Getting an investment from a company that is second rate immediately qualifies a startup as second rate, as though you've tried the more serious outfits and finally had to resort to 'plan b'.

Just like having kpcb (I know they're not Canadian, and not exactly angel investors, just to illustrate the point) on board is an automatic stamp of approval, the reverse also holds true. If I were on board of one of their other investments I'd definitely be concerned about the effect for follow up rounds. It's not just your company that matters, but also the company you keep.

Interesting -- so really it's just a signaling exercise. That makes sense, given how poor investors are at directly measuring quality.

Thanks for the explanation! One of the things I appreciate most about HN is the willingness of experienced people to provide this sort of insight to us newbies. :-)

Some investors are much better than others at judging the quality of the companies they are looking at, but plenty of them are looking at being the 'second' firm to invest after a 'name' is on board, since that dramatically increases the chances of success of that company. Of course every VC dreams of discovering that unknown nugget, but sadly there are plenty that are not able to separate the wheat from the chaff on their own power, so they look to others as a source of guidance. That's also why you'll see a slew of 'copycat' companies getting investment if a company in a certain league grows big. For instance, when Youtube exploded on to the scene there was a flurry of similar offerings backed by a very wide range of VCs, all of them trying to get a slice of the pie after the concept was proven. Some of those would have turned down youtube if it had been offered to them only a few months earlier.

Take Y combinator as an example. If a startup with a crappy product is invested in by Y combinator versus some unknown angel investing in a fantastic product then when shopping for a second round simply having Y combinator on board will open lots of doors and will probably lead to a quick second round at a fair valuation even if the product was bad and a quick and violent ending for the start up that was funded by an unknown. Having a great product and a great team is unfortunately not enough to always secure funding, having a partner with name recognition on board significantly increases your chances. Even if in that scenario Y combinator would not be 'working the network' on your behalf.

Having your wealthy great uncle as an investor will not do much in this respect.

This is sad but really true. Ideally every company should be investigated and judged on its merits, but the number of deals presented to some groups leads to weird shortcuts like this. And it would be even sadder if that meant they miss out on great opportunities, the fact is though that it even works. It is a self fulfilling prophesy, some 'name' is already in, company gets round 2, maybe scores big in the longer term vs company does not get round 2 and dies.

Looking back the VC that didn't go with the company that died will feel they made the right decision.

This is why I'm a cynic -- you don't even need a company to get big, you just need the field to be "hot". Back in 2000 I was cold-called by two VCs wanting to invest in my work on distributed computing (I had recently announced the computation of the quadrillionth bit of Pi).

They were interested for no reason beyond the fact that everybody else was interested in the field. I told them that there was no workable business model and that I wouldn't take their money under such conditions -- so they went and gave their money to someone who was willing to ignore reality in order to justify taking the money.

About $100M went into that field in 2000, and none of it came back out. Such a horrible waste.

Ideally venture capital (and especially angels) is a force that helps creative people realize their dreams in return for a realistic premium associated with the risks.

They should help with guidance and their expertise to maximize the chances of those dreams becoming a reality, and should use their portfolio to balance the risks between existing money making (and thus now lower risk) ventures and newer high risk early stage ventures.

In practice venture capital all too often distorts the market, creates unrealistic expectations (both for founders, the public and partners alike) and is 'penny wise and pound foolish' when it comes to evaluating new ideas.

Our host is - unfortunately - in this respect, imo not that much different than the rest, even if they do get the mentoring and assistance factor (far) better than most, there is not a single investment in the current batch that I would call worthy of the 'V' in VC, they're pretty safe bets, if they fail they'll fail quickly and if they're going to take off they won't fly too far. The scope of most of those projects is simply far too limited.

It's all about the batting averages, and that's essentially what these small funds are all trying to do, to show a good track record of managing their portfolio in the hopes of landing one that hits it out of the park, more likely than not due to a pivot.

By increasing the dealflow they're playing 'scratch lottery' instead of a strategy game in the casino, statistically speaking if you keep at this long enough sooner or later you recoup your losses with a healthy profit margin and you can continue to play until you score big.

The one nightmare I have is being unfunded, healthy and growing and suddenly getting a copycat me-too project with VC backing and a bunch of inexperienced cowboys in the same space.

That can really ruin your day, and possibly much more than that.

Back in 1997 or so, the real beginning of the .com bubble there was this great cartoon in a newspaper here, it pictured a train with tons of guys in suits, pockets bulging with money trying to get on board. The train was clearly labeled 'Internet', and a reporter was asking one of the guys the question where they were going. The answer: "No idea, but we really don't want to miss this train".

I had that nightmare too, until I realized something: Online backup is hard to do right. If you don't know what you're doing, you fail spectacularly.

I don't worry about the inexperienced cowboys any more. They'll fail sooner or later.

The investors in the competitor were actually very gracious about it and did a lot to make up for the damage they caused me, which they really were not obliged to do. Interesting how that played out, we still exchange Christmas cards 12 years later.

Focus on the hard stuff, let the cowboys fail and just keep plodding away and you'll be successful somehow. But they can destroy your market for you by giving the whole field a bad name and they can mess up the timing to the point that you miss out on something substantially bigger.