VC firms who invest money in a startup rarely lead the next round of financing.
A new lead investor who is not an existing shareholder will take a fresh look at the company’s prospects and bring a different perspective.
Current investors, on the other hand, may come to believe the prospects are better than they are. Their judgment is often clouded by their relationship with the Founding Team, the view of what was accomplished, and personal issues around declaring a dud in their portfolio to the firm’s other partners.
There is a psychological force at play, too. VCs sometimes fail to acknowledge that the startup hit the end of the road, and push to fund it to salvage the initial investment.
Experienced VCs know that it’s better to “cut the finger now than the arm later”.
Having a new lead investor also helps set a market price for the new round. The valuation is reported in VC’s portfolio assessment to their Limited Partners (LPs), the individuals and companies who invested in the fund.
It helps LPs make investment decisions on portfolios that have not had many exits yet. It’s the realized vs. unrealized issue, as VCs refer to it.
Do you know examples of startups that have received continuous funding because existing shareholders’ judgment was clouded?
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