing investors didn’t want to fund you, thereby putting you in a tight position.
- Counterargument: If your company or product is good enough, you’ll get Series A investment regardless of who you seed investors are and whether or not they agree to follow-on their investment. In other words, build something great, and none of these arguments matter.
In the wild, I’ve seen this play out in real life. On the investment side, investors looking at potential Series As most definitely pay attention to the signaling of VCs invested at the seed stage. If a company doesn’t have continued participation, this can most certainly nag the evaluation process, and I’ve seen people pass on leaning in, maybe not entirely because of this, but it’s hard to discount. Yet, I’ve seen the opposite also happen, where great products and teams aren’t impacted by any signaling and get healthy Series As, sometimes even preemptively.
At the end of the day, signaling risk will always be there for founders who take checks from bigger VCs, and a small handful of them will never have to worry about it because they were able to breakthrough, but the majority likely will. Despite this, I don’t have a strong position either way — if you are looking for seed funding and VCs want to invest…Great! At the end of the day, for all its shortcomings, I think investments at Series A and beyond are generally efficient, with a few headline-grabbing outliers.
But, here’s the rub…yes, I buried it at the bottom, buried the lede, if you will…I’ve finally decided what my general advice would be to early-stage founders who get wooed by the thought of having a big VC in their seed round…..DON’T WASTE YOUR TIME.
Unless you’ve got a long-standing relationship with a VC and want the support of a specific partner, or unless you’ve created Blogger, Twitter, and feel like getting some seed capital for your next idea, it’s more than likely that going to VCs is a GENERALLY A WASTE OF YOUR TIME.
- Sand Hill Moving Resources & Attention Away From Seed: After a few years of dabbling, most big box VCs are moving away from seeds. They’ll still back exceptional people they’ve known for a while or people who are the CTO at a big tech company, but that’s usually it. Some firms are moving away from seed because they often have to say “no” to great people, and they don’t want to foster any potential for negative feelings. Some firms will continue to fund seed, yes, of course, but don’t expect much help. Though writing a $100k or $200k check isn’t just a marketing expense, investors who are already time-strapped will most certainly not pay you the attention they pay to an investment where they sink in a $10m check. It’s obvious, but bears repeating.
- Potential To Get Unintentionally Distorted Advice: VCs are money managers who need to return capital within a specific time frame. In order to do this, they need to spread capital across high-risk bets, and they prefer to reduce those risks by investing at a time when it’s too expensive for individual angel investors but too risky for growth or momentum investors. All the risk and upside is usually around Series A and Series B, and this is where VCs make their legend. (See: Facebook with Accel and Greylock, for instance.) This is all dandy, but this can also lead to advice given without proper context. I recently met an entrepreneur with what I thought was a great idea for a seed investment in building developer tools, but he was rendered unsure of whether or not to pursue because some larger investors questioned the size of the market. I had to spend an hour unwinding this, and I’m not sure I succeeded.
- Dangers of Residual Information: You may have heard of the lawsuit funded by First Round Capital to protect one of their company investments against Best Buy’s bad behavior. In response to that story, SV Angel’s David Lee (a former lawyer) wrote a post about the legal concept of “residual information” and how in an industry with little and/or asymmetric information, some investors can take meetings to glean information about a technology or space that may benefit an existing or potential investment they’re considering.
Generally speaking, if you’ve got an idea, a prototype, a small team, a hunch about something that you care about, and you’re having fun and want to explore a market, focus on angel investors who are in the business of writing small checks to support entrepreneurs, and lord knows there are plenty of them around. Use AngelList. Get your former bosses and colleagues to back you. Network your way in front of institutional seed firms and/or microVCs, or consider the incubators or accelerators. Outside of just making connections with bigger VCS — which I agree can be valuable, such as getting warmer intros to angels, for instance — there’s a greater chance for getting sidetracked or derailed if you start spending your time swimming in ponds where the fisher(wo)men like to fish offshore, in deeper waters.