In this episode of  This Week in Venture Capital, Mark Suster discusses VCs and seed funding with guest Dan Primack, editor of PEHub.

Mark’s main points:

1. There is a structural reason that VCs are investing at early stages,

2. Many (Union Square Ventures, Foundry Group, True Ventures, GRP Partners, Mike Hirshland at Polaris Ventures) do it the right way – we treat it as a normal investment and we don’t have a “options” strategy with our investment.  I’ve done 4 seed investments in the past year and they are 100% referenceable.

3. Many firms do it in a way that can be more detrimental to entrepreneurs.  They either do too many seed investments (for which they can spend no quality time with any) or they treat it as an option (“if you succeed come back and see us and we’ll match any term sheet you get”) – they view it as a sort of “right of first refusal.”

4. The signaling affect is overrated.  Everything you do is a signal.  Investors will look at which angels you chose, whether old bosses invested, whether you were an EIR somewhere and did they invest, etc.  Future investors will also look at whether your angels “re-upped” if you hit a bump in the road. VCs are just one of many signals future investors at which future investors will look.  If you don’t understand the concept of “signaling” please read the blog post I wrote on Understanding VC signaling.

5. There are positive benefits to the right VCs being involved early – especially if your company or the economy hits bumps in the road.

6. So the biggest issue for entrepreneurs IMO is not “to VC or not to VC” but rather “what chemistry do I have with my funding sources, how aligned to I feel we are on how to build a company, how much do they understand my specific opportunity and importantly what can I find out about them from referencing previous people with whom they’ve worked and do they have a well defined seed program strategy.