It’s a good exercise for companies step outside of the box and a really take a look at their competition. It allows for a good level of intellectual honesty about one’s position in the market and how they can combat their obstacles — as the adage goes, knowledge is power. With that, for your benefit, we put together a list of four common competitive obstacles to seed VCs.
1. New Competition
This is one is a no-brainer, but it’s important to be aware of your competitive surroundings. The VC landscape is very different today, there are many more funds to compete with than there was let’s say five years ago. And although you may be sitting at the peak of your respective sector and geographic, there are many funds hungry for a piece of the action.
2. Skipping Straight to A
Some founders are able to leap past an institutional seed round and go straight to a multi-million dollar A-round where a larger VC puts in a large share of the capital. This can happen either because the founder can boost the company with his/her own resources to get further, or because the company (and team) is so captivating that a large fund can lead a series A right away. There are positive and negatives to this approach, but without a doubt, it’s becoming more prevalent in today’s startup universe.
3. Non-Institutional Leads
High-quality institutional investors may be interesting in investing in a company at fair valuation, but that doesn’t stop non-institutional investors from set terms 1.5 – 2 times higher than that valuation. Founders, more and more, are walking away from the smart money of institutional investors and settling for the same amount with less dilution.
4. Getting Crammed Down on Ownership
A threat that always besets seed funds is whether or not a promising business hits a rough patch, and ends up going through a very dilutive financing. Most seed funds have significant follow-on capital, but not to the extremity of traditional venture funds. This really becomes a problem when times are tough. If a fund decides to reserve more capital for such follow-on, they either have to invest less in the seed and have less ownership to begin with, or raise a larger fund. Of course if you invest and own less, you run the risk of getting crammed down the ownership chain. If you raise more money as a firm, the bar to return the fund is now higher because you have more capital. You either have to have bigger gains than before to get the same performance, or you have to own more of your portfolio companies, which puts you right back at the beginning.