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?
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).
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.
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.
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.
Unitus Seed Fund helps a startups primarily operating in India with potential for strong profitability, and serving a large low-income population to raise seed fund.