Co-Investors
Most venture deals involve more than one VC firm. In our industry vernacular, we call them "co-investors". The group of venture firms is called the syndicate. How the syndicate comes together is an art and not a science.
Sometimes, one firm will do the first round by themselves, a second firm will join in the second round, a third firm will join in the third round, and the syndicate will get built round by round. That's how Twitter's syndicate got built. Our firm, Union Square Ventures, led the first round and some well known angels joined us in that round. Spark Capital led the second round and joined the syndicate. In the third round, which recently closed, Benchmark and IVP joined the syndicate.
Sometimes, two firms will do the first round together, a third firm will join the second round, and so on. That's how Zynga's syndicate was built. Brad Feld from Foundry Group and I co-led the first round, Rich Levandov from Avalon led the second round, and Bing Gordon from Kleiner Perkins led the third round and was joined by Sandy Miller from IVP.
Note that I started to use partner's names in the paragraph about Zynga. The individual partners involved are really important. While VCs work in firms, and firms do have reputations, it is the individual VC that you end up working with so it is the person first and foremost that you are working with and the firm second. Don't forget that when you put together a syndicate. I've seen many an entrepreneur make a mistake by picking a great firm as the lead investor and getting stuck with a crappy partner on the board. It happens all the time.
But back to the topic of putting VCs together. It's a very tricky process and frought with risk. The best way to solve the problem is to work with VCs who have shown that they can work together successfully.
There are probably five or ten VCs who I have worked with frequently in my career and I know very well and love to work with. It's not hard to figure out who they are and I've been paired with them on many occasions. And that lists grows and changes over time. Bijan Sabet of Spark Capital only got into the venture capital business a few years ago and he and I have worked together successfully on a couple deals now and he would most certainly be on that short list.
In fact, Bijan was interviewed the other day on this very topic by Mark Kathleen Flynn of The Deal. Here's what he had to say about this topic.
There are two great lines in this interview:
"We generally like each other"
and
"You can't fire your VCs"
So in closing, when picking your syndicate, choose carefully, make sure the VCs will "like each other", and focus on the person more than the firm. And most importantly, check out your VCs like they check out you. It's an important choice that you most likely will not be able to change once you've made it.
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Comments (Archived):
Very interesting Fred.Is the onus on the founders or the VCs to put the syndicate together?Is every situation different, or is there a general framework in which (an initial) syndicate is formed?
The onus should always be on the founders. It is their company. The VCs can help but at the end of the day, it is the founder’s choice.
From the entrepreneurial prospective, I thought the concern was more about finding firms that provide more value then just money. The goal is to grow the company – just having VCs that get along may help the board meetings but not much else. Plus, if they don’t like each other – call them out to ensure their professionalism. It would seem that VCs wanting to work only with VCs that like each other – only benefits the VCs – not the company. I would not pass up an opportunity to have a VC on the Board that can open many doors just because he/she does not get along with someone else on the board. Having both (great VCs that get along) would be idea – but may not be practical.
Value added investors are nice but not essentialvalue subtracting investors are death
In your own post here: http://bit.ly/MbDPS you mention that the VC business has “got too much money in it, not too little” Supply and demand dictates that a savvy entrepreneur should only engage with investors that have something to add beyond cash.
I agree and that’s what I sell every day and hopefully entrepreneurs will buy thatBut I want to amplify the point that picking a bad VC has really adverse consequences
Fred i have two questions> how can a fund be great if it has a crappy partner? or what do you mean by crappy (unadapted to the specific deal?) usually funds are very small companies where each man matter. I can’t imagine a great fund without a great great team at partners level> unrelated (a little with the video) why tumblr, that i like a lot, does not offer comments in its blogging system?
Comments are a bid deal to david. He doesn’t like the way they work and he wants to come up with better forms of engagement. I hope he does but I don’t share his views on that oneThere are plenty of bad partners in good firms. I can’t and won’t name names
happy to hear that, right now i had to tweak tumblr with disqus (which is agood news for you .. 🙂 ) but i think it has to be a native feature orstreamline disqus integration.re names: i understand that. From my very little VC experience i rarelyfound a crappy partner in a great VC. but again i don t know enough
Having raised money numerous times I can tell you that the right person is by far the most important aspect of the process. The overall terms and deal structure are a distant second, which might surprise some people.
So true. And its important for VCs to be honest with themselves when they are the right person for the investment and when they are not
its all about the person. Yes the fund might add some PR shingle to your financing, but like any other business this is about people. When around money – the need for good people is amplified.
When I made the decision to get into the venture business towards the end of 2004 I made a few promises to myself. I would only invest in entrepreneurs that I would get along with personally. And I would try my hardest to find co-investors that I would enjoy working with and respect.As a former entrepreneur I’ve seen first hand a few times how awful it is when you have a PIA on your board or when the VCs dont’ get along.I’m lucky to have the opportunity to work with you and Brad. Thanks.
We feel the same way Bijan
Just applied for Start@Spark for http://www.jauntsetter.com. I’ve vacillated for awhile on whether to seek funding or not, but after reading about Foodzie’s inspiring experience with TechStars, decided it made sense. It’s good to know who you are a fan of, and nice to see your exchange with Bijan here. While i have no idea if he’ll ever see my application, still gives me a little hope about the whole process and re-confirms for me that the airport test* applies everywhere.* I always used to use this in my last job where I did a ton of hiring as a final step of sorts: would I want to be stuck in an airport with this person? If the answer was no, then I didn’t want them on my team. Sounds overly simplistic and visceral, perhaps, but the one time I didn’t listen to my gut instinct on that one, I paid for it.
He will see it
i actually meant “genuinely” not “generally” in the interview!
You need a new investor at each round to re-price the company. Right?
Ideally but we do that ourselves sometimes
Smellr: Flickr for your nose.Brevity by Fred Wilson is my favorite…
Posted to fredwilson.vc just in time for april fool’s dayThanks!
Interesting. Im really interested in the world of VCs. Seems like a really fun business to get involved in down the road. Being a finance major and at 1st wanting to get involved in the stock market. VCs and investing sounds 10x more exciting.Looking forward to learning more.
Nice advice, good interview, GREAT player. 😉
Interesting!
I’m pretty sure the wonderful woman’s name is ‘Mary’ Kathleen Flynn, rather than ‘Mark’.I spent a minute trying to figure out how someone would end up with ‘Mark Kathleen’ as a name 🙂
Oops. Typo
This post is very insightful. I have a couple questions. What happens when VCs do not get along? What is the source of the disagreement? What is the outcome?Are there any differences between entrepreneurs who choose syndicated investments instead of single VCs?
When VCs don’t get along the entrepreneur is often caught in the middle. Its not a good place to be