Industry thought leader Fred Wilson has written recently advocating inside led rounds and assertive monetization of pro rata rights. Fred is delivering fellow early stage VCs graduate-level education on maximizing fund return. However, he is, uncharacteristically, not advocating what may be best for building the company. Once a company is out of development and focused on scaling – moving from $10 million in revenue toward $50 million – an outside lead for the next round makes a lot of sense.

I am biased. I make a living raising growth rounds of capital led by new investors. However, I choose to do this for living because I believe the process is healthy and necessary for growing companies.

A typical company at the scale point may have existed for four years or so, during which two VCs financed it via a couple rounds of funding. The VCs were likely there near inception, maybe incubating the company with an EIR. The original Board likely has a trusted working relationship. They also, after four years together, have a high risk of group think bias. The early stage investors, at this point, are often not “drinking the Kool-Aid”; they are mixing it and serving it to others. It is exactly the phenomenon Fred writes about when he discusses “believing too much” in a company. An aside, it’s spectacular we have VCs like Fred with the humility to write about having a “signature failure”. We need more like that.

The process of going outside the existing syndicate for capital delivers a fresh set of eyes to the business plan and the people executing against it. This is a healthy process that is very difficult for people who have been actively involved in building the company for four years to complete effectively. A good third party process will surface issues that the Founder and existing VCs probably know but have under-prioritized or avoided addressing. The new investors are not “smarter” than the existing investors; they are just looking at the business, its results and its people as it is now, not as conceived four years ago. New investors are also going to do a level of diligence – including customer calls – that existing investors generally do not do when leading an inside round. There is value in that feedback loop.

When we bring a company through a financing process the CEO always ends up with a set of benefits beyond just capital. Prospective investors looking to demonstrate sector knowledge and connectivity provide introductions to partners and leads to possible customers. When new investors ask about gaps on the management team, they often have a quality candidate to recommend. One CEO told me that a Partner at a later-stage firm, one who did not end up investing, did more to influence his company direction than anyone else. The new investors are not more connected than the existing investors, but they deliver incremental connectivity that benefits the company.

A third party financing provides a validation in the marketplace and a higher “trust” in the transaction price. Fred is inarguably correct when he writes that no one knows the company better than its insiders. However, an inside round, fairly or not, does not carry the same level of market validation. Funding press releases always highlight “new” investors for a reason. The price discovery of a third party process is also important. The valuation may or may not be higher, but it will be trusted by the Founder, any angels or departing employees who take a little liquidity and by other possible investors. The head of strategic investment for a leading media company told me recently his team had a rule against joining rounds priced by insiders.

There are other intangible but valuable benefits to an outside lead. Early stage investing is a difficult business. Experienced VCs try to limit risk by investing frequently with others they trust. As Paul Gompers discovered in his HBS study, this “birds of a feather” approach does not produce the best outcomes. Bringing new voices to the Board has a likely diversity benefit. That can be accomplished with outside Directors, but Directors with share votes have more influence. A well-run third party process also trains management to tell the story of the company. That is a different act than the daily sales rhythm of telling the story of the company’s product. Telling the company story is a required discipline as a business matures and needs to communicate to new constituents including business partners, public investors and a larger employee base.

My bias toward an outside lead is not totally contrary to Fred’s view that early stage investors should ride their winners. We want existing investors participating in a financing and fighting a bit for more allocation. That sends the right signal to the market. We also want prospective investors to perceive insiders as competition, at least a little. If new investors cannot demonstrate added value and industry connectivity, they should fear the insiders will take the round. However, there are useful growth stage investors available for the next round. Most CEOs and Boards benefit from the process of bringing them onto the team.