[VC Politics] Index Ventures & when David works with Goliath

Nov 20, 2013
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The relationship between founders & VCs is a delicate one, to say the least. Because of the nature of their relationship, it is often in their mutual benefit for both to brush any tension under the rug. As such, the dark side of working with Venture Capitalist is often neglected or ignored, and so the vicious circle of unsuspecting founders getting into bed with VCs with bad practices continues. In an effort to provide clarity into such relationships, I am writing a series of posts called “VC Politics.” I have kept all sources anonymous, in order to preserve relationships, however in each case, I have talked to several actors deeply involved with the VC in question in order to get a well-rounded perspective. 

Big name VCs are often a hot item for founders, and for good reason: they’ve earned their notoriety by making good investments and helping winners win, so an investment from them is a better sign to clients & the community than investment from a no-name VC. These VCs often carry the network of their successful startups, leverage their portfolio companies in order to help the lesser-known ones get ahead, and they are willing to do anything to see their companies succeed.

However, there is a burden that comes with being a top-ranked VC, whether it be in the Silicon Valley or in Europe, which is that people are watching your every move, waiting for you to make a mistake, and looking for signs in your decisions.

Index Ventures makes investments across the board, starting at seed rounds and following on all the way through to the end; therefore, getting Index Ventures in on your seed round can be quite a good sign, and it’s likely to get interest from smaller VCs as well. However recently, some seed startups have been telling me that a seed investment from Index Ventures is a double-edged sword. Given that Index Ventures can do follow-on investments in future rounds, if they pass on your Series A after investing in Seed, it is a very bad sign to other VCs, who will undoubtedly ask themselves why Index Ventures is choosing not to invest.

Some studies have suggested that, in the Silicon Valley, startups perform better when they use smaller, less-known VCs for early-stage funding, and larger, more well-known funds for later stage. This, of course, lines up with the fact that larger funds are going to be more concerned with their larger funds than their smaller ones, but it also lines up well with the idea that, if a large fund isn’t happy with their early-stage fund, they can turn down follow-on investment and not worry about the company going on to be a success despite them.

Pushing Out other VCs

Another problem with dealing with Goliath in your early stage investment comes when Goliath doesn’t want other VCs entering in follow-on rounds. In Q4 of 2012, Capitaine Train (Index Ventures & CIC invested in their seed round) told its board, which included Index Ventures & CIC, that it would run out of cash if it didn’t raise a new round by the end of Q1 2013 – Index responds “we’ll let you know in January.” Capitaine Train ultimately began discussions with outside VCs, like Serena Capital & Xange, who were initially interested.

When Serena Capital reached out to Index Ventures to ask to talk about their interest, they were informed that Index Ventures wasn’t aware that Capitaine Train was fundraising, and were subsequently told that Index Ventures & CIC would be doing the follow-on round.

In the end, it seems the problem came down to a question of valuation. Index Ventures didn’t think Capitaine Train was worth as much as the founders did, and once they found investors who were interested at a higher valuation (no term sheets were ever offered, but conversations were had, I’m told), then Index Ventures came in and said ‘stay out of this round.’ CIC, I’m told, said they would do whatever Index Ventures said.

The problem I have here is the same problem I have with Business Angel groups – when VCs are making deals about startups behind founders’ backs, the founder inevitably gets the short end of the stick.

Speaking with Capitaine Train co-founder Jean-Daniel Guyot, it appears that the relationship between Index & Capitaine Train is very amicable – my intention is not to say that Index Ventures is doing harm to their investments, or that there is tension in the relationship. Quite the contrary, actually.

I find that powerful funds tend to be able to swing their weight around with other VCs; my hope has always been that, by talking to non-French VC funds, startups would only be doing themselves a service. Startups, though, need to keep in mind the fact that, while you may be in bed with Goliath, you’re not always David. Sometimes, you’re just a human up against a giant.