Party rounds may not be a party for founders...

I am observing this growing trend of startups raising seed capital from a large number of investors, mostly angels and some institutional investors. One startup I spoke to has commitments from 20+ investors for $1M+ and they were looking for an institutional investor to set a price. That's what is a party round- a large number of investors with not necessarily a lead investor.

The good news is that the angel ecosystem is becoming more vibrant and that's great for founders. Raising small seed money is hardly a challenge for good founders these days. I have seen founders prefer a large number of investors because they feel they have access to a better network and are more likely to get help, if required- the probability of getting help remains the same, hence large numbers increase the absolute chance.

At the same time, founders should be careful about what kind of investors to choose from. Obviously, this is relevant only for cases where demand is more than supply and founders have at least some freedom to choose. I am putting down a list which can be useful especially when you are raising close to $1M or more, and you have the freedom to choose.

Get a Lead investor

At seed stage, you need an investor to step up and take a proactive role when the situation demands. Most of the angels won't be able to do that. Even larger funds won't do that for you. Your startup has to be a key investment for that investor for this to happen. $0.5M from a series A fund won't make your startup important for that fund. Anyway, I'll probably write another article to cover this in detail. But, in summary- getting the right lead investor can help a lot even if it changes the round construct a little.

For angels, founders should ask if they bring more than money to the table. As you are starting up, getting some celebrity entrepreneurs and marquee angels associated with you can be tempting. Here is a way to evaluate and bucket investors:

Help with Leadership: Having successful entrepreneurs in a similar space as angels can work great. Not only can they help you with access but they were also in a similar boat in the past and can relate to the challenges you face. Even at a later stage, they can provide better answers to questions like- what should be the sales incentive? How should I build a data science function? Entrepreneurs from not the exact domain but some other common ground can also be useful e.g., investors from a fin-tech SaaS background for your health-tech SaaS startup. 

The trick is that they should be available for you. I would say a good check can be - can they do one call a month at least.

Help with Domain: Purely for their domain knowledge and experience. You don't go to them for leadership and fundraising advice but product, go-to-market, technology etc. e.g., an AI expert, enterprise sales. It's even more important to have expectations about the time commitments from them. 

Networkers: This is where founders need to be more careful. A celebrity entrepreneur doesn't guarantee anything. They have to be super excited about you. For example- if an investor doesn't even talk to the founders and agrees to invest only after looking at the deck, I will doubt that they would be of any use to your startup. Like I said earlier, it's easy to feel good about a marquee name but founders shouldn't think that any future VC would give much value only because they have a celebrity name on their captable. 

Look for those angels and small funds that proactively help out the founders build a network for fundraising, customers, hiring etc. 

Customers: I have seen less of it- startups raising from their potential or existing customers, but these can be really valuable investors. If customer policy doesn't restrict them to make investments, these can be the founders or employees (your direct client) of the customer. They are more likely to have time for you and can provide you great insight. In addition, it's a great proof point that your customers are investing in you. Most institutional investors will feel more confident about your product.

If you have the option to choose, it's better to have a balance of the above buckets. And again- the most important part is they should give founders their time- at least one good discussion in a month. This expectation should be clear from the beginning. Most angels I know will respect that. 

One committed investor is better than a few names, even big ones. Your equity is as valuable as you want it to be! 

All the best raising your seed rounds.