There’s been a lot of talk in venture circles lately about “signaling risk” and seed-stage investments. The gist: When earlier backers are high-profile venture firms, and these firms decide not to participate in a startup’s next round, it hurts the company’s ability to raise a Series A round.
Although this concern isn’t exactly new, recent numbers published by the firm CB Insights suggest that the issue is worth revisiting. According CB Insights’s findings, while 35 percent of all venture-backed, seed-funded companies go on to raise a Series A, a company that counts a respected venture firm among its seed backers has a 51 percent chance of raising a Series A if that firm participates in the round.
That’s the good news. The bad: If the venture firm decides not participate in the startup’s Series A, the company’s chances of closing its Series A round drop to 27 percent.
The study made us think about Y Combinator, the popular accelerator program, and its plan for the future. Right now, Y Combinator has the best of both worlds. It can make seed-stage investments at scale, for sizable stakes in startups, and not worry in the least about signaling risk: no one expects it to pour more of its capital into follow-on rounds. Its very model is premised on finding and funneling smart companies to other Series A, B, and C investors.
Recently, however, some have speculated that Y Combinator is heading into a future where it is both seed and growth-stage investor.