For companies seeking additional funding with new investors: watch out! Inter-firm relationships can be “interesting”.

Your existing VC investors frequently have an agenda when they refer new follow-on investors (or steer someone away). Most often, VCs want to expand their relationship with another firm (one way VCs get to know each other is by doing investments together). Or, they’re returning a favor — the other investor helped them with another deal, and they’re giving back.

When you’re steered away, it can sometimes be because of a grudge, or a competitive issue. Maybe your VC felt screwed in some previous deal with the other investor. Or, they feel like it’s a one-way relationship: they show the other group deals, but don’t get anything back. Or, they feel like the investor will hear the pitch just to get competitive info, not with any intent to invest (sometimes, a very legitimate concern).

The key point: the company (usually the CEO) should lead the fund-raising process, not the VCs. The CEO has a clear fiduciary responsibility to act in the best interest of the company. The VCs on the board also have this same responsbility, but sometimes can’t separate that responsiblity from their own firm’s agenda. (NOTE: If the VCs are driving the process, that’s a sign of a weak CEO).

When existing VCs are suggesting leads for follow-on investors, the CEO should do her homework with the VCs:

• Have you done any deals with this firm before? Which partners have you worked with? If so, what was the outcome?
• Has this firm ever referred you deals? Have you referred them deals? How recently? If so, what was the outcome?
• If you haven’t worked with this firm before, why not? How do you know them, and what do you know about them?