The problem with not hitting your seed round milestones

Here’s my quick response to Chris Dixon’s post on taking seed money from VC firms.  As a part of the First Round Capital team, I’m totally biased here.  First Round does quite a number of very early seed investments, even less than 500k (so you’re never too early to start talking to us.)  That’s ok, Chris is biased, too, because he’s an angel investor and wouldn’t benefit from more competition in the early rounds.  The nice thing is, there really doesn’t need to be any competition because seed investors and VCs can all play nice together in the sandbox.  Any firm like First Round would love to do a deal with Chris.

In any case, he points out that it looks bad when someone who can follow on, like a VC firm, doesn’t do your next round.  It becomes a case of “What do these guys know that I don’t?”

I have several issues with this:

1 – This assumes that angel/seed folks don’t ever follow on.  They often do—which is why they rarely do a deal without the prorata right to maintain their ownership stake.  Some of these “super angel” folks can write checks of hundreds of thousands of dollars, if not more.  So, you have the same problem if you have *anyone* in your deal who could ever write more than like a $25k check.

2 – If a VC invests in a seed round, something has to go pretty wrong for them not to follow on.  VCs aren’t generally in the business of just putting 100k slugs to work here and there.  They’re assuming and *hoping* that you will have an investable deal for them when Series A time comes around.  They’ll sit down with you early on and say “This is what it will take to be a viable Series A deal for us and for anyone else in the market.”  The entrepreneur should only agree to take seed money from them if they agree to that milestone.  If the company falls so far short of that milestone that the seed VC thinks that additional investment won’t get them there, then what other invester is going to want a piece of that deal?  Wouldn’t it be clear that this is a company going in the wrong direction?

3 – Having a top tier VC in your seed round, versus some random band of family members, the local real estate developer, etc. gives you a *better* chance at building a company.  VCs bring to bear an expertise, a network, and a powerful brand that often brings a halo effect to their companies.

So, yeah, the problem doesn’t seem to be with the optics of who’s in/who’s out… it’s more the problem that the company didn’t do enough to make themselves a screaming buy to the people who knew them best.