Saturday, October 20, 2007

On Being the Last Investment

I had a terrific team in my office recently, evaluating their financing options. One VC had told them, "We only have room in our current fund for one more investment, and we think you might make the cut." That's good news, they said. Right?

Wrong. On the one hand, a term sheet is always good news, especially if you're a startup outside Silicon Valley, where capital is still scarce. But, much like Twix bars, one VC is never enough. There will be further rounds of funding and startups need to think about how the investors you select now will figure into later rounds of funding, and later syndicates.

If a VC is telling you it's on its last investment, you need to find out whether it has closed its next fund. If the answer is no, then you have to consider how this will impact your ability to attract additional investors. I've heard it more than once from US VCs in particular: having a co-investor that may be a lame duck is a problem; they don't want to be left as the only ones supporting a portfolio company.

The logic doesn't necessarily flow. VCs typically reserve funds for follow-on investments, so in theory, even if you are their last investment, they will have reserved money in the current fund for further rounds. Nonetheless, other VCs have said, they worry about misaligned agenda; the other VC is more likely to push for an earlier exit. Failing that, they may sell their position in your company in the secondary market to an entirely different player altogether.

Right or wrong, the issue here is marketing perception and how the investors you team with impact your ability to syndicate. An issue to be approached gingerly.

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