Chris Dixon has a post up on Silicon Alley Insider arguing that it is dangerous for startups to take seed investments from big venture funds (thanks to @robinklein for the pointer). His argument has two parts:
- If the seed VC decides not to invest in the Series A it will scare other VCs off
- If the seed VC does decide to invest in the Series A their inside track will get them a better valuation than in a more open competition
I agree that taking seed investment from a VC brings these risks with it, but there are also some benefits. Namely you get the public endorsement from that VC at an earlier stage, you get to work closely with them for longer, and you will have a better chance of securing them as Series A investors.
There is no right and wrong here, my point is just that there are pros and cons on both sides.
Where the cons start to outweigh the cons is if the VC has a large number of seed investments (and it is large seed investment programmes that Chris is mostly taking issue with). In this scenario the large VC won’t have the bandwidth to give much love to all their seed companies and they will most likely be expecting to fund only a fraction of them at Series A.
On the other hand, if you are the only seed investment from a top name investor in a given year that will make you more attractive to other VCs. If you go on to play the game well (and have negotiated your documents properly) you will then find it easier to generate competition amongst investors to lead your Series A.
That is twice in two days I’ve cited Chris, and I can’t remember the last time I did that for anyone. He writes and thinks extremely well.