Following on in a hot market

Conventional wisdom says that you follow on in your winners in venture capital, but I'm not sure you can always accomplish that so cleanly.

In hindsight, if you were an Etsy investor, you would have wished you participated in every single round the company ever did, putting as much as you could in.

But what if you had done the same thing with Fab?

Did those companies look so different in the first few rounds?  In fact, didn't Fab look like much more of a $3 billion IPO after those first couple of follow ons than Etsy did?

If you're making investments in seed stage companies, I'd argue that if you don't have a very big fund, you're much better off just writing one check for each company, and not following on.  The multiples of return you get in a winner when you're in at single digits are more than enough to make up for missed follow on opportunities, and the truth is, the Series A guys want as much of the next round as possible anyway.  You actually make things easier for the entrepreneur--because once things "take off", they can't fit everyone in.

The funny thing, though, is that "take off" these days usually just means "raises money."  It's not clear whether the metrics of pre-sales, downloads, or customers acquired with venture dollars are really predictive of great outcomes.  Yet, companies are able to raise tens to hundreds of millions of dollars before you can really confidently say you've got a winner.  I question whether or not seed funds leaning into Series A and B deals really know that they have a winner on their hands just a year to 18 months into the life of the company.  If that were true, why is the average Series A fund such a mediocre performer?  

Plus, the idea of leaning into your winners makes it sound like these funds are really being selective about their follow ons.  When's the last time you saw a seed fund not participate in a next round because they thought the price was too high or because they still weren't sure if the risk was off the table enough to call something a winner?  If you're just doing all the follow ons available, in a market like this it almost means you're following on in every deal.  

Is every deal going to be a winner just because their Series A came so easily at such a high price?  What happens with this Merry-go-round stops?

Not to mention the prices at which you're being asked to follow on at.  When the average IPO market is a bit flat from last year and 9 out of 10 M&A transactions are $100mm or less, does it really make sense to lean into Series A valuations of $25, 30, even $50mm?  

At minimum you have to call traditional thinking into question in times like this if you're a small seed or angel investor without a large pool of capital that you're trying to return.