The model for funding tech startups has changed a lot in recent years. While angel investing has been around forever, Angel list is blowing it up, making it easier for angels of all shapes and sizes to find deal flow and come together. VCs are also getting in on the action with many VCs participating in seed rounds on and off Angel list.
While all this activity is mostly good, and more startups are getting funded, there is a risk for startups in this funding model. Investor groups are getting larger and larger. I recently did a deal with 13 co-investors. How will all these co-investors react if the company hits hard times and needs more $ before it has hit its key milestones? How does the founding team extract value add from so many investors?
In the traditional VC model, a fund would make 12 – 15 investments. Each of those would be significant. And for better or worse, that meant the partner would spend a lot of time on each investment. If an investment did not work out it was important for the economics of the fund.
Startup success is never a straight line and no startup ever performs as planned. How do you manage those ups and downs with so many investors?
We are thinking through some of these issues at Real Ventures. We have now done or committed to over 30 deals. Many of those are deals where we are the lead investor. But a good number are minority investments where we are part of a syndicate. With four investing partners managing a huge pipeline of investment opportunities, a growing portfolio and everything else that comes with running a fund, the scarcest resource is partner time.
We are committed to every deal that we do. And we back people. So our relationships with the founders we back are key. But as the demands on the partners grow, we know we will be forced to make trade offs on where we spend time. And ownership level will become a filter on how we prioritize. It will only be natural to focus on investments that have the most potential to generate returns for the funds.
I’m sure we are not alone in thinking about these issues. Every active seed investor, whether fund or individual, has huge demands placed on their time. If for no other reason, just by the sheer volume of startups seeking seed $.
So, if you’re thinking about raising, think in advance about what your objectives are. If you just need $ and have low expectations for value add, then these “party rounds” with lots of investors may be just fine. But if you’re truly looking for a long term partner who will be committed (in time and money), then I encourage you to work with fewer investors who are more committed and make sure that you matter to each and every investor you have.