VC Syndicates: How Many VCs Is Too Many?

One of my mentors in the VC business used to say "the success of an investment is in inverse proportion to the number of VCs on the board."

I love that line and use it often. One or two VCs on your board is OK. Four or five is a disaster.

But beyond the board, what about the syndicate? I've seen some recent financings where there were six or more VCs firms in the syndicate. And that doesn't include the angels.

We've been asked to participate in first round syndicates with four or more VC firms and we have not done that, at least yet. I thought I'd explain why.

Most entrepreneurs don't want to dilute more than 25-33% for a single round of financing. And good for them. They shouldn't.

Let's take the high end of that band (33%) and divide it by four, or five, or six. If you have that many VC firms in your syndicate, then each one will own something like 5-7.5% of the company. That's not a lot of equity for most firms.

Each firm will want to increase their ownership in the future rounds so there will be pressure to do an inside round. That can be a good thing. But there will not be much room for a new firm to price and lead the round. So you've basically pre-built your syndicate for the long run without the ability to add new investors.

And you've also created a dynamic where no one firm has enough equity to be totally focused on the investment. The various firms may all be looking at each other expecting someone else to do the work.

Some will say that VCs will just have to learn to live with less equity and that sub 10% ownership is OK. I've posted before that you can make good money with sub 10% ownerships so I totally buy into that argument. But that will require the company to be a big hit. You can't make good money with 10% ownership on an average investment.

We prefer to invest alone, with one other firm, or with several firms with one additional firm being added in each round. That's the traditional approach and I think it is still the best approach. The pile on seems to be gaining attraction for both entrpreneurs and VCs. But I don't think it's the best way to finance your company and hope that our firm can avoid them.

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