innonate

caterpillarcowboy:

mikehudack:

“When you take any money at all from a big VC in a seed round, you are effectively giving them an option on the next round, even though that option isn’t contractual. And, somewhat counterintuitively, the more well respected the VC is, the stronger the negative signal will be when they don’t follow on.”

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Chris Dixon (via entrepreneurwisdom)

Yes. This always bothered me. I’d rather raise from a group of great angels (and therefore herd a lot of cats) than run the risk of having a seed VC not lead the next round. And if they do end up leading there are lots of distorted incentives that can cause serious problems for the entrepreneur. Negotiate too hard and you lose your lead and end up sending a really negative message to other prospective investors. Not good.

(via mikehudack)

Thanks for the advice, would love to hear more about it. About to go through this now for the first time. Definitely leaning towards doing a syndicated angel deal than a VC seed round that also requires a board seat and other strings. Pros / Cons?

(via caterpillarcowboy)

Your angels should get a board seat. More specifically, the lead should represent them as a class on the board. I guess this doesn’t always happen. It’s the way it worked for us, and it worked reasonably well. At some point they should expect to give up their seat as they get crammed down by professional venture investors in later rounds.

I think there are many reasons to go with an angel syndicate over a VC in an early seed round. The follow-on issue is only one of them. You also get more diverse advice. You also get friends. No investor is really your friend, but angels are probably as close as any investors get. Most angels invest because they love it, not so much for the returns. VCs are professionals that are fiduciaries for LPs (pension funds, university endowments, etc). They’re more likely to be dicks because sometimes they have to be dicks. You want investors who you can grow with.

There are exceptions to every rule. I think it would be tough to turn down a seed round from USV, for example. But imagine how much it must suck to have Fred put in $500,000 and then refuse to participate in your next round. Everyone out there thinks Fred has one of the best noses around. How do you explain to potential funders that Fred won’t be participating? This is always a problem, but it’s much more pronounced early in a company’s history when concrete metrics are hard to come by and you’re still to a large degree selling vision.

This is great, thank you.