I’ve been thinking about the topic of institutional venture funds continuing to invest in seed deals (even if they say they don’t), and finally had a moment of clarity as to why. Here’s my logic:
- It’s not founder-friendly: Founders are often worried about signaling risk once the ink has dried on the seed checks written by large venture firms. It creates cognitive overhead and unnecessary stress for the founder.
- It’s generally a waste of VC partner time: I met with an experience enterprise investor yesterday. He makes 2-3 Series A investments a year. He spends a lot of time on them, or helping the founders behind the scenes. Even though his partners do seeds from time to time, he finds them to be distracting. He is OK with missing a deal here or there if the trade-off is focus and clarity of mind when it does matter at the A-level.
- Potential to dilute VC firm brand: Every VC firm is trying to “brand” their money, and in most cases, the branding is warranted because of the teams they’ve assembled. That said, holding a portfolio of 50-100 seeds but only doing a few As and Bs per year has the potential to send mixed messages to the market and to founders who, right or wrong, may feel they’re buying one thing but getting another.
- There are already mechanisms in place for seed: AngelList, other incubators, and seed firms and angel investors all provide more than enough capital. It sort of feels silly for larger VCs to also play in this game given how limited their time is.
- Early-access doesn’t often translate to pole position: The rationale for a larger VC firm to play in seed is simple – have an option to pounce on the A. But, it doesn’t just work out that way. What if more than one firm is in the seed? What if the founder wants to let the growing micro-seed firms lead the next round and stay leaner? In this environment, it seems like the best thing for a VC firm to do is focus precisely on larger As and Bs and build tight networks in order to leverage each check with engineering and design talent, pilot customers and customer development, and preparing the team for the next financing round from day one. The rest may be noise.