A few years ago, the trend of companies raising smaller seed rounds combined with the emergence of new seed funds caused many big VCs to create seed investment programs. This triggered a debate among entrepreneurs and investors about whether it was risky for seed-stage companies to take small investments from large VCs. (I blogged about the issue here, here, here).
Since then, enough founders have directly experienced the downside of taking seed money from big VCs that I think it’s safe to say there is no more room for debate. I can think of about 15 founders I’ve spoken to recently who tried or are trying to raise Series As but are seriously hampered by the fact that a big VC invested in the seed round but isn’t participating in the Series A. (I’d love to mention specific companies and firms but it wouldn’t be appropriate for me to do so – I guess I’ll just have to cite Jay Rosen’s “I’m there, let me tell you what I see” principle of reporting).
There are two important nuances to point out here. First, there are big VCs who invest in seed rounds the right way – with the genuine expectation to follow on and the intention to help out during the seed stage (some that I’ve invested with include USV, True, and Spark). One important sign of this is how much they want to invest. If a $300M fund wants to invest $100K, they are buying an option. If they want to invest $500K, they are more likely making an investment.
The second nuance can be counterintuitive: the danger of taking seed money is positively correlated with the reputation of the firm. If a top VC invests in the seed round and then passes on the A, other VCs will have difficulty overlooking that the smartest money that knows the company the best isn’t following on. If the VC isn’t well respected, it is easier for other VCs to second guess them.
I’m not revisiting this issue to criticize big VCs. A healthy startup environment requires smart, ethical investors at all stages. But I don’t think these big VC seed programs benefit anyone. And there are enough angry entrepreneurs out there that I expect the message will get through.