Sunday, May 19, 2013

Venture Capital Seed Investors – Who Re-Invests in Follow-on Funding Rounds?

Statistics are spare, but we incline to believe that many of the 300,000 active US Angels not members of organized groups will invest in one and only one funding round. Their goal is to help the entrepreneur get started, not to finance his company until cash flow positive.  Of course, many of these Angels have contacts and experience to help the founders raise funds from other sources, but they themselves prefer to step aside. Many of the very early angel groups also invested this way. Today, most of the Angel Capital Association member angel groups we know of do organize or participate in follow on rounds.

In recent years, a number of VC firms have entered the angel space. It is unclear their level of commitment to their companies, some of which has been uncharitably called “spray and pray.” The question we might offer is what happens to these companies if the VC fails to invest in follow on rounds?

For example, consider Atlas Ventures. “When it comes to doing seed rounds for Boston area startups, no venture capital firm is more prolific than Atlas Ventures — a main reason why the firm managed to close VC deals in Boston last year at the rate of nearly one a week,” wrote Kyle Alspach, VC Editor of the Boston Business Journal, last July. “The Cambridge-based firm closed 47 venture deals in the Boston area last year (2011), with a total of $60 million invested across the deals, according to new Boston Business Journal research.”

So what is Atlas doing now?  For us at Atlas Venture Tech, we're looking at approximately 12 seeds (average check $400K) and 4 or 5 Series A investments (average check $4M) ... if we can find the entrepreneurs to partner with!” writes Atlas Partner Fred Destin in an April 2013 blog post.

From the numbers above, one might conclude that there is in fact a “Series A Crunch” and that Atlas Ventures is causing it.

But hold on right there.  Newly released industry figures show Atlas ventures to not only be one of the most active seed investors in the US, but to also be one of the most supportive firms at reinvesting in seeded companies.

The data on this topic was collected by market research firm CB Insights, the same firm that produces the HALO Report on Angel Investing.

“Earlier, we detailed a list of the top 10 Seed VC investors based on their portfolio’s historical follow-on investment rate. But we also wanted to analyze which of the most active seed investors from the 2010 and 2011 vintages were most inclined to reinvest in companies they previously seeded. From an entrepreneur’s perspective, having an investor who is more inclined to participate in follow-on rounds of financing should be a plus since it probably means less time wasted pitching and educating new investors,” reports CB Insights.

“Also, if you believe that seed deals made by larger funds who don’t reinvest present a signaling risk, this list of prolific re-investors is also valuable.  Note: The signaling risk argument is one that was popularized by folks like Chris Dixon (Andreessen Horowitz), Mark Suster (GRP Partners) and David Hornik (August Capital).  Unfortunately, the argument about seed VC signaling risk is not supported by the data as we’ve previously shown.”

Below is a list of the 30 most active Seed VC investors over the two-year time frame ranked based on number of Seed VC deals they participated in followed by a ranking of the Top 10 most frequent re-investors:

In terms of re-investment rates, the top 10 is led by  German early-stage firm High-Tech Gründerfonds and London-based venture capital firm Atomico, followed by Philadelphia-based First Round Capital and Chicago-based Lightbank.

The ranking of all 30 most active seed investors by re-investment rate can be found on the ‘Research’ tab here, after logging in to CB Insights. (Note: The list of investors is only available to paid subscribers with access to CB Insider.)

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