One of the most common criticisms of VC investors making seed investments is something that has become known as “the signaling problem.” The explanation of this problem is that VCs create a “negative perception” about a company if the make a seed investment but then don’t follow through and make a next round investment. Another way to say this is that a VC creates a “signaling situation” with their seed investment – if they don’t follow on in the next round they are “sending a signal” that something is wrong with the company (hence the label “signaling problem.”)
Last week I spoke with a partner at a large VC firm whose firm has been around for a long time. They have a new seed program (as of a few years ago) after eschewing seed investments from 2002 to 2008. The partner that I talked to told me that they are doing 30 seed investments out of their newest fund.
I was surprised on two levels – the first is that they have a very visible anti-seed reputation. I pointed out that their market reputation was that they didn’t do seed investments nor did they do many Series A investments. He said “we changed that a few years ago.” I suggested that their web site didn’t talk about their seed program; he responded “yeah, we need to work on our web site.”
To read the full, original article click on this link: Technology Review: Blogs: Feld Thoughts: Addressing The VC Seed Investor Signaling Problem
Author: Brad Feld
