Disclaimer: I myself have made countless “process” mistakes, have gotten worse at replying to all emails, and sometimes take longer to close loops. I also don’t intend this post to sound like it’s an easy fix and everyone should do it. I’m sure most want to, but it is harder to do so in traditional firm structures.
We all know there’s lots of seed money floating around. And, seed funds have gotten bigger. When we say “seed fund,” that could be a $10m fund or a $100m fund, yet those are two very different things. So, say you’re a founder which has taken initial funds from a larger seed fund. They may have given you a $500k check out of a $2M+ round. And, your company is doing well. You’re booking revenues. You’re growing. They like working with you. They may make you an offer that’s pretty good too, like this: “We’d love to invest more. Even at higher terms. Maybe even a note, potentially uncapped.”
The temptation is obvious.
The concern founders in this particular fortunate position have is around losing time and gaining a distraction. A more formal institutional fundraise could be a huge distraction. While some institutional VC firms have quick and clear processes, most don’t (though I know many individual GPs wish that wasn’t the case) because of inherent coordination problems that naturally arise as a part of being in a partnership rather than a traditional corporate structure. The larger seed funds which need to up their ownership in companies can play into that fear and, with conviction from already having a relationship with the company, short-circuit a traditional process and try to invest more.
What does this mean for founders?
Founders have to weigh the opportunity cost of taking the time to coordinate a proper institutional fundraise, and be OK if things take longer to bake. On the flip side, just rolling in money for a new note or having insiders price a round can either lead to unforeseen dilution and/or a price that’s not respected by outside investors in subsequent financings.
And, what does this mean for larger VC firms?
I believe there’s low-hanging fruit for a larger VC firm to have “A quick, clean pitch process” be a core part of their brand. Every VC firm is thinking about their brand today. That happens when you have a noisy market with lots of options. And, founders want brands to validate their efforts in the early stages when things are unknown. So, instead of just branding around hot new sectors (VR) or similar angles, I believe a big VC firm doing Series As and Bs could just come out and open-source their process for evaluation of a company. Almost like getting a progress meter for when you order from DoorDash. You can see where you are in the chain. You know that if one GP wants to sponsor the deal and work with you, then you have to go meet the partnership, and then after that, there may be 2-3 weeks diligence, after which you’ll get a term sheet or an email or phone call back to explain the “why” behind the “no.” If a VC firm built up their brand just around this process vector to their point where many founders would not only talk about it with other founders, but share it on social media, too, it could actually lead to more proprietary deal flow because it could, in cases where a company is progressing nicely, sooth a founder’s core fear around wasting time — not whether or not they get money.
Post-Script: If this were so obvious and easy, then every firm would do it. But, it’s hard. It requires coordination among GPs who may be traveling, or having a big partnership, or who cover different geographies, or who don’t have the structure in place to install and enforce a process. But, I believe it’s possible, so while hard, for a firm that wanted to build a brand around this element, it’s not a bad idea.