The New York Times recently wrote an article about the advantages and disadvantages of so called “party rounds” during the angel-investing phase of a startup. After reading this article it got me thinking about the advantages of syndicated seed rounds. A topic we discuss quite often internally.
For the purpose of this post we’ll define a syndicated round as one in which a startup raises an amount of capital from one lead investor, who sets the terms, with participation from a variety of other investors. This usually includes institutional investors (VCs) and/or angels.
Prior to pitching VCs, and eventually joining one, I didn’t realize how common syndicated rounds were. With that said, syndicated rounds can be tremendously advantageous for the entrepreneur and is something that Founders should consider as part of their strategy when going out to fundraise. The two biggest advantages that I see to a syndicated round are Specialized Value Add and the VC Network Effect. And here’s what I mean:
Specialized Value Add
The startup ecosystem is evolving and specialization/domain expertise is in.
For startups, it means that Founders are unbundling giant industries and focusing on being the best at one thing, specifically.
On the accelerator front, we’re seeing companies like Disney (media and entertainment), R/GA (IoT and Connected Devices) and Barclays (FinTech) all creating vertical specific accelerators where they aim to add value through the use of employee expertise and industry connections.
And finally, in terms of VCs, we’re seeing laser focused funds popup up likeBlockchain Capital (invest in the blockchain), Brand Foundry (invest in consumer brands) and others, who look to leverage their prior startup experience and strong domain expertise to assist founders in the early stages.
While I don’t think that every firm needs to be (or should be) laser focused on specific verticals, I do think that the Founder should understand what type of specialized value add the VC can bring to the table and use it to his/her advantage. Similar to the approach you’d take to building out your team, I think Founders should work to strategically build out their investor base. So whether that means getting a firm like Lerer involved for their klout with the press, Forerunner Ventures for their expertise in branding/customer experience or us, Corigin, for our background in Real Estate and access to consumers, you should really work to identify what it is that a firm can bring to the table and look for firms that compliment each other.
The VC Network Effect
This point is straight forward and builds on the last one.
The more VCs you have in your round, the more connections you have. VCs essentially network for a living and you’ll now have access to that network. What is important is understanding what type of a network the VC has. This will usually correlate with what their background is and how they’ll add value. For example, a VC with a product management background in SaaS probably knows some good product managers for SaaS and can add value to the product personally as well.
For Corigin and myself, this lies in real estate, consumer brands and our relationships with other investors. So for the variety of startups startups that need access to those types of people as either potential mentors, clients or marketing vehicles, we make a great partner.
While these are the two most obvious advantages, Founders will also find others. The fact is that disadvantages as well.
Most importantly, however, I believe that getting value add investors at the seed stage should be the priority. With that said, you must figure out what it is that you’d like out of your investors and try to make sure they can fulfill that role ahead of time. Clearly not every startup will have the ability to handpick the investors that will be around the table, but doing your homework on the investors and knowing how to leverage them in the most effective manner is an approach that I’d love to see all Founders take.
Can you think of any other major advantages? Connect with me on twitter @BoatShuman and let me know what you think.