The Risk of Taking Seed Money From A Well-Known Investor

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There is much added value in getting seed money from a well known investor. Such an investor can help you hire better people, open better doors and generally signals to the market that you have a top-notch company.

However, there is also a risk in taking seed money from a well known investor. In cases where a well known investor decides not to invest in the next financing round, his great reputation becomes the entrepreneur’s biggest enemy. Why? Because that signals to other investors that he doesn’t believe in your company. And if this investor, who has both great reputation and inside information, doesn’t think you worth an investment, why should others think different?

One solution is to take seed money from well known investors who only invest in seed rounds. Thus, no one expect them to invest in the next round and there is no danger of bad signalling. Usually, this is the case with angel investors, who for diversification reasons don’t tend to invest in later financing rounds.

Unfortunately, that’s not always an option. So is it a mistake to take seed money from a well known investor who usually invests in following financing rounds? To my humble opinion, the answer is no. I believe that the advantages worth the risk. Eventually, if your existing investors don’t believe in your company, you should at least ask yourself why and whether you should really spend more time working on this idea.

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