Please Succeed or Fail Fast: Why Large VCs & Seed Rounds Could Lead to Portfolio Conflict Down the Road
Despite some speculation, I’m not @StartupLJackson. However, after reading this article about his NVCA talk, I’m realizing I might be Naval Ravikant because there’s a lot in there that I’ve been thinking about as well. Our early stage fund Homebrew debuted just two years ago in early 2013 but already I’ve witnessed a dramatic change in how BigVC thinks of seed.
In 2013 BigVC was putting small checks to work in lots of companies for a variety of strategic motivations (marketing, first looks at promising startups). As Sarah Lacy notes in the article referenced above, “firm after firm announced new ‘seed programs’ — pools of capital that they’d invest different than they did Series As, Bs, and Cs.” The article further details that many of these programs have shuttered or slowed. But BigVC hasn’t left seed, just changed its approach.
From where I sit on the front lines, more large funds are playing lead/co-lead roles in seed rounds these days (or pushing the startups Straight to A Round). There are lots of implications for founders — both positive and less so — so they should go into these opportunities thoughtfully, but at Homebrew we’ve enjoyed co-leading with some BigVCs and anticipate we’ll happily continue to do so when it makes sense for the entrepreneur.
Less discussed is what I believe to be a primary challenge for these larger funds making meaningful commitments to seed companies: competitive conflict within their portfolio. It plays out like this ->
- $500m fund leads a bunch of seed rounds, putting $2m into $2-$3m rounds for early stage startups. That capital is supposed to last 12–24 months until company is ready to raise their A, like the rocketships they hope to be.
- But not all startups are up and to the right. Those which grow more slowly suddenly become very capital efficient — burns get reduced, second seeds get raised, etc. They reach profitability or become zombies.
- BigVC who led round gets frustrated. Small ongoing concern isn’t worth their time but even worse, what happens when they — or one of their other partners — wants to invest in the Series A, B of a company in a similar vertical. Uh oh, potential conflict. Earlier seed founder isn’t happy — you’re investing in one of our competitors!
Pragmatically, some BigVC firms specifically incorporate the “is this our bet in the vertical” question into their seed investing strategy. It’s why their seed investments skew towards problems which have technical risk or unique markets rather than, for example, one of 12 competitive companies with low barrier to entry and high network effects. Their thinking is, better to wait and try to invest in the “winner” later than take yourself out of the game at seed.
I’m not privvy to what many of these firms tell seed founders about potential conflicts. Founders should expect that non-lead seed firms may make a larger number of potentially competitive bets within an industry. Those checks are usually <$500k. However I think it’s fair for a founder to assume their seed round lead will not make competitive investments in the foreseeable future, whether the check comes from a micro VC or BigVC.
The hardest thing about this situation is no one’s intentionally being a good or bad actor here! The BigVC would like to see early stage startups win. But if they don’t, they’d like to see them fail fast. I’m wondering what happens over the next few years when these conflicts come up increasingly often.