The importance of investor signaling in venture pricing

If I was Sequoia, I would basically require that all Sequoia investments be kept in utmost secrecy until the investment round closes. Thus, nobody would be able to piggy back of the Sequoia investments.

Think about it, what does Sequoia really do? They do not really provide capital, because they use other people's capital. Their contribution or value is in selecting the investments. Presumably, they are so popular and rich and successful because they are very good at selecting profitable investments.

If you think about it in this way, it is no surprise at all that there is a herd mentality with VCs. It is actually kind of logical. If an investor merely follows the Sequoia investments, they will get the benefit of Sequoia's presumably excellent investment picking skills without having to pay Sequoia anything. For example, imagine if you are an investor that is well connected in SV and you simply sniff out deals where Sequoia is investing and put in 10c of your money for every dollar that Sequoia puts in. That is like being an investor of a Sequoia fund. But it is even better because the actual Sequoia investors would have to pay costs to finance the salaries of the very well paid Sequoia partners. You on the other hand get in for free.

So Sequoia is crazy to let other people in on what investments they are making.

"Don’t try to be clever and get an auction going"

This differs from the advice I heard from a lot of savvy founders who used investor interest to ratchet up to better investors and valuations.

You gotta be a playa to pull that off, though.

EDIT FOR CLARITY: I'm not talking about shopping term sheets; this is universally agreed to be a Bad Idea.

It seems like he's discussing a form of reflexivity, this phenomenon actually IS present in the capital markets.

Chris Dixon: Don’t try to be clever and get an auction going... [i]f you do, once the price gets to the point where only one investor remains, that investor will look left and right and see no one there and might get cold feet and leave you with no deal at all.

Venture Hacks: Auctions and artificial deadlines create a positive feedback loop of social proof ("Other people want to invest, don’t you?") and scarcity ("Hurry up or the deal is going to disappear"). That’s what closes deals... [but] don’t use the a-word (‘auction’) when you’re raising money. Investors don’t like it. Auctions are "taboo" when you’re selling part of your company to an investor...

http://venturehacks.com/articles/adam-smith/comment-page-1#s...

Synthesizing the two, it seems you want an auction-like simultaneous, short-term, competitive process... but without the 'auction' name, without being too blatant, and without winnowing it down to a solitary highest bidder (who will then face buyer's remorse/fear-of-winner's-curse).