What the new VC show-and-tell means for signaling risk

A month ago, we asked several venture capitalists if they planned to change the way they invest or lead rounds during COVID-19 - most said no, but they noted that valuations were coming down and founders in their portfolio companies were responding to the crisis.

Northzone's Paul Murphy predicted fewer FOMO rounds because investors will take more time to get to know and diligence the business... and it might also take a bit more time to close deals," adding that he would continue to lead rounds and back great founders." But, as other investors call their bluffs, firms are looking for tangible ways to show they are open for business.

At least that was the case with First Round Capital. On Thursday, the seed-stage firm announced that when it leads a first round in a company, it will always take pro rata in the next outside-led venture round with a commitment of up to $3 million.

Pro rata is a clause in an investment agreement that gives the investor a right to participate in future financings. If investors don't invest in a company's pro rata, that might negatively signal they don't believe in the company's future. I asked Brett Berson, a partner at First Round, to offer more context about the announcement.

The question is your investor taking their pro rata' is not necessarily a checkbox answer," Berson said. And I think in a time of maximum uncertainty, what a given investor was doing 12 months ago might not be what he or she is doing today."