From the VC’s corner (12): the early (-stage) party rounds
I don’t like them much (the early-stage financing party rounds,) and I have noticed quite often, especially in parts of Europe, including my region, that different types of investors (early stage CVCs or VCs / accelerator programs / business angels, and even some wealthy individuals) are syndicating and investing together in a Seed round.
At a first glance, this seems promising for everyone involved: the accelerator program supports with operational expertise and forming the team, the CVC/VC provides capital, hopefully an experienced board member and an early strategic alliance, and the business angel is mostly the one fitting it all together as he knows the founders and is already on the board. But the downside is obvious: different types of investors all have different types of interests. If you have multiple VCs, they all care about control and return. You, as a founder, don’t want a micro-managing jackass on your board. Imagine also the complexity of the cap table when the startup needs more capital to reach the next liquidity event, and when the founders discover that some of the party members have not put aside reserves but they’ve asked pro-rata (btw, managing reserves is an art.)
And even if you think that syndicating is good for you, first check the opinions and/or experiences of other startups (in the portfolio of a CVC/VC) on syndicates with different types of investors in the same round; and always ask all the investors if they have reserves for your startup.
Syndicating may come with various term sheets (which is bad,) and have seen cases where the offered terms were abusive, excessive and, apparently, no one was leading the round. For example, I don’t like participating preferred in the early-stage rounds, as it misaligns entrepreneurs and investors; an investor who wants a lot, at this early phase, is definitely not very experienced, as precedence is the rule of the game. And if the angel wants minimum nX liquidation preference (which they usually do,) things get complicated for the further rounds. It might even be the end of your startup.
Quality of people is also important. In most deals, reputation is an important constraint and incentive. Do your homework! If a reputed VC/CVC is leading the round, and a single term sheet, with straightforward and simple terms, is circulated and agreed by all participants, things are great (as long as you raise enough and don’t need a few more convertible (notes) rounds to make the cap table too hairy.) And don’t imagine we work with lots of spreadsheets and sophisticated models, so it shouldn’t take half a year to close.
To conclude, configuration and cap table of the startup at the beginning matter. From my angle, intros from other VCs, out there in the market, are not constructive (may be even a bad thing,) but the warm intros from the individuals I know (or are closely and professionally connected to some of the investors I know) are worth a lot. If you are a low burn, cash conservative tech startup, and you raise like EUR 1.5m for the next 18 months, and you bring 2 VC firms, 2 more angels and 3 other HNWIs, all fighting for seats on the board, that’s bad, man… that’s a party round. Accelerators are something else; have a different business model, can de-risk and syndicate (or crowdfund.) If you do robotics though, and want like EUR 10m for the seed (more like a Srs A,) syndicating makes sense; but keep the number of participants decently low. Additionally, don’t forget that venture debt is awesome (for some stuff, like for inventory.) Moreover, for the subsequent, larger rounds, syndicating is best practice.
My today’s preferred: Rumpus, Oblong’s cloud-based collaboration system that brings all the multi-stream sharing and concurrent interaction features of Mezzanine (Oblong’s) to any video conferencing system, including Zoom, BlueJeans, Webex, and Google Meet. You can watch a nice YouTube intro here.
