

VC Signaling Coming Home To Roost - eladgil
http://blog.eladgil.com/2012/04/vc-signaling-coming-home-to-roost.html

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pg
I think there is less here than meets the eye. We will hear about signalling
because the new big seed rounds have added another option to the collection of
plausible sounding excuses VCs use when they don't want to invest. But as with
the other excuses, it will always be less of a problem in reality than it
seems to be from what the VCs are saying.

If you judged by what VCs say when they turn people down, it would seem like
the most dangerous thing you could do as a startup would be to start a company
VCs couldn't add much value to.

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zackattack
Dangerous in the "sexiness" sense?

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ChuckMcM
This is an important thing to consider. It used to annoy me that people would
dismiss an idea or company because of some peripheral (and not necessarily
material) bit of information. Jim Breyer was an investor in FreeGate (a
startup I did in the first bubble) and he explained it fairly simply, he said
"Chuck, people invest (or don't) for their own reasons, not all of them
(either the people or the reasons!) are rational." And what that means for the
budding entrepreneur is that you have to cater to the irrational ideas that
live in the ecosystem, even though they are irrational. The whole "we won't
invest if your seed round investor isn't" is similar to people who won't hire
engineers if a company that they did an internship with didn't offer them a
job. Irrational, but it's something to be aware of.

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earbitscom
I think it's also due in large part to VCs giving you one reason when it's
actually another. They want to leave their options open. Sometimes saying the
real reason would leave you not wanting to work with them in the future.
Giving you a trivial excuse that seems stupid is better than one that's
offensive or makes them look like an asshole.

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dudeguy999
another reason to avoid VCs in the seed round - those VCs will know they have
leverage due to signaling issues and offer worse terms. That matters when
you're selling 20%+ of your company.

Angels are on your team when they have 50k in you, but VCs are not. They are
not truly om your side until they have a few million in you.

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jayzee
In a somewhat related note, I noticed that A16Z invested in Instagram in the
seed round, but is nowhere to be seen in the later rounds
(<http://www.crunchbase.com/company/instagram>). Wonder what happened there?

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horatiumocian
A16Z invested in PicPlz, which was a competitor to Instagram, after the
initial investment in Instagram (which was then called Burbn and was doing
something else). So, after Burbn pivoted to Instagram, A16Z had to choose
between 2 competing products, and they chose PicPlz for further investments.
Not an inspired choice, but they still took a good chunk of money from
Instagram's $1B acquisition.

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jpdoctor
Trying to figure out why he is focusing on the issues in signaling for the A
round. As near as I can tell, it applies to every round.

Bottom line: Build a company that your current investors want more of, and
they will send the proper signals to new investors.

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teuobk
Indeed, signalling concerns apply to every round, but perhaps they are more
important for the seed-to-A transition than for later rounds.

It seems that most companies that raise a seed round (and survive) go on to
raise a series A before an exit, but many companies that raise a series A can
get to an exit without raising subsequent rounds. (Admittedly, I don't have
solid numbers; this is just based on casual observation) Thus, future
signalling worries could be less important during the A round if you aren't as
concerned about ever having a B round.

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eladgil
Agreed - the transition is really seed to series A.

By the time you hit series B or C, you have investors who own a large part of
your company already (and in most cases won't do an "inside round" - or if
they want to do it, the entrepreneur does not).

So the dynamic post-series A becomes the VC helping you more in raising a B,
but not _competing_ for the series B. Since they are not competing to lead
your B (they just pro rata), there is no signal (unless they do not want to
pro rata, which is a very large negative signal).

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ajitvarma
Great article!

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kruipen
Great comment!

