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September 21, 2015

Why Angels & Seed Funds Might Be Better For Seed Rounds

With Tiger Global and other global investors straying into VC territory in the hunt for the next set of Unicorns, the ( Lee Fix(el)ated ? ) Indian VC firms - whose fund size mathematics earlier disallowed them from "writing cheques" of less than $1-2 million - have been actively foraying into seed funding zone competing and often co-investing with angels and seed funds.

But what type of investor should entrepreneurs prefer for their seed round - if they have the luxury of a choice between angels, seed funds and VC firms? Mukund Mohan, the former head of Microsoft Ventures, recommends going with angels and seed firms. Extracts from his post titled "Does raising institutional money at the seed stage help or hurt?":
If you are looking to raise money and you have an interested later-stage VC investor willing to put money in your company, by all means you should take it. Assuming they will invest later is a big leap of faith. There are, like most things in the startup world pros and cons to this approach.  
The pros include the “name brand” value of the VC firm on your cap table early on, the ability to tap into the expertise of the VC investors and also access to their network and connections. The downsides are the signalling effect if they refuse to invest in the follow on round, the likelihood of them investing in other competing startups in the same space in later round (since they understand the market) and finally the smaller pool of investors available for you (since many VC’s wont invest if a lead VC investor passes on the follow on) in the next round. 
While I dont think there are many options in India for entrepreneurs, the best bet I would still recommend is to get the right investors at the right stage of your company. At the early stage, angel and seed stage firms make sense, and later on using their help to get VC’s is a good approach.
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