No.  Although yes.

Let me explain.  Because the thing is — you can’t tell from the outside, or a TechCrunch article, what’s really going on. 

Yes, it is a terrible, awful, terrible sign if a prior round VC that is anything larger than a seed sized VC, i.e. >$100m in assets … doesn’t want to do their pro rata.

It’s a terrible sign.  It means the VC doesn’t believe it’s one of their winners.  Sometimes as Yuval Ariav notes, there can be a good reason for this, e.g. fund winding down, or fund that has exhausted reserves.  But even then, they usually find a way for the winners.

So it’s a terrible, terrible sign.

Because the simplest, fastest, least work-iest, highest ROI-of-time thing a medium or big size VC can do is double down on their winners.  Takes 5 minutes.

So … usually … they hide it if they don’t want to continue to participate:

  • They soft commit, but hope the next round VC wants to own so much, they ask the earlier guys to cut back.
  • They bring in an LP to do a direct investment.  And it can be unclear what this means.
  • They commit, but to a soft number, and only in the end don’t do full pro rata.
  • They don’t really commit, but they soft commit enough so the round gets done.

The best VCs are really good at getting The Next Guy to carry their Good But Not Great companies.

So net net, if you see a piece in TechCrunch and you don’t see an earlier investor continuing to invest … you don’t know the whole story.  Or even much of it.

They may have offered to do 125% of pro rata, but stepped back 100% to let a Unicorn investor in, in which case it looks like they didn’t support the company — but clearly they did.  Or they may have put in 10-25% of their pro rata to show “support”, and then you see in the PR pieces.  But the real support wasn’t there.

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