Historically it’s always been a weak signal when a VC backed startup needs to raise money from the inside investors, aka as the inside round. But I never understood why. If the current investors love the company, they should keep investing as the company grows. Why do they need outside validation?
Back in 2009, I wrote about inside rounds and my take at the time was that conventional wisdom was wrong and I ended the post with
I’m sure a number of outsiders will see those inside rounds and see weakness. But it may very well be the other way around.
And looking back on our nearly 50 portfolio companies, it’s pretty clear that inside rounds can be a very good thing indeed for founders and early investors. Some of our best performing and fastest growing companies were all financed with follow on inside rounds by us and early syndicate partners – a few examples include Tumblr, AdMeld, Adap.tv and GroupCommerce.
The first three of those companies went on to raise big rounds from fantastic firms after we did the insider rounds previously (we just did the inside round at GroupCommerce so it’s too early to tell). The reason we brought on the new money eventually was because the new VC in each case brought something special to the party and the capital requirements for the business were likely to be outside the ability of the insiders capacity (not interest but capacity).
I’m not suggesting that we will only do inside rounds in our highest performing companies. It depends on the objectives of the founders, capital requirements and the skills and fit of the new VC. But it is clear to me that inside rounds can be very important for early investors and founders alike.