Seth Levine wrote about one wrinkle to the “VC Seed Signaling Problem.” The crux is that some founders actually ignore or cut out the VCs who invest in seed financings. We’ve seen this happen at SV Angel too.
This is probably the worst possible outcome. Not only is the VC not “value add”, they are actually “value subtract” because they’re forcing you to behave in sub-optimal ways.
There’s no categorical rule on VCs investing in seeds, IMHO. When founders ask, I offer a simple “cost/benefit analysis.” When a VC invests in a seed round, there is signaling risk. Higher risks equals higher costs or higher prices under basic finance theory. Thus the VC’s seed money is “more expensive” because it has higher risks.
If you can identify the tangible, concrete benefits that outweigh these additional costs, you should take their money. The example I always use is Reid Hoffman of Greylock. He started LinkedIn and angel invested in Facebook, Zynga and Twitter among others. If I were starting a consumer internet company and got even a few hours of his time, I’d do it. Other examples of tangible value add: introductions to key customers, help with recruiting, etc.
How do you determine this? Just ask them what you can expect. Most will be surprisingly open about what they’ll do. Some will say that they can’t provide the same attention as their Board-level investments but you can expect ‘n’ number of hours (or minutes) per month. Then you can determine if benefits > costs. Thanks to Zao Yang and Adam Smith for this last point. Both are advisors to SV Angel.
Some entrepreneurs view timeliness as ‘value add.’ There’s no question that VCs act quicker. So do individual angels. I’m not sure that this overrides the added costs though. As John Wooden says, Be quick, but don’t hurry.
If the benefits don’t outweigh the costs, you are taking expensive money. It’s like using a high interest rate credit card when 0% financing is available.