Why Raising Money From VCs In Seed Stage Might Not Be A Good Idea

Source | INC42 : By Sanjay Mehta

Less Money Raised At Seed Stage Leads To More Success.

Being an angel investor, for me startup means a business which requires external funding for an accelerated business growth till it reaches to profitability. Raising funds from investors is an uphill battle for entrepreneurs. Entrepreneurs typically pitch to angel investors for their first cheques. We now are witnessing VCs entering in seed stage funding scene. The lines between VCs and angels for the first round funding is getting blurred.

To get funding in the first round itself from a VC firm sounds exciting & glamorous. Getting a VC firm as a partner involved early, who is fully committed and also get more money early is a great story to go after. But there are a number of serious drawbacks that have profound implications if a VC firm comes up on the startup cap table very early. Let me try to help explain why it is not a good idea to raise money from a VC at Seed stage.

The fact is that the valuations and the amount of capital startups raise in their first round from Venture Capital firm is inversely correlated with startup success.

Below mention points are in order of importance why first cheques should not be taken from VC firm.

1.   For start-up if the VC firm decides not to write the second cheque Series A then it’s sure shot curtains for that business as NO other VC firm in the town is going to write that second cheque Series A. If the seed round first cheque was from angel investor group, then it’s not expected for angels to write the second cheque Series A. The entrepreneur is then free to pitch to multiple VC firms for the next round of Series A raise. The entrepreneur is neither locked nor at the mercy of the VC firm if they raise the first cheque seed stage funding from an angel investor group.

2.   VC firms write $250K – $500K first cheques or even up to $1Mn depending on their size of the fund. Once seed investment is done VC firm will put in lower rung junior team to manage this early stage portfolio. General Partners of that VC firm do not invest their precious time with the early stage startup hence the business outcomes success becomes the sole responsibility of the founders. These portfolio companies are given step motherly treatment with no real attention or nurturing from GPs. In comparison, an angel investor group will have a lead investor who would have more expertise, offer more face time and mentoring to the founding team so that the business is successful.

3.   Angel investors are proud of their Seed stage first cheque investments and parade the entrepreneurs proudly among media, customers, investors and otherwise whereas for VC firms their pride is with their second cheque Series A and third cheque Series B invested firms and not the first cheque seed stage companies. Seed stage first cheque funded companies will never be a priority for a VC firm. Emotionally it’s a big drain for the entrepreneur when the VC firm is not proud nor excited about the future of its own investee.

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