Though counterintuitive, Covid-19 has turned tables between founders and VCs. Today, founders can negotiate multiple term sheets at the same time and demand the valuation they deserve.
Having multiple options at your hand is also a problem (a rather good problem, right?). You must pick the right investment partner for you, which will have a significant impact on the course of your venture.
Imagine you are an early-stage founder who has already raised an angel round and is currently in active dialogue to raise capital for your seed round. The funny thing about seed rounds is that a diverse range of investors are interested at that stage. Angel investors who typically have participated in pre-seed / angel rounds, have started participating in such rounds as Angel’s ability to write larger cheques has increased. You have the option of going to angel platforms and syndicates. Then there are Micro VC Funds (such as us) who primarily specialize in seed stage investments. We are now seeing VC funds whose primary focus is Pre-Series / Series A investments starting to invest at the seed stage. In fact, once we saw a Private Equity Fund interested in joining hands with us to invest in a company.
This is again a problem of plenty. How you structure your fundraising efforts and which investment avenues to prioritize. You want to avoid spending all your bandwidth on fundraising, which adversely impacts your business – ultimately leading to a spiralling impact on your fundraising.
So, would you rather have multiple investors (a party round as it is called) or a single large VC in your captable (See table below)? Below are the few parameters which would help you evaluate as you strategize on identifying the right set of partners (or a mix of them).
One of the most significant advantages of working with larger VCs is the speed at which you can close the round. You don’t have to pitch to other multiple VCs after receiving a term-sheet from a larger VC. Most of the funds prefer that you fully subscribe the round before they can invest in you.
You have to work with investors who specialize in the stage you are at; otherwise, you will not be able to get the attention or relevant advice. I see two kinds of larger cheque VCs investing at the Seed stage – 1) Ones who are investing at the seed stage to ‘lock-in’ high potential opportunities with a view that they can ensure their participation in the next round. 2) Other ones are building strong competencies around the Seed stage and having a dedicated team working with early-stage companies. For example, Sequoia has built the Surge program specifically to participate in Seed stage companies and has a dedicated team around.
Even if you decide to work with larger cheque size funds, make sure you evaluate if they have a dedicated team and resources to support early-stage startups.
Specialized Value addition:
Imagine yourself as the founder of a Fintech company building a blockchain solution being sold through the SaaS business model. Ideally, you would look for expertise coming on all three areas (Fintech, blockchain, SaaS) from your incoming investors. Fortunately, as the ecosystem matures, you can find specialized funds focused on specific verticals or horizontals.
As a founder, you can tactically look for investors where you need specialized help. And it boils down to partners of the fund you are engaging with. You may be able to find a fund where the expertise you seek is possessed by multiple partners,but in practice, you only get the attention of the partner managing the relationship with you. To secure a wider breadth of expertise, founders work with multiple sets of investors.
Technically speaking, the more investors you have in your cap table, the more extensive a network you can capitalize on.
Control and direction:
Control and direction are two competing forces in the context of picking up funds to work with. You could decide to work with one larger cheque size VC (who owns 15-20% of your business) so that you get one consolidated advice and directional view on strategy topics. But if you, as co-founder and the VC disagree on a topic, the deadlock could paralyze decision making. You don’t want to make your only investor unhappy.
Having multiple VCs on the cap table could lead to getting diverse opinions which could be stressful as well, and you will struggle to identify which path to take. But this is also an opportunity to assimilate all the feedback and decide what is right for your company. The important thing is that you stay in control.
Signalling for next rounds:
It is definitely comforting to have a larger VC fund in your cap table as you know that there is a good likelihood that they will be participating/driving your next round – probably Series A. The challenge appears when they don’t offer to participate in the next round – it becomes really bad for your company as it triggers negative signalling for outside investors.
Having multiple funds in the cap table helps diversify that risk at multiple levels. You don’t need all of your existing investors to participate in the next round for right signalling for outside investors. More importantly, new investors understand that micro VCs core focus is seed rounds, and it’s understandable that they don’t participate in subsequent rounds.
I hope this sparks some thinking as you step towards raising your seed round. Clearly, there are no straight answers, but deliberations on the above points will help you decide which path is right for you. Happy fundraising!
Read:For Start-Ups, How Many Angels Is Too Many?
Party in the Seed: 2 Advantages to having multiple VCs in your round
Do you really need a lead investor in seed financings
The Fight for Seed