Party Rounds(blog.samaltman.com)
blog.samaltman.com
Party Rounds
http://blog.samaltman.com/party-rounds
15 comments
Definitely true--if someone invests a lot of their money, they'll focus. The problem comes when a 500MM fund makes a 100k investment.
YC is somewhat different, since all the investments we make are the same size. And, I'm biased, but I think we work pretty hard.
YC is somewhat different, since all the investments we make are the same size. And, I'm biased, but I think we work pretty hard.
"The problem comes when a 500MM fund makes a 100k investment."
Interestingly, after crunching the data, this is not true.
In reality, companies who receive money from a larger, multi-stage fund actually raise follow-on financing at a higher rate than those that raise only from dedicated Seed VC firms who presumably care more as they're more invested (or that's what they'd like you to believe :)
While Chris Dixon (prior to joining Andreessen Horowitz) and others have championed the idea that large funds don't care and are just investing in seed rounds as a call option for future rounds, the data just doesn't support this contention.
We were as surprised as everyone else when we found this.
Full research brief we published on this here - http://www.cbinsights.com/blog/trends/seed-venture-capital-f...
Disclosure: I'm co-founder of the firm, CB Insights, that put this research together. We sell data to VCs, LPs, etc.
Interestingly, after crunching the data, this is not true.
In reality, companies who receive money from a larger, multi-stage fund actually raise follow-on financing at a higher rate than those that raise only from dedicated Seed VC firms who presumably care more as they're more invested (or that's what they'd like you to believe :)
While Chris Dixon (prior to joining Andreessen Horowitz) and others have championed the idea that large funds don't care and are just investing in seed rounds as a call option for future rounds, the data just doesn't support this contention.
We were as surprised as everyone else when we found this.
Full research brief we published on this here - http://www.cbinsights.com/blog/trends/seed-venture-capital-f...
Disclosure: I'm co-founder of the firm, CB Insights, that put this research together. We sell data to VCs, LPs, etc.
YC has to work hard in order to justify the low valuation (or large equity stake, whichever definition you prefer). In that sense you can't really compare YC with normal investors.
The problem comes when a 500MM fund makes a 100k investment.
Right, so the problem isn't party rounds, so much as people not taking advantage of the fact that doing a party round allows them to go after smaller investors.
I think we work pretty hard.
Having never been through YC I have no direct evidence, but all the indirect evidence points in this direction, yes. ;-)
Right, so the problem isn't party rounds, so much as people not taking advantage of the fact that doing a party round allows them to go after smaller investors.
I think we work pretty hard.
Having never been through YC I have no direct evidence, but all the indirect evidence points in this direction, yes. ;-)
There are a few serious advantages to party rounds that this post doesn't mention:
1) Party rounds generally lead to greater founder control and more founder-friendly valuations
2) In party rounds, founders get to date VCs before they settle down. Choosing a long term VC partner / board member is hard. Party rounds allow you to experience working with many investors before deciding who you want to partner with for the long haul.
3) Taking a lead investor in a seed round creates a serious negative signaling risk that party rounds don't -- if you have a lead and they pass on your Series A, raising will be much harder.
4) You can often close a party round much faster than a round with a lead because the diligence processes are faster. This means you can get back to doing what matters -- building your business.
I don't think there is a clear optimal choice here -- there are plusses and minuses for the entrepreneurs both ways.
1) Party rounds generally lead to greater founder control and more founder-friendly valuations
2) In party rounds, founders get to date VCs before they settle down. Choosing a long term VC partner / board member is hard. Party rounds allow you to experience working with many investors before deciding who you want to partner with for the long haul.
3) Taking a lead investor in a seed round creates a serious negative signaling risk that party rounds don't -- if you have a lead and they pass on your Series A, raising will be much harder.
4) You can often close a party round much faster than a round with a lead because the diligence processes are faster. This means you can get back to doing what matters -- building your business.
I don't think there is a clear optimal choice here -- there are plusses and minuses for the entrepreneurs both ways.
One important aspect of party rounds that this post leaves out: not everyone comes to the party at the same time.
Party rounds usually happen because investor A is interested and invites B and C, who invite D & E, and the situation repeats itself over days/weeks. All along the way, the founder is able to angle for better terms (and price!) as investors realize they have less and less leverage.
By the end of the party, it looks like a waste since investors D, L and R were the best fit and could have covered the whole round themselves. But, what brought investors D-R to the table was everyone who came before them. We can't go kicking them out of the round now! So, everyone takes a group picture (Techcrunch announcement) and makes it sound like they're so cool that they've always been partying together; nobody needs to know that most of the people showed up at the end and can't really remember the founder's name that they used to get in at the door.
tl;dr: One important aspect of the party round is that founders get better terms and less stress by signing investors as they arrive at the party. To the founder, that may be worth it.
Thanks for another great blog post Sam, keep 'em coming!
Party rounds usually happen because investor A is interested and invites B and C, who invite D & E, and the situation repeats itself over days/weeks. All along the way, the founder is able to angle for better terms (and price!) as investors realize they have less and less leverage.
By the end of the party, it looks like a waste since investors D, L and R were the best fit and could have covered the whole round themselves. But, what brought investors D-R to the table was everyone who came before them. We can't go kicking them out of the round now! So, everyone takes a group picture (Techcrunch announcement) and makes it sound like they're so cool that they've always been partying together; nobody needs to know that most of the people showed up at the end and can't really remember the founder's name that they used to get in at the door.
tl;dr: One important aspect of the party round is that founders get better terms and less stress by signing investors as they arrive at the party. To the founder, that may be worth it.
Thanks for another great blog post Sam, keep 'em coming!
I didn't realise party rounds were formed like this – if anything I thought the opposite, that if you had a lead then they'd help bring on additional valuable investors.
I thought party rounds were just when a company has 4 VCs + 20 angels = $1.5M seed, vs. a company that raises a seed where there is one clear lead.
I thought party rounds were just when a company has 4 VCs + 20 angels = $1.5M seed, vs. a company that raises a seed where there is one clear lead.
For companies raising $1.5 mil or less, from my (very limited) anecdotal observations it seems like investors have a base usefulness that may or may not fluctuate as a function of the amount they have invested. It also may or may not fluctuate depending on how interesting your startup is, how much they like you, how often you run into each other at social functions, etc...
From what I've seen (certainly a small sample, so may be wrong, curious to have others chime in) there are investors whose lowest possible usefulness (they invested the smallest amount they ever invest) still exceeds other investors' highest possible usefulness (however invested they would be if they were responsible for the entire round - $1.5mil or less). As a result I see the appeal of a party seed round - you increase your chances of getting investors who are useful by nature.
From what I've seen (certainly a small sample, so may be wrong, curious to have others chime in) there are investors whose lowest possible usefulness (they invested the smallest amount they ever invest) still exceeds other investors' highest possible usefulness (however invested they would be if they were responsible for the entire round - $1.5mil or less). As a result I see the appeal of a party seed round - you increase your chances of getting investors who are useful by nature.
"It turns out that investors are generally about as involved as they are invested."
I suspect that if an entrepreneur raised money from a few thousand people on kickstarter (or similar) and then asked them all to help with certain things, they'd get a lot of people willing to do stuff. Maybe only 1 in 100 per ask, but if you have a couple thousand people reading your emails then that's more than enough. I don't think there's anything wrong with party rounds, rather that with the way they're currently done it's just too small of a party with the wrong people invited. You need a lot of people who really like the product and want to see it succeed, rather than a small number of people who like bragging about the fact that they're investors but who don't really have that much money.
I suspect that if an entrepreneur raised money from a few thousand people on kickstarter (or similar) and then asked them all to help with certain things, they'd get a lot of people willing to do stuff. Maybe only 1 in 100 per ask, but if you have a couple thousand people reading your emails then that's more than enough. I don't think there's anything wrong with party rounds, rather that with the way they're currently done it's just too small of a party with the wrong people invited. You need a lot of people who really like the product and want to see it succeed, rather than a small number of people who like bragging about the fact that they're investors but who don't really have that much money.
Managing that army of volunteers becomes a job in it's own right.
So raise an extra 50K and hire someone to do it.
People who manage investors are typically the highest paid person of anyone in business. Very few people can be relied upon in place of the CEO, CFO in that communication. $50k won't buy you much.
Exactly. Investor management takes time and attention away from sales and product management. Event if it's rallying a large group of volunteers, that person is getting pulled away from other vital tasks.
Find one or two strong leads to commit to your round. Make sure these are experienced angel investors. Make sure they love what you do. Make sure you love working with them. Fill the rest of the round with people committing to smaller amounts. In my experience, it is hard to set a limit here. Do what feels right. If someone offers you money along the way, do take it. You can care about your valuation later and the way bigger risk of your business is running out of money. Spent 80% of your investor time with your leads. Limit the money you take from VC's in your angel rounds. Just my two cents.
I've heard a different take on this from an entrepreneur who raised several time in the past. His strategy was to raise small amounts for 20-30 angels investors at the seed round with the assumption that when he needed more money it would be easier to ask from someone who already invested 25k to double down on the investment than from someone who invested 100k (which is probably high for the average Angel).
Though I appreciate the logic of having a single or small group of 'good investors', this only applies if one is able to attract said 'good investors'. If one is unable to attract the attention of 'good investors' (assume the start-up has a good idea - being unable to attract 'good investors' is a separate problem), and only 'bad investors' are available it would be logical to try to get a lot of 'bad investors' so that they would not be able to individually influence the company. Thus party rounds make sense in that case don't they?
I think another key point is one that was only partially touched on in this thoughtful post. When you go to raise your B round, this party round A is going to look "different" than what the B investors are used to seeing. Anything that looks "different" creates some amount of impedance on the deal. B round investors are used to seeing a few familiar names from the A, and at least part of their diligence is based on if they want to work with them or not.
This doesn't mean don't do it - it's just another point to consider.
This doesn't mean don't do it - it's just another point to consider.
Here's my (decidedly cynical, I know) take on this:
Sam's model makes sense if the investors actually care about the product and are able to at least somewhat judge & shape it.
If, on the other hand, funding startups is a lottery for the big payout item, party rounds make sense for investors. And the same goes for the company side - if you just hope for the big acquisition, at first glance guidance matters less than runway.
Sam's model makes sense if the investors actually care about the product and are able to at least somewhat judge & shape it.
If, on the other hand, funding startups is a lottery for the big payout item, party rounds make sense for investors. And the same goes for the company side - if you just hope for the big acquisition, at first glance guidance matters less than runway.
I think the focus of this discussion ignores an important point: some of these companies, perhaps a decent number, raise these rounds because they probably wouldn't be able to get fewer investors to pony up the full amount they're seeking.
I wonder what this implies for crowdfunding?
What are some examples of party rounds?
There are more recent examples but to make it interesting, I'm going to reference this TC article from last fall which uses these examples: Exec, Socialcam, Pair.
Exec was led by Sam Altman!
http://techcrunch.com/2012/08/27/party-rounds-excellent/
Exec was led by Sam Altman!
http://techcrunch.com/2012/08/27/party-rounds-excellent/
"Betable...has received an undisclosed amount of money from 25 investors including Greylock Discovery Fund, FF Angel LLC, True Ventures, Dave Morin...and Yuri Milner..."
http://venturebeat.com/2012/07/09/betable-could-disrupt-soci... "
This sounds like something which is obviously true; but I'm not so sure: In particular, it seems to me that an investor's involvement is likely to depend as much or more on their investment as a fraction of their assets as it does on the absolute size of their investment. If I invested $100k in a startup, it would be because I really believed in it, and I would help them in any way I could; but if Warren Buffet invested $100k in a company he would probably forget about it before lunch.
To the extent that "party rounds" involve large investors throwing their spare change into a pot, I agree that they would certainly not be productive; but if a party round allows small investors who would provide advice and assistance disproportionate to their assets to get involved, it seems like it could only be a net positive.
After all, nobody expects that an investment of only $20k means that YC won't provide much help.