My comment on Fred Wilson’s post on Co-investors discussing the fact that most deals involve more than one VC. Fred stresses the importance of the people chemistry.
Bringing in another investor to re-value the company (upwards!) allows the existing investors to justify the higher price to their investors. It also widens the skills and contacts available to the founders. It is unusual for the existing investors to go for a “flat” round (why would they?) and it forces the founders to keep pushing out into the tough world of the market place. Who would ever wish to start-up and run an Active Equity Company?
In one of my investments (sorry, no names), the founders attracted offers from possible new investors who effectively underwrote the round at the higher valuation. The existing angels and staff fully subscribed the round. The “underwriters” did not receive a fee!
The round was complicated because the investors agreed to waive part of their entitlement to allow staff to subscribe for shares. This meant some complex maths to work out our entitlements and one angel disputed the workings and showed that there was a mistake in the third decimal point. Just another demand on the founders of an Active Equity Company and shows the need for a business plan resource.
In the existing market, companies are doing well to achieve a flat round - the same price as the previous round - so I hear. This is a disaster for the founders as any stalling in the capitalisation of a company can only signal problems ahead. In the current tough times, only the best will be demonstrating increased valuations so should an angel keep investing?
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