Top VC Firms Don’t Outperform the Broader Market at Seed

Top VCs increasingly want to invest in earlier rounds.

Sequoia recently closed a $195M seed fund. Last year, Kleiner Perkins raised a $700M fund to invest in early-stage companies. Not to be outdone, the hedge fund Coatue also closed a $700M early-stage fund.

It’s easy to see why: Q4 2020 was the best quarter ever for early-stage startups in terms of markups.

With more top VCs investing at seed, angel investors now have a clearer signal on which seed deals are the “best.”

Right?

Not necessarily…

The Top VC Fallacy

Our data suggests deals with “top-tier VCs” (firms with the most unicorns in their portfolio, per CBInsights) at seed don’t necessarily perform better than deals without them. On AngelList, there’s no difference in probability of reaching Series A based on whether or not a seed round has a top VC. For both, the likelihood is roughly 50%.

These results are based on 3,717 seed deals on the AngelList platform through the first half of 2020, with results current as of Jan. 1, 2021. The markup rate holds true for investments made prior to 2019 to allow time to season.

The results of our analysis defy commonly held notions that top firms produce more winners—something the data does bare out in later funding rounds. So why is it different at the seed stage? Investors we spoke to offered several explanations.

“These are $1B funds and they’re not about to spend a lot of time worrying about a $250K check they wrote,” said Blake Commagere, an angel investor and advisor to the early-stage firm 500 Startups. “I’ve always considered their involvement at seed to just be buying an option to see the Series A before other investors.”

“With some exceptions, Series A VCs don’t know what the right advice is to give seed stage companies and can rush them to grow too fast,” added Immad Akhund, who runs the Immad Akhund Rolling Fund on AngelList.

Jason Jacobs, manager of the MCJ Collective Rolling Fund on AngelList, said signalling risk can also be an issue:

“There’s signal risk bringing in a bigger fund too early if they don’t choose to lead the A,” said Jacobs. “If I were another big firm and I saw that one of my competitors did the seed, maybe I would be less inclined to chase for the A, meaning it might hurt the founder’s chances to have a competitive process.”

Our data suggests that if you want exposure to deals that involve a top-tier VC at Series A, your best bet is to broadly index your investments at seed.

Here’s why.

Broader Seed Investing Increases Exposure to Top VCs at Series A

The circles are proportional in size to the number of startups that would find themselves in each unique fundraising situation. 

As this chart shows, a greater percentage of deals seeded by top firms go on to receive Series A funding than seed deals that don’t feature top firms. However, top firms participate in a relatively small number of deals (21% of all deals on AngelList). We found that 70% of Series A deals with top VC participation will have been seeded by a non-top VC firm.

In other words, if you only invest in seed deals with top VCs, you’re missing out on a ton of great opportunities.

Avoiding the Halo Effect

Our data implies that seed investors shouldn’t assume that seed deals with top VCs are “better” than other deals.

Jeff Adelson-Yan, GP of the early-stage firm Third Prime, cautions investors not to fall for the “halo effect” when evaluating these seed deals.

“I think many investors get enamored with a big name and let it affect their decision-making process,” said Adelson-Yan.

There’s also the argument that top VCs are no better at picking winners at seed than other investors.

“What VCs are doing at seed isn’t all that different from what angels are doing at seed,” said Commagere. “But VCs have their instincts honed around the Series A stage of a company. I think it's fair to say the investors focused on investing at seed have a better understanding of how to assess those opportunities than investors focused on investing at the Series A stage of a company—and vice-versa.”

In sum, our research suggests that investors who index broadly at seed tend to outperform the market because of the unpredictable nature of startups. Whether the seed round includes a top VC or not—startups stand about a 50% chance of making it to the next step.

If you’re looking to diversify at the seed stage, consider Rolling Funds. With Rolling Funds, you can invest quarterly in a variety of deals—including those with and without top VCs.

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