The Color Of [Easy] Money

Earlier this week, Mark Suster wrote an eye-opening post about a recent experience he had with an investment his firm made which related to the behavior of an individual angel investor in that round. Please read it here. The immediate reaction by most was the shock around how an investor could behave as this angel did, but putting this specific, unfortunate story aside, I had a different, more general takeaway: This is the color of easy money.

Today’s times are defined by a few forces. Many would agree there’s an oversupply of seed capital. So, it’s a great time to start something, and it’s pretty easy to raise seed funding (for the most part). Founders prefer rolling closes with convertible notes vs priced rounds (for a variety of reasons), and are getting more savvy at leveraging crowdfunding and other alternative sources of seed capital. For folks who successfully raise at seed, oftentimes it’s a crowded cap table, and the most lines on the cap table mean more potential points of information failure. (This is part of what Mark is blogging about.)

Generally, it probably isn’t a problem for founders because most of these smaller investors don’t get information rights. But, I can say that there are other people hanging around these deals who want to at least look — other LPs and folks who have invested in the seed investors’ funds, people offering debt (versus equity). Mark is right in pointing out that so many smaller investors are also trying to leverage their positions into something bigger. It’s only rational to assume that’s happening, and with that race comes its own behaviors and norms.

In reflecting on Mark’s post, I wonder about a few things. Will professional VC firms (like Upfront, or others) want to help “clear the cap” table when they come in to lead a round? There are economic incentives to do this today given how ownership targets have been lowered for many in VC, but maybe there’s a security angle, too. Will this kind of news ripple across founder networks and make them more critical of who is on their cap table, or is this just a blip for a blog post and it’s back to business as usual?

Haystack is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2018 Semil Shah.

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