How Many Investors is Too Many? A Template for Seed Rounds

A couple of weeks ago Mark Suster wrote an excellent blog post stating that a leaderless seed round with multiple angels and VCs is a bad idea for startups because no single investor will feel obligated to take responsibility and step up to the plate when the company needs help.  In general, there is a lot of  truth to this statement.  With more investors on board, it is inevitiable that there will be less individual accountability and a smaller sense of responsibility for each investor.

However, seed rounds are here to stay and more and more VCs are jumping into the fray everyday.  So if you’re about to raise capital, I don’t think the sole question should be how many VC investors is too many.  Perhaps the more important question you should ask yourself is:

Am I getting married to the right investors?

Is your VC firm going to step up to the plate when you need them the most?   At GiveForward we closed a “leaderless” seed round earlier this year  with a mix of  12 VC, micro-VC, and angel investors.  Coincidentally, shortly after Mark’s blog post came out, we actually had the opportunity to test out this theory.

Last week, we had a major crisis looming that had the potential to temporarily shut down functionality on the site.  Instead of sending out our regular monthly investor newsletter, we wrote an email to our investors asking for immediate help.  Within an hour, a handful of them jumped into action and went to bat for us calling up their CEO friends and cashing in favors to make sure we averted this potential crisis.

In particular, Matt McCall at New World Ventures stepped up to the plate a delivered for us big time.  The reason this is notable is because GiveForward is by far the smallest investment in New World’s entire portfolio.  From a purely economic standpoint, it doesn’t make sense for New World to devote time and energy to helping us on a regular basis  — the opportunity cost of diverting time away from their larger investments in order to spend time with GiveForward is simply too big. Yet, Matt treats us with the same amount of respect as any of New World Venture’s big portfolio companies. To me, this speaks volumes about Matt’s character and the character of the firm.

Bottom line:  I will defer to Mr. Suster on this subject as he has much more experience than I do and I think he’s correct that you don’t want five VCs coming into your seed round (allowing five VCs to invest in your seed round would lead to infighting about who leads the Series A if you’re successful).  But I will say that if you seek out investors like Matt McCall who truly care about your company and support what you are doing, then it shouldn’t matter if you have a “leaderless” seed round with two or perhaps even three VCs backing you. When the time comes and you need them the most, the quality VCs are going to have your back.

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4 thoughts on “How Many Investors is Too Many? A Template for Seed Rounds

  1. Reese Schroeder says:

    Best of luck with this blog, Ethan!

  2. I agree with quality over quantity, but not all of them will always have time to “have your back”.

    Suster states that they “need enough ownership that it warrants rolling up your sleeves and doing the hard work when things aren’t going well.” Key examples are recruiting key employees and actually writing a check in case of a debt/bridge/down round in case clouds are gloomy. This may require more work

    • ethanaustin1 says:

      Granted VCs are pretty busy people but that doesn’t mean they should ignore you. I think you just have to keep searching until you find the VC firm that is going to MAKE the time for you.

      That’s why I think it’s a good idea to ask your investors these types of hard questions before you take investment from them. I think you have to ask your potential investors: Are you going to be there for us when sh*t hits the fan even though we only represent a tiny investment in your portfolio?

      In full disclosure, we didn’t ask these types of tough questions when we were raising money, but if I was doing it all over again, I definitely would.

  3. By most objective measures, on paper at least, my startup, ParElastic, has “too many” investors. Enough that the number of names on the cap table makes going for a majority approval a bit of a production. That said, I really like all my investors and am very happy that we closed the round that we did.

    We did an angel led seed round with a few VC’s included as well. Some of our angels are former colleagues and mentors who are providing tremendous advice and guidance which is much more valuable than the checks they wrote. The other angels have also provided advice and connections that we would have missed out on otherwise.

    On the institutional side, we have one great VC on the board who has been great to work with and who I truly believe has our backs. We also have another larger firm that has been very helpful even though they only made a small (for them) seed investment, providing advice, introducing us to other portfolio companies etc. In addition, we also have a couple of other early stage firms who have also been great supporters.

    When we started looking to fund our company, I had some ideas about things I did and didn’t want to do in putting together the round. We ended up breaking some of those rules, bringing in a bigger VC with a small stake, bringing in such a large number of angels, taking our largest investment from a VC firm that isn’t one of the “biggest names”.

    The rule we didn’t break, however, was that we are working with people we trust and are great people to work with. I really believe we’ve been very luck to have all the investors we have on board. With such the great team of investors, even if there are a lot of them, i feel we’ve positioned ParElastic for great success.

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