A fair bit of ink has been spilled about the detriments of taking seed rounds from large VC funds.  At the same time, there have been some good counterexamples and rebuttals in recent months.

As a firm, NextView has invested in rounds with angels, dedicated seed firms, and large scale VC’s.  I am not as dogmatic as some about the benefits and perils of large funds.  But I do think that entrepreneurs should know what they are getting into and be able to tell the difference in the way they will be perceived by their investors.

So here are a few points to consider when talking to a VC about a seed round.  Above all, the goal is to make sure that the VC is truly committed to the investment.  The more the VC thinks the investment is truly an investment the better.  The more the VC thinks of the investment as an option, the worse it is.

Indicator  #1: % of capital in the initial investment / fund size.  Straightforward, so I won’t belabor this point.  The idea is that the smaller the initial check is relative to the fund size, the less important that money is, which means that it’s more likely to be treated like an option rather than a true investment.  That said, many great investors behave differently despite the seed being a small % of their fund, so let’s move on to some other factors.

Indicator #2: % of round committed by the investor.  Or, in other words, is the investor willing to be the lead or co-lead.  Because of indicator #1, it becomes very puzzling when a large fund puts in a small % of the round.  What’s the real difference between $200K and $500K for a $400M fund? If a large investor is not interested in being at least half of the round, then I’d take that as a worrisome signal of mixed support. This is only mitigated if the round is competitive and the investor was not able to get a larger allocation of the round.  But in that case, it’s probably best for the entrepreneur to fill out the round with angels or dedicated seed funds vs. another large VC.

Indicator #3a: Does the investor want to take a board seat.  Even if the dollars committed is small, a VC investor has capacity for only so many board seats.  If they are giving up one of their board slots for a seed deal, it is a strong indicator of their commitment to the investment.  For example, when I was at Spark, Bijan Sabet took a board seat at Tumblr even though it was a very small seed deal.  Same for Patricia Nakache in Trinity’s investment in ThredUp.

Indicator 3b: Are there other indicators that the investor’s reputation is tied up in the deal?  Even if an investor does not take a board seat, it’s important to make sure that their pride is on the line in the investment.  Do they allow themselves to be publicly identified as an investor or an advisor?  Are they willing to make introductions to people that are important to them?  Are they willing to be quoted publicly about the company?  These aren’t as good as having your investor take an active role through a board seat, but if they are behaving publicly like a committed investor, that’s a good thing.

Indicator 4: Did you go through a thorough diligence process and develop a rapport with your lead investor and at least one other partner?  This is counter-intuitive.  As an entrepreneur, it seems like you’d much rather get a deal done as quickly as possible.  But most large firms have some process and conduct real due diligence on any meaningful deal.  The more the VC treats a seed like a real investment, the more the process will look more similar to a typical deal.  It will still be abbreviated – there should be much less to diligence in a seed deal, and the reality is that VC’s can do their work quickly if they really are motivated.  But make sure they do some work.  If a VC puts you through an accelerated process, it may put you in a position where you only have minimal buy-in across the partnership, and you’ll have to answer to a more thorough process down the road when you are raising your series A.

Indicator 5: Do you really like and respect the partner leading the investment and are they spending time to figure out the same about you?  Actually, this is probably requirement #1.  Even though it’s a seed, remember that if things go well, the VC you take money from will probably lead or co-lead your series A and be with you through many years and more rounds of financing.  It’s a very long term relationship, even though your plan shows the seed only lasting 8-18 months.  Don’t rush it.  Spend time with the investor and make sure you like them and you want to go into battle with them.  If they are showing an interest in doing the same, that’s a good sign.  If it’s hard to get them engaged in this way, then that’s not a great sign.

These indicators should give you a very good idea of how committed an investor is to your round.  I’ve seen investors at very large funds behave like very committed seed investors, and would recommend them to any entrepreneur seeking funding.  I’ve also seen seed investors behave in less than stellar fashion.  So it really isn’t as cut and dry as it may seem.  But there are really simple indicators that you can look at to gauge how committed the firm is to their investment in your company.

** Late addition: must give a shoutout to Eric Paley who helped shape much of my thinking on this topic.