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.