The Real Truth About Inside-Led Financing Rounds

A new academic paper seeks to destroy the myth that venture capitalists use inside rounds to dilute founders by issuing themselves cheap stock.

Sure, there are plenty of lawsuits that claim this, but I’ve actually never seen it happen when reputable firms are involved.

This paper is the first empirical study of its kind and concludes that inside rounds are most often seen when companies can not find a new funding partner and the pricing seen in these types of transactions tend to be over-priced, not under-priced.

It’s a fascinating report and the authors (Jesse Fried from Harvard and Brian Broughman from Indiana) are seeking feedback on their article. So please read and fire away.

One piece of information that I’ve already given them is that in good economic times (like today) one sees more and more inside rounds done at attractive increases in valuations between companies and VCs that don’t want to waste management time to go seek a new outside lead investor.

The article is here.

  • Correct, when real firms are involved this happens much more rarely. But all entrepreneurs should still watch out and have their counsel involved. That is the number issue we see.
    Paul Azous, CEO
    PPM.net

  • Isn’t it inside rounds that significantly dilute the founders a failure by the founders themselves to create enough value to either increase the valuation of the company or increase the confidence by the investors this is the right team?

    I’m sure there are really bad investors out there, but probably the 90%+ of the investors are not looking to screw founders. They are just defending their money. Sometimes there is conflict because the interests are not aligned.

    • Anonymous

      Let’s not be too hard on the founders. Sometimes it’s just bad luck, but yes generally this isn’t investor bad behavior.

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  • Well I’m
    late to the party here, and the market is no longer “rockin”, but I
    have to say that in my experience inside rounds are done out of generally pure
    intent.  You can blame management, you can blame fate, whatever – everyone
    is fairly motivated to do the right thing and everyone should be plugged into
    every strategic move of the company.  In
    short everyone is culpable to a certain degree. Inside rounds are done when
    everyone around the table believes in an outcome that makes sense to management
    and investors.  When it no longer works
    for everyone, things get bad fast and people get mad.  It’s actually that simple – I think. 

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