One of the most common questions I get as a VC from seed-stage company founders is "Should I take money from institutional VCs in a seed round?" That's a difficult question, and every start-up is going to have their own approach in answering it. I'll try to work through what to think about in this post.
Any time a company raises a venture round, investors are curious to know whether the current investors in the company are also participating. The reason is simple: the investors who probably know the company best are the ones already on the cap table. They get the investment updates from the CEO, and should be intimately familiar with the business and its future prospects. Thus, their further investment in the company sends a strong signal of how current investors see the business performing. If they are attempting to increase their ownership, it indicates they are bullish on the company. If they are trying to avoid putting more capital into the company, that is probably a sign that the company is no longer a good investment.
This is one of the most visible signals for a company raising capital. Its importance should not be understated.
When it comes time to raise a seed round, many company CEOs try to game this signal by placing only angels and micro-VCs in the syndicate – essentially, any investor that doesn't have the capital base to offer more money in a future round (or so little that it ...