Why do VC funds allow the GPs to invest in seed funds?
It’s not a big deal, and it works well for all sides.
Most VCs are very LP-focused (LPs or Limited Partners are the folks that invest in Venture Funds). The LPs are really just as much the customers for most VC funds as the founders they invest in are. Why? Raising a venture fund is hard — harder than raising a venture round. There are too many folks with good track records trying to raise venture funds and not enough LPs to go around.
As a result, outside of a handful of top funds that always have a surplus of LP dollars (Sequoia, Benchmark, etc.) … 95% of VCs are very focused on communicating and collaborating with their LPs.
So … if you are a “downstream” GP that has invested in a seed VC fund before, it’s great alignment.
The seed fund shares lots of information with you and gives you an implicit leg-up on next round investments in the portfolio.
And in return, the seed fund gets a simplified way to socialize deals to a handful of later-stage funds they have worked well with in the past.
This is much less of a potential conflict, and much more synergistic, that VCs doing direct angel investments, for example.