Just so everyone understands, I was not saying that Google Ventures is a bad investor and should be avoided. If we thought that, the email would have been a lot shorter. I was just talking about a structural problem that happens when you've already raised some money on a convertible note with a valuation cap, and an investor offers to invest at a lower cap.
That sort of offer puts founders in a bind, because if you take it (a) it can anger the earlier investors, and (b) perhaps worse, it can, like a "down round" give investors the impression that your prospects are getting worse.
My overall advice about fundraising is to do breadth-first search weighted by expected value. I.e. talk to every investor who's interested but focus on the most promising ones. This is one of many situations whose solution follows from that rule. An investor offering you money on worse terms is at least offering you money, which is better than nothing. But all other things being equal, the expected value of such an investor is lower than that of one willing to invest on the same terms as your existing investors, so you have any of the latter you should focus on them.
Perhaps Google is leveraging their name and their value as a resource? Google Ventures investing in you could also be seen as a strong positive signal too. And not that I know what those resources offered might be, and not saying it is fair to earlier investors, though I would give someone with say media reach more value than say a local silent investor who has nothing other than money to offer.
Google Ventures is not the "Google" of venture funding. And there are about 5-7 firms that would have this type of brand-value that don't even consider these kind of tactics.
It's still called Google Ventures to leverage Google's name. Regarding tactics, I guess it's a matter of knowing your poker hand and trying to put your best foot forward. I can see a point to perhaps doing such a lessened risk with incubator-founded startups, in that the model isn't yet proven of how the average incubator startup can compare to an external team that would have very different dynamics of being processed. It's in an incubator's best interest to make things look good - so the startup gets funding and the incubator's equity becomes more available - though it doesn't mean it was people on the team itself that could have achieved the same, nor that those same resources would continue to be available to the team (or at the same amount) once away from the incubator.
Paul, re: your comment "all other things being equal" -- wouldn't you agree that some investors are not at all equal to others? (YC itself included)
seems that GV resources are worth something more than other investors checks by themselves. while i agree there are many investors who are "just a check", there are at least some who bring a lot more to the table than just capital.
anyway, i understand the timing issue of subsequent / lower cap deals, but i wonder if this isn't just a result of a sequencing problem for diff "hi-res" financing negotiations within a period of 30-90 days around the same raise.
Sure, some investors are more helpful than others, and GV is probably above average for VC funds. But an investor would have to be really good to invest on a note with a lower cap than previous investors without messing up the startup's fundraising. It can work if the investor is a domain expert that the startup wants to recruit as an advisor, but not otherwise in my experience.
Isn't common or even expected for founders and 1st round investors to get diluted by subsequent investment? This comes off to me looking like YC just doesn't want to get diluted, but that happens. Is that not the case?
This is actually a "first round investor" coming in later in the first round and asking for better terms then previous (maybe only days previous) investors got. It's not an additional round of investing.
Traditionally you'd give later investors higher valuations/caps/etc, particularly if you were at or approaching the magical amount of money you need point.
That sort of offer puts founders in a bind, because if you take it (a) it can anger the earlier investors, and (b) perhaps worse, it can, like a "down round" give investors the impression that your prospects are getting worse.
My overall advice about fundraising is to do breadth-first search weighted by expected value. I.e. talk to every investor who's interested but focus on the most promising ones. This is one of many situations whose solution follows from that rule. An investor offering you money on worse terms is at least offering you money, which is better than nothing. But all other things being equal, the expected value of such an investor is lower than that of one willing to invest on the same terms as your existing investors, so you have any of the latter you should focus on them.