Let’s build the future that we want to live in.
Building the Best Seed Syndicates
As I like to say, fundraising tends to move slow until it moves fast. It feels like a bit of a grind in the early and mid stages of a process, but in a successful fundraise, things tend to heat up at the end and move at a breakneck pace once you drive towards final allocations and a close.
At this point, founders find themselves in a luxurious situation of being able to build the best possible syndicate. Here are a couple tips and suggestions on how to go about creating the most supportive investor base for a typical institutional seed round.
1. Get early commits to start generating momentum
As soon as possible, you want to lock in a few early commitments from angels or smaller funds that know you really well and are willing to stick their neck out early. I would be clear with them that you will use their support to continue to build interest in the round, and I’d also give them an out in case the round doesn’t come together as they might hope. These folks don’t typically lead rounds, but would certainly invest if the right round came together. So make it easy for them to say “I’m “in” assuming you get a good lead and close at least $X to get you Y months or runway.”
2. Big rocks first
Aside from the early commitments, the next most important thing to focus on is nailing down your lead investor. I’ve found that the lead investor will end up doing 90% of the work for a startup (or will cause 90% of the pain if you get the decision wrong). So really take your time to do your due diligence on the investor (both the individual and the firm). I believe it’s more important to optimize on the right lead investor vs. the highest valuations at the seed stage (within reason). I’ve also found that the best lead investors tend to be somewhat more price sensitive. This makes sense, because it’s more likely that a firm with a weaker competitive position is willing to stretch and pay a price way above market in order to win what they think is a competitive deal. The strongest investors usually aren’t cheap, but typically don’t do things outside of the normal bounds for a company at the seed stage.
Some founders may end up getting a little paralyzed at this stage because they are trying to optimize too many things at once. It’s not necessary to nail down every element of your syndicate simultaneously. I think the most simple thing to do is to focus on securing the lead investor, and then optimizing around the edges after that. As the old adage says, big rocks first.
3. Large funds: Signaling vs. Support
Often one of the leads in the mix is a larger, multi-stage fund. There are real tradeoffs to having a large fund lead your seed round and practical things you can do to insulate yourself from some of the negatives.
In general, I think it ends up being a bad idea to have a big fund as a very small, passive investor. It’s all the downside of investor signaling without the upside. Big funds realize this too, which is part of why many have resorted to leveraging scouts to obfuscate the signalling to some degree.
The benefit of a large fund is that they may be able to lead your next round sooner or faster, without the need of running a full-blown process next time. It may also be easier to get that large fund to invest in a seed extension or to give you forward credit on future milestones because they’ve come to appreciate what’s happening at a deeper level. This can be helpful for businesses that have long sales cycles, ones that are in unpopular market segments, or are located in geographies without ample downstream series A capital.
But the only way you are going to get those benefits are if the large fund feels meaningfully invested in the startup, both in terms of dollars and emotionally as well. Some ways to do this include:
- Giving the large fund more allocation so they are as close to their ultimate target ownership as possible
- Building relationships with multiple partners at the firm
- Pitching the full partnership even if their process doesn’t require it
- Having the lead partner agree to monthly “check-in” meetings post investment
- Figuring out what % of the time the large fund up leading the A (if it’s less than 50%, be concerned).
4. Optimize for diversity but maintain alignment
Having diversity of investors can end up being pretty helpful. Typically, the most useful form of diversity ends up being in network and skillset.
In terms of network, you want to prioritize recruiting, industry, and fundraising networks (most likely in that order). This tends to correlate with whatever geographic diversity is relevant as well.
In terms of skillset, it’s nice to have some investors that may be great at product, some that are great at helping in GTM, some that are great at thinking through business models, some that are great at personnel issues, etc. I’d make a list of your most important priorities and risks for the business in the next 12 months and shape your syndicate around those skills.
Although diversity is good, mis-alignmnet is bad. If you are building a company with the strategy of pursuing steady, capital efficient growth, you probably don’t want syndicate members who you know favor a blitzscaling approach. If you are convinced that you want go grow by building virality in your product a-la-Dropbox, you probably don’t want investors that invest in companies that win primarily on enterprise sales. As a founder, you want to be open minded to a variety of opinions, but it can be a real hindrance if your investors don’t share core assumptions around how you want to build your business.
5. Remember Goldilocks, not too many, not too few. And stay in touch!
In order to accomplish the things above, you will probably want to include more than 1–2 investors on your cap table. But just like Goldilocks, you want just the right amount of investors, not too many, not too few.
If you have too many investors, you risk a diffusion of responsibility. It becomes easy for an investor think that someone else is paying attention vs. feeling like they can be a unique contributor to the success of the company. There is also always some non-zero unpredictable risk with each investor that you have in your syndicate that could end up being a headache later. So the more folks you have, the more you expose yourself to that sort of risk.
If you have too few investors, you narrow the network and skill sets you can draw upon. So too few is not great. Generally, I’d recommend a syndicate of 5–10 investors, usually with 1–3 making up the majority of the capital with a handful of other investors writing relatively small checks. You also want to make sure you keep your investors in the loop so that they feel emotionally invested in your success as well. Be really good about sending regular updates, and find a way to see your investors in person or via a video call at least a few times a year. This ends up being pretty tough to do with all the things you have going on in your business, but if isn’t worth it for you to do these things, you should ask yourself whether it’s really worth it to have them in your syndicate in the first place. Chances are, your top 2–3 investors would gladly take their allocation anyway.
These are the top consideration I can think of in building seed syndicates. Did I leave any out or does anything require more explanation? Please let me know (@robgo) and I’ll try to address them on Twitter or a future post!