Being very close to the formation stage of startups and their financings, one trend I’ve noticed is, increasingly, founders have a rough idea in mind of the mix of “branded” vs “non-branded” money they want on their cap table. For instance, a pair of founders who receive high demand from investors to get involved, those founders may want a specific name brand on the cap table and, after securing that, just seek to top off the round however it can be done with the least amount of time and pain. They tend to go after the brand — either just a big name that adds credibility, or someone who can help the founders in a specific space.
This means, even at seed, an investor’s brand matters a great deal. The brand helps the investor get the dealflow, get his/her email returned, get the phone call, and gets the ability to have a round re-opened for them, for extra room to be made for them.
This is what happens before any Series A.
Most seeded companies don’t make it to Series A. For those who do, most have to really fight for it. It takes time and is grueling. For others, there are more offers to invest then there’s room. And, this is where it gets very serious for most VC firms downstream — whether Series A, B, and especially growth stage investors. Those high-flying, competitive Series A companies may, in their lives, want to have a branded VC firm on their cap table — who doesn’t want Sequoia listed as their Series A investor, right? After that, maybe one more, a reputable firm like IVP.
And, once the founders have that signal — “Fred Wilson is on our board” — the rest of the money they need likely has to be very value-add and/or strategic, otherwise, they are growing increasingly savvy about creating layers to separate the companies from their investors. For instance, this is why early-stage investors in companies who have earned the trust of founders can act as de-facto investment bankers for the companies, creating SPVs with generous fees and carry arrangements to allow their LPs to invest somewhat indirectly in the company.
To quote Shakespeare, “A rose by any other name would smell as sweet.” And, increasingly, that is how founders who are in demand view money after they have the social proof and signal in hand. For larger firms and especially those downstream, as founders have more choices and need less money, how will they get their names directly on the cap table? That is a question LPs and later-stage funds will have to ask over the next decade.