Once upon a time, VCs raised big funds and wrote big cheques. They talked about putting “money to work”, and looked to put $5M – $10M into every company they backed. There were many reasons why this strategy did not work that have been well documented. And while some funds were successful with it, the industry as a whole was not.
Today’s software startup does not need $5M to get going. 1/10 of that is more the case. So, we are seeing new breeds of investors from angels to super angels, micro VCs, etc.
One of the benefits of the “old” strategy was that, for better or worse, you had committed investors. They each owned big chunks of your company and had lots of capital invested in you. So, whether you wanted it or not, you had their attention.
To be clear, I think the super angel phenomenon is great. I think it is great for entrepreneurs as it gives them more choice and plugs them into investors with huge networks and data points because of all the deals they do. And I think it’s great for Limited Partners (the folks that give super angels their capital), because the super angels are building a well diversified portfolio with exposure to many companies, sectors, and in some cases geographies.
But, what happens when things go wrong? What if you’re running out of runway before getting enough milestones to truly be ready to raise a new “up” round? What if you need more time because you want to pivot in a new, exciting direction? What if you need to replace a key team member? The examples are endless.
When you had a small number of highly committed investors, I would say it is easier to convince them to continue to back you. After all, they are already “all in”. A few pennies more on top of that investment could give you the bridge you need. But how easy is it to convince investors who have 60, 80 or more other companies to spend the time needed to understand your new direction and back it? How much effort is required to get a large syndicate of many, disparate investors to re-up and bridge you?
If you were building a shopping mall, your 1st priority would be to secure an anchor tenant: a big brand that takes a big chunk of space and acts as a draw for shoppers and other merchants. You can’t build a mall without this. I think funding syndicates should follow a similar strategy. By all means, get angels, use Angellist, get super angels on board. But, I would say having a lead investor who takes a big chunk of the round and has the capital, brand and relationships to keep your syndicate together in good times and bad and influence it through its own actions is key. Without that, I think you create a lot of exposure and set yourself up for a lot of work getting the group to come together if and when you need them again.