One big thing has changed in venture over the past few years that’s subtle but a big shift:
Big VC Funds want to lead the next round in their winners, period. Not once in a while. Not if it’s a good deal. But in all their winners.
Smaller VC funds can’t “carry” a start-up and lead every round. But multi-billion funds are structured more and more to do just this. To lead every round — in their winners. In fact, in the Top 3 current investments in SaaStr Fund, existing investors led big “up rounds” at higher prices in the past 12 months. And intentionally left almost no room for any new investors.
Now having an existing investor lead your next round does have cons.
In fact, let’s start with the Cons. Because the Pros are more interesting, and more in number and significance than they look.
Cons to Doing an “Inside-Led” VC Round:
- No additional pockets around the table. This is the #1 issue in my experience. Even the biggest funds don’t have an unlimited pocketbooks. And they often really only want to write another check into a clear winner. This year’s winners sometimes struggle next year. Each big investor you bring in, you add more pockets. Now, the biggest firms have “tricks” to make their pockets even bigger (SIVs, Opportunity Funds, direct investments from LPs). But even so, not adding another player is one less source of capital. I have seen this be pretty stressful when One Big VC leads multiple rounds and growth slows.
- No additional validation (sort of). I Not having a new lead is less validation, at least, sort of, to the outside world of your new valuation and progress. It’s not a brand new, top-tier VC saying you rock from scratch. Still, this is minor these days. I’m not sure anyone cares anymore.
- Maybe — worse valuation from an inside-led round. Maybe. Sometimes, an insider-led round isn’t the best price you can get. Especially if your investors don’t usually do rounds “later” than the current one. Take me. I’m a partner in a $175m series of funds at SaaStr Fund. I can write a $500k-$5m check fairly easily. But that does put a ceiling on my valuations, implicitly. But … sometimes, your insiders will give you the best valuation, as long as it’s fair and has context. Because they can dollar-cost average. Especially if they don’t see the investment as being super risky.
- And — that’s about it. I’m struggling, folks.
Pros to Doing an “Inside-Led” VC Round:
- No need to give up another board seat or any additional control in most cases. The seats at the table don’t change.
- Much more percentage ownership / dilution flexibility. If I already own 10%, maybe I’d like to “buy up” to 15%. But that also means u only have to sell 5%. If you are dilution sensitive and the valuation isn’t Unicorn-y, you can potentially optimize a round size (and thus dilution) much better with the insiders.
- No due diligence, no deal risk, more time efficient. Because the work’s already done.
- No additional bozo risk. You already know the bozos on your board and in your syndicate.
- It’s a huge vote of confidence, an inside-led upround. That’s something.
So I think the Pros are bigger than they look, and some are subtle.
Beyond that — look, I know you are Super Hot. If you have 11 term sheets, pick the best one, all-in, of course. #founderpower
But … there are only so many VC firms. And VCs get tired. They do too many investments. Maybe they’re done for the year. Maybe something comes up in diligence. Maybe your competitor does something crazy.
If your insiders are so in love, and want to deploy more capital … don’t dismiss it too quickly.
And remember, if you do pass on an attractive, inside-led round … and then you have a rough month or two … the offer can quickly disappear. Inside offers are a higher bar for VC partners to get done among the rest of their partnership. Because there isn’t that outside validation.
Personally, I’m kinda full, and a smidge tired. I may not do another investment this year. But I’m totally down with putting more into my winners, any day of the week. Of course I am. It’s the easiest possible way to invest and make money as a VC.
You covered it all and they are all valid points in my opinion.
However, I think you watered-down one key point – “more time efficient”.
If money is a commodity, time is not, it is the most scarcest resource. Optimising on time and a little bit less on valuation, is a win for all.
If momentum is hot, fundamentals are strong, and the market continues to demonstrate acceptance of the product/service and grows accordingly, doubling down is often a no-brainer. I agree that I struggle to see the cons as real cons. The biggest problem as a firm would be if you can’t reasonably participate your pro rata share of the last round into the next, for example, if reserves were left a little light and most of the fund’s capital has already been deployed.
Plus you do the right thing by your friends and supporters. Makes social sense as well as financial sense.
I watched a friend of mine bypass an inside round awhile back in search of a better outside round.
He spent months pitching VCs, found one at a decent valuation, but then had the round break down. It scared off other investors and he eventually had to pull together a last minute round at a little better than half the valuation he was offered by the insiders at the outset.
Sometimes it’s better for everyone to just take the inside round and get back to work. Especially if you’re making good progress. Taking your eye off the ball to go find funding can cause you to make mistakes.
I think that Sequoia, Horowitz … are companies that really, and I mean REALLY, want to change the world. And for this, you need to invest with your heart, too. Who knows – maybe – as you said, they got bored in the process of JUST making money.
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