It was good advice when you were in high school, and it's good advice when you're out raising a seed round for your startup. Here's the scenario:
You and a small team have been working on a great idea for a new business. You start talking to a few of your friends who have been successful before to get their feedback and advice. Your friends like the idea and offer to put in some angel money themselves and introduce you to a few other angels who might be interested. You know that ultimately you will need to raise a venture round, but an angel round now sounds like a great idea. It will allow you to put more meat on the bones and get a better valuation for your venture round. Before you know it one of the angels has introduced you to a venture capitalist or two from good firms and they want to participate in the angel round, but since it's a seed investment for them, they won't take a board seat. Your startup has just been deflowered.
All early stage venture firms do seed rounds of any size. The next time I hear an entrepreneur say something to the effect of "I didn't think you guys would be interested because I wasn't raising enough money" I'm going to scream. We do. We all do. And if a venture guy said the round was too small for him he's either a) not an early stage venture investor, or b) he's lying because what he's really telling you is that you just haven't brought the dots close enough together yet. But beware of the venture firm that is going to make that seed investment and not make a commitment by taking a board seat. Early stage investors take board seats in companies they are committed to regardless of amount invested. Time is the most scarce resource a venture capitalist has, so they commit to Boards very sparingly. Board commitments are a part of a venture capitalists permanent track-record. If they're not making that commitment then all they are doing is buying an option. It's a great deal for them and a terrible deal for the entrepreneur.
But why, you ask, is it such a bad thing? I've got celebrity-VC's money or top-tier-VCs name as an investor and I'm all teed up for my venture round. Their money is truly a double-edged sword for you. Heads, they win, and tails you lose.Heads they win: the VC wants to put money in the venture round. What you've done by allowing them to participate in the angel round is to cap the price they have to pay to lead the venture round. Regardless of how much progress you've made, any new VCs will be reluctant to spend too much time looking at the deal or giving you a term sheet because they will believe, probably correctly, that the VC who participated in your angel round has the inside track. Anything they offer will simply be matched so why waste the time. Your VC-seed investor won't have to give you their best price. The partner is always more important than the price they pay within some range, but every partner is wiling to pay more if the market demands it.
Tails you lose: the VC decides not to lead the round. If you've come to the conclusion that the dog doesn't hunt yourself, then no harm no foul. You close up shop and move on to the next thing. But if you're still committed and believe there is an opportunity, you've just made your job of raising new capital much more difficult than it otherwise would have been. Any new investor looking at the company is going to assume that your VC-seed investor knows something they don't. They may be able to get over it, but it's hair on the deal and any hair on a deal raises barriers to getting a deal done. Even if you are ultimately successful in getting a new investor to lead, you probably ended up getting a lower price than you otherwise would have and it certainly was more difficult for you than it would have been otherwise.
All early stage venture investors make seed investments, but if you take a seed investment from an early stage venture firm, make sure you get the commitment of them taking a board seat along with their investment. If you don't, then you've been deflowered, so at least make sure you got a good kiss out of it as well.