You weren’t supposed to be reading this blog post. It was easier to just discuss privately with other investors, but Jason Calacanis tweeted this morning about VCs trying to take entire seed rounds, and so, here it goes. Anecdotally, over the last 3-6 months we’re definitely seeing more examples of larger early stage or multistage funds offer to do 80-100% of a company’s seed round. And it hasn’t been a special situation such as the founder as an EIR at said fund, or having been previously backed by that fund at earlier company. It’s a really interesting development – if ~2012 was about the “party round,” could 2014 be about the Piggy Round? I don’t have enough data to concretely pronounce this a trend, but I’ll throw some ideas out there about (a) why this might be happening and (b) whether it’s a good option for seed stage founders.
Why Are We Seeing More Piggy Rounds?
(a) We’re not, there are just more people to get hurt by sharp elbows: Ok, let’s first suggest that this isn’t happening more often, we’re just hearing about it more often. Previous to the prevalence of angel investors, it was a bunch of VC funds fighting over deals. Someone “won” a deal and the others went off to the next one. No one tweeted about it. Or wrote blog posts like this one. You just wrote a check to a different company. Now there’s so many angels and smaller funds, many who have been investing for fewer than five years, so everything looks new.
(b) Everyone wants WhatsApp: Sequoia made a bunch of dough in the WhatsApp acquisition not just because they picked a great company once, but because they kept other VCs from investing alongside. Now we all want our WhatsApps so more VCs are willing to concentrate their capital risk and cite the positive example of WhatsApp as justification.
(c) Barbelling of VCs: There have been debates as to whether the VC industry is barbelling – that’s to say, a number of near-billion dollar+ funds on one end and sub $250m funds on the other. To be caught in the middle, especially without a strong brand and partnership (aka the Benchmark exception), is to miss out. But there’s a lot of capital concentrated in that middle right now, often in firms who have a partner or two known as top in their vertical but without necessarily a broader reputation in other spaces. Thus the firm doesn’t see the breakout good deals in those other spaces. In order to go after them, they need to head earlier into seed. And they need to own enough of the company in order to get the returns they need from a $500m fund, so instead of owning 10% and splitting the seed round with another investor and some angels, they go to own 20%, which is more typical of their model in Series A and beyond. They’re less price sensitive and more ownership sensitive, so these firms are willing to pay more to get the deal. This theory is the most structural one suggested here and I tend to believe is influencing some early stage investment behaviors.
(d) AngelList Syndicates: I haven’t seen any Syndicate take the entirety of a seed round yet but I’m sure it’ll happen. And here there’s an aspect of ‘per deal’ economics that could serve as motivation since carry occurs on each deal and not the total dollars invested by the Syndicate lead.
Are These Rounds Good for Founders?
Ok, time to ‘talk my book’ (a phrase I first encountered on Fred Wilson’s blog which means roughly, arguing that something is correct where, if true, also benefits my business). I don’t think Piggy Rounds are good for most founders because they reduce optionality too early in a company’s lifecycle. Because these rounds are mostly coming from multistage VCs who are counting on you to shoot for a “venture-scale exit,” you’re resolving to be an eight or nine figure business waaaaay before you know what that means. You’ve also got signaling risk for next round. Relationship risk (you better make sure you get along with your one investor). Lack of experience and network diversity at your investor table (can partially be solved by great advisors).
On the other hand, why would a founder jump at a Piggy Round? The opportunity to finish your fundraising in one fell swoop is very appealing since it’s the biggest time consumer and risk of an early stage company. Certainly if this is the only money being offered to you, take it! Also if it’s a partner you believe can, and will, work closely with you to build your business but only if they can hit a target ownership stake, well, I still think it’s high risk but understand the decision.
I guess it’s also appropriate to ask me whether Homebrew would ever do 80-100% of a seed financing round. It’s certainly not our model, especially when round sizes are larger than $1m (we seek to commit ~$500k – $1m as lead or co-lead of a seed round). I could imagine doing a full round at smaller scale – let’s say a founder we know is raising their first dollars and needs <$500k to get started before raising a larger round. In special situations I’d be open to this. Otherwise we’re eager to syndicate rounds with other great investors.