You state that VCs hate down rounds, which seems intuitive for the reason that a down round may be…
Eli Lyons

Hi Eli,

Like I told Ryan just above, the equity story is an important investment criteria. Just like the team, the traction or the market although with a smaller weight. So if we really really liked the opportunity we could go over it (I think that it never happened with us so far). And it’s not helping when you want to convince the partnership to move forward (in VC making an offer is always a collective decision).

Why? The reasons to pass on a down round are multiple:

  • the founders can get strongly diluted — even if you issue new ESOP for them they can lose motivation
  • the board can be improductive due to the resentment for a while
  • your can get the reputation as a VC to be “predatory”. And reputation is really all you’ve got
  • the Series A investor can lose faith in the company and disengage
  • the equity story looks weird and the question can be raised during future rounds (“why did you raised 5m and then 5m ? the traction was bad?”)
  • the founders might not be careful with the money and overspend
  • most important: it can be a sign that the founders over-promise and under-deliver

Hope this makes it more concrete

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