DISQUS

gregory · 2 months ago

Charlie, as you point out, a lot of it comes down to the investor's reputation for follow on financings. Imagine if Paul Graham lead follow on larger financings in his few favorite Y Combinator companies every year. If Graham didn't put a term sheet out on on a Y Combinator grad, everyone else would wonder what Paul Graham knows that they don't and be very wary of investing. Of course since Graham never does (to my knowledge), he can credibly help all Y Combinator-backed companies raise their next round.

Firms like First Round pretty much do they same -- if they lead your series A and you do well, there's no expectation they'll lead the B because they're not set up to do that no matter how good the deal is. (Eric made a similar point.)

That said, I think it makes sense these large VC firms (Charles River and the like) to put some small portion of their capital in seed deals for R&D if nothing else, and it's always good to have more seed money out there for entrepreneurs. Perhaps the solution is to have a middle man. RRE kind of did this by investing in Betaworks, which makes angel investments in addition to their own products. Because there's different management, I don't think anyone expects RRE to lead the next round of a Betaworks investment. Sequoia invested in Y Combinator, but there's no expectation that Sequoia lead the round for successful YC companies.

I could see a couple of big VC firms putting money into a new entity that'd make fast $200-500K investments. They could have regular interactions with the fledgling companies, without setting the market expectation of an investment if things work out.

ceonyc · 2 months ago

Here's the problem though.

If I'm a Series A investor looking at a deal that Betaworks showed me,
I'm going to go to RRE and ask them what they thought. If they didn't
like it, I'm going to wonder just the same as if they were in it from
the beginning--because I absolutely know they saw it.

Same with angels... I'm going to do my homework and ask whether the
angels want their prorata in this next round. If it's your parents, of
course the answer is no, but your theory means I shouldn't ever take a
Roger Ehrenburg or someone like that who might at least be willing and
able to step up for a little of the Series A.

On the other hand, if all you take is a bunch of angels who can't step
up, what happens when you run out of cash? Don't you think it's better
to have someone who *could* step up in case of bad times... b/c then
they'll know you, see how hard you've worked, etc. and be willing to
support an insider round, then to have no one who could?

gregory · 2 months ago

Charlie, I think the best solution is to be born filthy rich.

chris dixon · 2 months ago

Hey Charlie - I don't think we are that far apart. I think there are pros to taking money from top tier firms like First Round. And if a company is killing it, they'll get financed regardless. But there are borderline cases, e.g. when the company is doing ok and has turned in a direction the VC doesn't like. I just think entrepreneurs should understand the cons as well as the pros.

Also - I'd love to do deals with First Round! Actually already have done a few - ScanScout and Knewton among others.

ceonyc · 2 months ago

If you shift, and you have good reason for it, and the VC is right there
with you during the whole process, wouldn't the seed VC be *more* likely
to support a shift if it was well thought out and a good opportunity...
versus getting angels who can't follow, shifting, and then running out
of cash b/c you had to shift, which was best for the company, but left
you halfway there. Then, you'd have to pitch to a bunch of VCs that
didn't know you as well as the seed VC does--who might get your back at
that point b/c you have a built up relationship.

ewiesen · 2 months ago

Charlie - I think your objections to Chris' post are largely straw men. First of all, the post is about the newly-trendy "seed stage programs" at larger VCs, not about dedicated seed investors like First Round. But even with this distinction, I don't think his point hinges on your assumption that seed investors will *never* follow on, only that sometimes they won't. If these programs are run to fruition, a $200M fund committing $10M (5%) to 20-30 seed stage deals most certainly will NOT follow on to all of them. The point Chris makes is that these 20-30 companies are the options the VC has collected, and the handful of them that draw larger follow-on capital from the parent VC are the lucky winners, but the remaining companies are comparatively disadvantaged relative to companies that never took this type of funding in the first place. It goes without saying that I also disagree with your assertion that something has to go seriously wrong for a VC who made a small seed commitment to refuse to follow on. While it's early in the game to be tabulating data, if firms really are going to seed several dozen companies, you should expect the funnel to narrow significantly down the road.

Just for disclosure, we've been known to make seed investments at RRE (including drop.io and Payfone) but we don't have a formal program for doing so and tend to make relatively few investments at this stage.

ceonyc · 2 months ago

The remaining companies might not have existed had they not taken this
kind of funding in the first place... they might not even be anything
resembling a company at the end of the seed round. Maybe the tech
didn't work or they didn't gain the right traction.

It's a small minority of companies that 1) are viable companies with
viable product 2) need VC capital and are still a VC trajectory deal
but 3) aren't appealing to the seed VC.

ewiesen · 2 months ago

I think these points are theoretically true, but practically unlikely.

It's unlikely that a company that could attract a seed investment from a brand-name firm dabbling in seed stage investments would fail to attract capital from more traditional angels (or "super-angels",whatever that means). Sure, theoretically possible, but I think the minority of cases.

And there are any number of reasons why the parent VC who put in $300k might not want to write a $4M check a year later, particularly if they have 15-20 seed stage deals all asking for Series A checks. Chris' point (and one with which I agree) is that these programs are designed to create a minor-league system for Series A investments, and just like in the actual minor leagues, only a few will get through. What happens to the rest is at issue here, and I think most people will agree with you - something must have gone terribly wrong for the VC not to have invested. It's not necessarily true, but it makes raising that round MUCH harder than it had to be.

ceonyc · 2 months ago

What % of 20 companies who take 300k from *anyone* do you think will be
viable VC investments a year later?

amanda peyton · 2 months ago

Charlie - What I got out of Chris' blog post was that by participating in these seed programs, some companies unknowingly align themselves with a particular fund too early and do themselves a disservice when they are ready to raise a series A.

I think it's really an issue of timing. If you align your startup too early with one fund and for whatever reason they're not going to do your deal (and there's about 1 million reasons why deals dont get done), you put your company in a worse negotiating position when you meet with other potential investors.

ceonyc · 2 months ago

I really think you need to get the best possible people you can find as
early as possible... and do your best to execute so that none of this
is an issue.

Trying to overthink this process just in case you're a borderline case
doesn't seem like a very good strategy to me.