Leo Polovets @lpolovets General Partner @SusaVentures (seed investor in @RobinhoodApp & @Flexport). Before: @Caltech → 2nd non-founding engineer @LinkedIn → @Google → @Factual. Apr. 06, 2019 3 min read

1/ Ok, this might ruffle some feathers, but here are some thoughts on taking money from next round's investors now (e.g. taking Series A investor money at seed, or seed investor money at pre-seed).

TL;DR the cons usually outweigh the pros.

2/ As a caveat, I have a vested interest because I don't like competing against Series A investors in seed rounds :). In the rest of this thread I'll talk about Series A firms investing at seed, but it's a placeholder for Stage N+1 firms investing at Stage N.

3/ Series A investors typically invest in seed rounds because they want to improve their shot of investing in your Series A. They don't care about the seed investment's performance itself. This isn't true 100% of the time, but probably 80-90% of the time.

4a/ Series A investors won't spend as much time w/you as w/their Series A companies. This is basic incentives: if they invested $1m in your co & $10m in another co, you have about 1/10 of the priority of the other co. Especially true if the investor is already overworked.

4b/ If you do let next round's investors invest today, you want the check size to be meaningful to them. E.g. if a Series A fund normally invests $10m and they invest $1m in your round, that sucks; if they normally invest $4m and they invest $2m in your round, that's okay.

5/ Since Series A investors don't care about seed returns, they'll offer nicer terms. A seed fund might offer $1m at a $10m valuation while a Series A fund offers $1m at a $15m valaution. The Series A fund doesn't care about $10m vs $15m, they just want to do your whole Series A.

6/ This is a double-edged sword: you have more capital with similar dilution, and that's great. But you also have a less-involved investor and a higher bar for the next round. Expectations for the next round are proportional to your valuation in this round.

7a/ Additionally, Series A investors participating in a seed round creates signaling risk. If the fund doesn't lead your Series A, other Series A firms will wonder if there's a reason for that.

7b/ This signaling risk won't matter if you have A+ traction (because you'll have tons of term sheets) or B traction (because you won't get any term sheets), but can hurt if your traction is a B+ or A-.

7c/ Also this signaling risk gets worse if you let many Series A firms participate in your seed round. Maybe you can explain away why one firm w/deep pockets didn't step up for your Series A, but it's very hard to explain 2-3 such firms passing when they have insider knowledge.

8/ One final thing to consider is that if you choose a seed fund over a Series A fund right now, you can still work with the Series A firm in your next round. If you pick the Series A fund over the seed fund, you won't be able to work with the seed fund on this company.

9/ I'll close by repeating my earlier caveats: I'm trying to be objective but I have a vested interest; this isn't just about Series A/seed investors, but also about seed/pre-seed, growth stage/Series A, etc; & the statements above apply to most Series A firms but not all of 'em.

You can follow @lpolovets.


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