It seems like every week that there is another venture fund which is announcing that they are now also making seed investments. The question for you as an entrepreneur is whether it makes sense for you to take a seed investment from these larger venture firms?
Deep Pockets. One of the biggest positives about taking a seed investment from a larger venture fund is that the venture fund has the capacity to provide much more capital for you down the road as you need it. If you can build a good, positive relationship with this VC, then you might save time on fundraising. And if they like you and commit early to a new financing round, this sends a strong positive signal to other investors. One interesting twist though is that many VC who lead in one investment round don’t like to “lead” in the next investment round. The main reason is that they want 3rd party validation on pricing the round rather than doing what’s known as an “inside round” (no new investors added).
Free Resource. Another positive is that if the partner leading your investment is willing and able to add value to your company, this could be a strong “free” resource. Generally, VC firms do a good job of networking, so this is also a benefit. The question is will a partner choose to spend much time with you when they’ve made such a small investment vs. spending his/her time on companies where they have a lot more capital at risk.
Good Terms. Another potentially positive factor is that VC firms generally don’t negotiate that hard on terms for seed investments. This means that you might get a relatively favorable convertible note or valuation. Generally, their view is that they hold the keys for your future investment rounds, so they can “clean up” the terms at that time. Generally, they do take veto rights on you raising more capital so that they can control future financing rounds.
Networking Opportunities. You may also get invited to events that the VC puts on for their portfolio companies. These could be good networking events for you including other entrepreneurs, vendors, and, possibly, industry contacts.
Effective Veto Power. The most important negative is that if the VC doesn’t invest in your next financing round, you’re screwed. Even if they say “nothing is wrong”, they have the capacity to invest and other investors will perceive that they’re not investing because they know something they’ve not talking about.
An Option, not an Investment. See, you need to understand from the VC’s perspective, when they make a seed investment, they are not really making an equity investment … they are buying an option. That’s an option to invest more in the future … if they like. That’s it. They have already written off the seed investment internally. They don’t have much invested in you, so unless you are doing really well, they just cut their losses and you’re screwed.
The emergence of “Micro VCs”
Over the past few years, there has been a lot of innovation happening in the venture investing space. There is significant specialization going on within the venture investing ecosystem. Imagine that: creative destruction amongst the investors!
Micro VCs are differentiated from traditional VCs in a number of important ways:
- Specialize in seed investing – it is what we do 24×7
- Make a higher volume of investments – large number of portfolio companies
- Develop a support community of entrepreneurs, mentors, experts, and professionals interested in startups succeeding
- Invite the fund’s investors to get involved with companies
- Led by experienced entrepreneurs and business operators, not lawyers and bankers
- Operate like a startup, at startup speed, not like a bank
- Happy with good, mid-sized exits — these are more likely exit scenarios, and provides good returns for more entrepreneurs
About the author
Dave Richards is co-founder and managing partner at Unitus Seed Fund. Dave has been part of the Unitus Group since 2005, helping to lead efforts to select and invest in BoP entrepreneurs in many developing countries. He led the Unitus Labs incubator for 2 years including the successful research and spinout of both Unitus Impact (livelihoods venture fund) and Unitus Seed Fund. Previously, Dave developed multiple high-growth technology businesses at RealNetworks, Sybase and Symantec from startup to multiple hundred million dollar global enterprises. He also is a partner with Social Venture Partners Seattle and leads the Social Innovation Fast Pitch startup angel fund. Read more about Dave.