A lot of entrepreneurs have come to me recently looking for advice about their seed round, mostly because they are oversubscribed and need to choose between VCs and angel investors. Given that I am a VC, you would assume that I would side with other VCs, but I am actually somewhat negative on VC participation at the angel stage.
My advice to entrepreneurs is to ask two questions – if the answers are both “yes” than go ahead and take the VC fund, but otherwise leave them out. The first question is to the specific partner and the second question is for the VC firm:
Q1.) Does my company count as one of your “slots”?
From time to time a VC goes in front of limited partners (the people who invest in VC funds) to talk about capacity. Capacity is the industry term for how many investments a single person can manage. When we do that presentation, either your company counts towards that total (i.e. it is a slot) or it gets swept under the rug in a collective pool of angel deals.
Asking this question establishes an honest playing field for how much time the firm/investor will spend with you. Most VC firms use 8-12 deals per investment professional as an indication of overall firm capacity. If this answer is yes you should expect some help every week in terms of introductions and recruiting. If this answer is no, all you are really getting is money. At that point there are established angel funds as well as individual investors who will each be more receptive to your needs.
2.) Will the firm avoid investments that are competitive with my company?
Most firms have a policy on this for their core investing, but I have heard of many firms that aren’t counting seed deals towards the group for the non-compete. Entrepreneurs should be aware of this. Greycroft gives every portfolio company CEO a veto if they deem that a potential investment is directly competitive – you can ask our CEOs about it because a few of them have exercised it in the past.
I expect this line of questioning will sort out the VCs that are willing to invest the time to make your company successful from the ones that are just going on for a ride. Personally, I am most curious about the second point, because I understand there is a high probability that a seed stage company will pivot into a new line of business post investment. This means that every seed investment gives an entrepreneur an option on me, not the other way around.
As a consequence of all of this, Greycroft has been as careful about angel investments as we are about larger investments. My casual observation is that many similarly-sized firms have more angel investments than we have, and some have made angel investments in quantities that blow up industry norms on partner capacity. This leads me to think that either A.) entrepreneurs are not concerned about these issues, or B.) there is some bait and switch going on, where entrepreneurs think they have the resources of a VC firm only to find that they are treated as class B citizens. Either way I find that it is worth asking around and specifically getting these two questions pinned down before you invite a VC into your angel round.