Thoughts on Tumblr’s Financing

Fred Wilson posted on AVC about why he feels Tumblr is a good investment and he went onto discuss the current market for investing.  I decided to comment because historically same investor funding for a series B round has meant that the company may have been unable to attract outside funding somewhere else.  Typically, Series B finds a new investor to set price with A investors following on.  While this is not always true (Sequoia kept investing in YouTube), industry veterans do tend to wonder about valuation and terms when say USV and Spark follow-on their own investment.   USV seems to operate a bit differently (they also reuped on Outside.in) but Spark lead Twitter’s last round (I think USV participated).

Was this a good deal?  I’m sure.  Tumblr needs time.  It’s really so new. I use it a bit.   I’m told by people close to it that the potential is enormous.  Just this week, Blip.tv’s CEO  Mike Hudack told me he thinks it has blockbuster potential.  I’m glad that Tumblr wants to charge for its service.  I hope this works and becomes a trend.  My comments on Fred’s blog are below.

Fred:

Tumblr clearly has some meaningful traction, but as a longtime follower and participant in the industry I would say there is a frequent concern when the same venture firms invest from round to round. Most entrepreneurs have been trained to go find new venture participants to set a valuation. Frequently, current investors give that same advice. I’ve always felt it was an inflexible position because if I were a venture firm I would want to reup with strong portfolio companies for two reasons. First, I know the company better than most and have an advantage as a result of that and Second, money raising is enormously time consuming and distracting for growth companies like Tumblr. While I have not read all the publicity for this week’s announcment I did read Bijan’s post and yours and there was no real valuation or terms information. While this is not atypical, it does, rightly or wrongly, lead people to speculate in a way that’s different from say, Huffington Post, because that brought a new investor, Oak, to the table.

To me all of this is about the “rules of engagement” in which veteran participants have been trained. I’m not sure it makes sense for them to apply anymore, but without transparency on the part of investors/entrepreneurs it’s hard to know what’s really changing, if anything.

Originally posted as a comment by aarondelcohen on A VC using Disqus.

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One Response

  1. Aaron – I don’t know the terms and am not an investor, but there’s another potential explanation for the inside round: The first round was very small and by doing the second round inside it allows the current investors to put more money to work in a company they perceive to be a winner, rather than simply play pro-rata with a new investor. I don’t know definitively, but I wouldn’t be surprised if that was the case here.

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