Benhmark Partner Bill Gurley, for my money one of the smartest VCs around, and and author of the amazing Above The Crowd blog did an interview with Sarah Lacy last night which is partially written up here.
Amongst other things he was talking about why Benchmark hasn’t copied many other VCs and started making seed investments. As the cost of starting a business falls and falls the pressure on VCs to identify wining companies earlier in their life is getting stronger and the fear of missing out on the next Google means it takes courage to stay out of seed investing whilst other investors pile in. These are the reasons Benchmark has resisted the temptation:
The problem … is that if you don’t back your seed stage investments when they raise a Series A or B round, there is a “signaling problem” that makes other VCs wary to invest. That can hurt a company, but it’s just as damaging to a VC firm’s reputation. And reputation and branding is as fragile as ever with the hyper-transparency of blogs and Twitter.
Benchmark hasn’t crept into seed stage investing because of that problem. And because the firm is worried about attaching its brand to so many passive seed investments. “Having passive investments is having your brand walk around without the work that you want to be known for,” he said. “It’s unscalable and we can only sit on so many boards. We don’t want to be involved and not involved.”
In summary, Gurley thinks large funds investing at the seed stage creates problems for some of the companies they invest in, and in the long run will create problems for the fund too. I think that’s true if the large fund doesn’t do full due diligence on the seed investments, which is true for most, but not all, large funds which play at the earliest stages.