

The importance of investor signaling in venture pricing - neilc
http://cdixon.org/2010/03/11/the-importance-of-investor-signaling-in-venture-pricing/

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hristov
If I was Sequoia, I would basically require that all Sequoia investments be
kept in utmost secrecy until the investment round closes. Thus, nobody would
be able to piggy back of the Sequoia investments.

Think about it, what does Sequoia really do? They do not really provide
capital, because they use other people's capital. Their contribution or value
is in selecting the investments. Presumably, they are so popular and rich and
successful because they are very good at selecting profitable investments.

If you think about it in this way, it is no surprise at all that there is a
herd mentality with VCs. It is actually kind of logical. If an investor merely
follows the Sequoia investments, they will get the benefit of Sequoia's
presumably excellent investment picking skills without having to pay Sequoia
anything. For example, imagine if you are an investor that is well connected
in SV and you simply sniff out deals where Sequoia is investing and put in 10c
of your money for every dollar that Sequoia puts in. That is like being an
investor of a Sequoia fund. But it is even better because the actual Sequoia
investors would have to pay costs to finance the salaries of the very well
paid Sequoia partners. You on the other hand get in for free.

So Sequoia is crazy to let other people in on what investments they are
making.

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100k
"Don’t try to be clever and get an auction going"

This differs from the advice I heard from a lot of savvy founders who used
investor interest to ratchet up to better investors and valuations.

You gotta be a playa to pull that off, though.

EDIT FOR CLARITY: I'm not talking about shopping term sheets; this is
universally agreed to be a Bad Idea.

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adamtmca
It seems like he's discussing a form of reflexivity, this phenomenon actually
IS present in the capital markets.

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gojomo
Chris Dixon: _Don’t try to be clever and get an auction going... [i]f you do,
once the price gets to the point where only one investor remains, that
investor will look left and right and see no one there and might get cold feet
and leave you with no deal at all._

Venture Hacks: _Auctions and artificial deadlines create a positive feedback
loop of social proof ("Other people want to invest, don’t you?") and scarcity
("Hurry up or the deal is going to disappear"). That’s what closes deals...
[but] don’t use the a-word (‘auction’) when you’re raising money. Investors
don’t like it. Auctions are "taboo" when you’re selling part of your company
to an investor..._

[http://venturehacks.com/articles/adam-smith/comment-
page-1#s...](http://venturehacks.com/articles/adam-smith/comment-
page-1#series)

Synthesizing the two, it seems you want an auction-like simultaneous, short-
term, competitive process... but without the 'auction' name, without being too
blatant, and without winnowing it down to a solitary highest bidder (who will
then face buyer's remorse/fear-of-winner's-curse).

