The Problem with Party Rounds

Posted on Sep 1, 2011 | 79 comments

The Problem with Party Rounds

Collecting logos. It seems to be all the fad in the startup and VC world these days. VCs are paying up at enormous prices to say that they have GroupOn, Facebook and Twitter on their roster irrespective of whether they really venture funded them or bought in late stage.

And entrepreneurs are working hard to make sure they have as many VC names and famous angels on their cap table for signaling value. As a result they end up taking money from many firms all at once.

I call this collecting logos because it seems that having fancy brands to brag about trumps the logic of maximizing the value of your investor. Here are the problems that I see increasingly crop up for entrepreneurs in collecting VC logos.

1. Leaderless rounds
Let’s say you’re raising $1.5m and have 5 different VCs kicking in $200k each and 10 angels taking the balance. There is really no “lead.” This is a problem. Every corporate transaction you’ll do will require somebody to help you to: Think through the options, negotiation terms, get other investors on board, talk with new investors/partners/companies you’re acquiring, etc. With no lead it’s hard to get somebody to play the role. Everybody assumes that somebody else is playing parent.

Even if you’re super successful there will at times be dissent on issues like: Firing founding employees, increasing the size of the option pool, putting in place provisions about selling on secondary markets, agreeing controversial “bet the company” strategic biz dev deals and the like.

2. Not enough skin in the game
When investors don’t have enough capital at work – enough “skin in the game” – then you’re simply going to get less of their individual time and attention. I know they’ll all tell you otherwise. But think about it logically. Even if they emotionally want to spend time with all their children it’s hard not to prioritize your huge financial winners. Or at least companies where you have enough money in the deal and enough ownership that it warrants rolling up your sleeves and doing the hard work when things aren’t going well.

3. Nobody’s head on the chopping block
The biggest problem with leaderless rounds is that no one individual has their head on the chopping block if things aren’t going well.  “Yeah, that wasn’t a ‘real’ deal for us. We just kicked in $200k. It was seed.” That’s what they’ll be saying to other VCs or their partners as your company is flaming out. If the deal has just one investor, for example, there’s absolutely no hiding for the investor if the company fails. You’re more likely to get their attention.

If you had taken $1.3m from one investor or $650k from two then they would be a lot more accountable. Their partners would see it as “their deal” rather than a company that just “passed the hat.”

I have had this debate publicly with some other VCs. They say “ownership percentage doesn’t matter.” That’s true. If you invested in Facebook or Zynga. Here’s how a VC thinks.

“I’ve got 7 investments and 7 boards. I own 20% of these three companies that are killing it. I’m going to put more wood and more time behind them. I have these 3 ‘problem children’ that are having some difficulties (founder quit, product has no uptake, Facebook just copied them) but at least I have meaningful stakes. 20+%.  And I have this other company that I put in $500k and own 5% of. It’s struggling. Ugh. What a time suck it has been. It doesn’t look likely that they’re going to succeed. Oh, well. It least is was a small check.”

It’s not going to be so destructive as that investor being unhelpful. The “lack of support” will be more subtle. They’ll send some intro emails to other VCs but they won’t sell hard that someone else “really has to look at this deal. I love what they’re doing.” They don’t do this because a VC has to protect its reputation with other VCs so sending others your problems isn’t going to win them over for more important deals. Read: Deals in which that VC has a meaningful stake.

4. Fights over follow ons
Ironically you also have problems if the company is going reasonably well. See most VCs (let’s say funds $200m or greater) will be putting in their $200k into your round with the hopes that if you succeed they’ll get the chance to write a larger check later and therefore own more of the company. They’re not going to build a successful fund on a 5% ownership for $200k. So as you go out to raise more money you can often find these VCs fighting amongst themselves about who gets to pick up the next round of investment.

I know it sounds like that would benefit you by creating internal competition and higher prices. Trust me, it will become a shit show and you don’t want it.

5. Information leaks
Some people give advice that you should always be open with your information. I don’t feel that way. The more people around the table the more knowledge about your company and your actions are going to leak into the market. Often it’s inadvertent. The investor doesn’t intentionally share all of your good ideas with other companies. But once it’s in their head they can’t “un-think” what a brilliant idea you had. It leaks out in unintentional but very real ways.

Is there any good case for taking a large number of VCs into your deal?

Top 5 excuses for taking many investors in a round
1. “I want as many people helping me in the market as possible.” Wrong. You want a few, highly placed people who are incentivized to work their asses off for you, to shout from mountain tops how much they love you and to think about you constantly.

2. “I want more people around the table to help with the next round.” Wrong. As I’ve said before, too many investors can create problems in downside or upside scenarios. You want motivated investors who have their heads on the chopping blocks.

3. “I didn’t want to have to turn down A,B, C investors. I don’t want them to be pissed off at me or fund my competitors.” Man up. VCs turn down entrepreneurs every day. And VCs are turned down all the time, too. It’s part of the job. If a VC would truly be pissed off at you for not selecting them then you dodged a bullet. If they’re that big of a prick for just not getting selected imagine how much fun they’d be to work with in your darkest hours.

4. “We want some financial investors and some strategic investors so we have to split it up.” Strategic investors are oxymorons. Ask them to be in the trenches with you when the economy totally tanks over night. If you’re company is successful there will be plenty of chances to bring in strategic investors at a later stage when your company is more mature.

5. “We want some investors in New York, some in Silicon Valley and some in Los Angeles to help us with Hollywood.” No. You don’t. You want 1 really strong investor locally to meet you for beers after work when you have strategic issues to go through. You want an investor that will help you interview senior executives for your company. You want an investor who can meet a much broader set of your team than just that CEO. And if you take a second investor it’s OK to either have them be local or cover another important market like NY. But you don’t have to dice up your round like onions.

You don’t need logos. Logos are for insecure people. Just like they were in high school when the cool kids had to wear the right logos on their shirts, shorts and handbags. Show strength & conviction. Make the tough decisions and choose the investors with whom you feel the closest fit. Make sure they own enough to be motivated to work with you in good times & bad.

  • msuster

    Ha. So true!

  • msuster

    I gave several examples in the post. I’ll try to write about the topic you suggested. Thanks.

  • msuster

    It is certainly a risk. I often think that 2 investors is a good number. Makes it easier for them to write checks in tough times – only 50% to continue. Plus, they want to support each other as well as the company. And if one is supportive and the other isn’t, the supportive one can still write a check.

    Trust me, if you’re not doing well having 5 investors in small numbers won’t help you either. Nobody wants to be the only fool who wrote you a follow-on check.

  • msuster

    VC financing is not in its twilight. It will continue to be how startups are funded for the foreseeable future. I don’t see a workable alternative that lasts through booms and busts.

  • msuster

    It’s fine and totally acceptable to raise from a bunch of angels. That’s different. Good luck!

  • msuster

    thank you, sir

  • Peter Cranstone

    Funding is a milestone – not a goal. If you want to collect logo’s then I suggest Customer logo’s are the best ones. 

  • Steve

    Excellent Mark. I’ve always seen multiple partners/investors/VCs/Angles as a sign that no one person or company was will to go all in on an idea. They are hedging their bets and sharing the pain because the expectation isn’t a huge payout, but a minimal loss. 

  • MParekh

    Collecting logos from customers, especially on the enterprise side, can run into the same issues.  Done too often for signaling value, leaving insufficient resources to focus on going deep in key enterprise installations.

    Great post, Mark.

  • MParekh

    Collecting logos also becomes an issue when it’s time to pick underwriters for an IPO.  Has been a bit of a trend this IPO cycle.  Admittedly a high-class problem. But worth thinking through pros and cons here as well.

  • Aaron Crayford

    Suster you’re right… There’s little value in having GRP on my investors page…
    You’d hear such an amazing pitch your nose would bleed and you’d sprang your wrist from how fast you’d reached for the checkbook. Never pitching you is something I’m going to do for your own good.

  • James Ferguson

    Mark  –  your advice is sound and a variation on a theme I learned from a great mentor at the outset of my career – who told me how to look for a job.
    He said – you talk to everyone. you write everyone you know, and you go to every interview (because interviewing is a learn-able skill) BUT… Since you can only take one job, the questions that matter are the ones that you ask ! –

    Everyone has answers, and everyone is filtering. If you don’t KNOW the answers to your questions, and if you don’t know whether this is THE job for you, then it never will be.The way I see it is that taking on a lead investor when I need one (soon for our SaaS) is a bit like choosing from job offers.  

    Yes the interviews should be exciting (even make your palms sweat) and yes you should be well prepared to explain what you can offer, and yes interviewers can be tough but ultimately it is you and only you who can make the decisions on which one team you give your time to.

  • Dave McClure

    agree with the general observation.

    on the other hand, “fractal” distribution with 1 major lead + 2-3 supporting players + N smaller participants / angels can be a reasonable way to structure a round that still has someone “leading” but also multiple players still involved.

    my $.02,

  • David Smuts

    Hey Sus 

    (btw.., just figured out “Hey Sus” is the same as “Jesus” pronounced in Spanish!)

    I have some sympathy for the CEOs going down this route. Simply because it is a headline grabber, it does get you mentioned in the press, impresses people (not the VCs of course) and very likely gets you a higher valuation. I also get what you say about having too many VCs on board without any leadership. I also know I would certainly rather have too many than too few.

    The downside risk of relying on a lead VC (grand daddy, mentor, guru etc…,) to steer the next round and be there for you when times is rough is that so much of the “leadership value” of the lead VC is actually your sponsor partner and not the firm per se. If the partner who truly “believes” in you goes, there too goes the value of the “leadership role” of that VC firm. In other words, don’t hold all your eggs in one basket.

    I know you’ll say a good partner will not only have the full backing of his firm for the company and would do his utmost to ensure that support was in place when he left but I still think there are some inherent risks in relying on a single relationship of company+lead VC. Diversity affords the CEO options, and if he can have a lead VC (with ALL partners support) and at the same time have options available to him so much the better. I guess we could say it’s hedging your position.

    Again, it goes without saying….., superb post Mark

  • Jan Schultink

    Sorry my use of language as a non-native English speaker. I fully agree with you. With twilight I meant “in between”.

  • Anonymous

    The problem with logos is that they work – why else would people do it? The insecurity is shared by the funders and the entrepreneurs. Doesn’t mean it’s good.

    Very early in my startup career, a seasoned exec told me: investors are like sheep; they don’t like to be alone (only one in a deal; only one not). I think that is true for 96% of investors. The other think it through develop themes and make investments on their own judgement, not others.

    We recruit based on their preparation for the role, alignment with our vision and fit with our culture. We look for big kids who can make their own decisions and have authentic judgment on our situation.

    That goes for the lead investor too.

  • HumphreyPL

    Ahh great to know. Thanks Mark. Unfortunately the other bad thing is that Angels in Australia tend to ask for 25-30% in the seed round which isn’t great but don’t really have much of a choice. The business includes funding some hardware in the beginning to assist with customer acquisition.

  • Robert Thuston

    Well said.  Especially the “man up” mentality, as well as the specific comment on the investor support team you want:

    “You want 1 really strong investor locally to meet you for beers after work when you have strategic issues to go through. You want an investor that will help you interview senior executives for your company. You want an investor who can meet a much broader set of your team than just that CEO. And if you take a second investor it’s OK to either have them be local or cover another important market like NY.”

    Mark, thanks for the PRACTICAL advice.

  • dissertation

    cool post! thanks alot for sharing!

  • Micah Marshall

    Well said. I just read your “about you” page. It must have been great to work in so many different locations. I got to travel quite a bit as a Marine but Im sure my living conditions were different – lol. I wanted to see if you would take a peek @ my LinkedIn page and see if you thought it would be beneficial for us to meet.


  • Hafind


    If you smoke anything,

    If you wait for the deal of the century,

    Good reading, thanks. 


  • Hafind

    Filtering comments? Good.

    Seems you like cyber stuff, is a way to green the web and pocket.

  • Anonymous

    Which start ups have this problem?  If they have interest from multiple top tier investors, then they are doing something right.  With that in mind, I’m assuming that the team is smart enough to leverage the multiple term sheets against each other for the best deal.  Just negotiate hard on the term sheets, a few investors will pull out, the rest will stay in on killer terms for the entrepreneur.

  • resume

    very cool post! thanks alot for sharing!

  • kidmercury

    damn bro you just called a whole bunch of your peers insecure. did they respond? nope. probably too scared and insecure…..

  • Michael Zaro

    Totally true. Two of the moments that led to the greatest confidence boost and personal growth was #1 when we told a major customer “no” and we realized that they were still our customers at the end of the day. #2 was turning down a terms sheet from a group that we realized was simply not a good fit and did not have the best interest of the company in mind. And you know what, we’re starting to kill it without them!

  • Wesley Wise

    I’ve seen some web pages that has most of the leading logos posted on their page, most of them say that these are sponsors. I’m wondering if are these ‘sponsors’ aware that their logos are being published in some web pages?

  • Stewart Craine

    Great post. As a 7-year-old startup that had to raise Series A of $5-6 mill from 70 separate deals, mostly angels, I know the other end of the spectrum. There were a few logos in there, but no US VCs. The other Aussie further down this column will know exactly where I’m coming from – in Australia, it comes in dribs and drabs, and Europe is not that different, especially when your business is with poor villagers in the scariest coutries on the planet. Series B is, thankfully, different, but frankly still hard to find clear lead investors who actually lead. Will write a blog on the worst-ever raise that still survived – crowd-sourcing capital is not fun…! But neither is starving or going bankrupt….!

  • Subramanyam Kasibhat


    I am resisting hard the temptation of even reaching out to first angle or VC! Want to build it all with funds generated by acquiring customers and innovating.

    At times I get to think on the cost of this approach! Am slower than what I want. It would help to see your views on the approach to do it without a VC.