VC seed money and monogamy
Venture Hacks has another contribution to the wide ranging discussion of taking seed money from VCs. As I worked my way back through the links to posts by Suster and Dixon and read through various comments from Fred Wilson, the concerns for the entrepreneur that come to the fore are (1) is the entrepreneur giving the VC a cheap option to the detriment of a good valuation later on and (2) is there negative signaling?
There are, of course, two sides (maybe more) to this argument. The VCs acknowledge the issues but argue that mostly they are “entrepreneur mythology.” Nivi (from Venture Hacks) takes the other point of view.
We are all prisoners of our own experience. So here is what I have seen. First, I have never had a situation in which a name brand VC (Suster and Wilson certainly fit that description) seeded a client (usually with $250K and usually with a co-investor VC for another $250K for a total of $500K) and did not follow through with a Series A round. I have seen one situation in which the concept did not prove out and the entrepreneur (with the support of the VC) walked away from the business idea. But, I hasten to add, that in each instance in which I have represented entrepreneur getting VC seed money of this type, it has been an “A” list entrepreneur. (By “A” list, I mean someone who has previously started a funded company.) It may be that the bets are good bets, and for this reason the VCs exercise their options.
Since I have not seen the situation in which the VC does not take up the investment, signaling has not been an issue. But here is what I have seen. In several cases, I have noted that entrepreneurs are unhappy with their VCs. In these instances (and there are many more than most VCs would like to admit), the entrepreneurs have not gone back to their original funding sources to fund their second and third ventures.
Suster suggests that this situation would be a negative signal about the entrepreneur or the new business, i.e. how does the entrepreneur explain that so and so did not invest in the new venture? I suggest that it may be just as bad (worse?) for the VC, who has to explain why an A list player did not go back to him to fund a business that other name brand VCs lined up to fund and in fact funded.
One final thought. I think the whole area is way over analyzed. Good teams with good business concepts tend to get funded (in a normal environment – whatever that may be). Good business concepts coupled with good execution, tend to succeed. Options and signaling are secondary issues. Getting funded once is not like getting married -- you do it once for life (actually getting married is not like getting married since about half of all marriages end in divorce).
VCs make investments in different teams at different times for all sorts of reasons, and entrepreneurs seek investments from different VCs (and other sources) at different times for all sorts of reasons. Neither VCs nor entrepreneurs should attach too much value to monogamy.