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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#VC & Technology

Comments (Archived):

  1. infoarbitrage

    Fred, it will be interesting to see how this plays out. IA Ventures has co-led with 2 other firms in a small, capital efficient round. In these cases only 2 of the 3 firms take a board seat, with the 3rd having observer rights. We have also led and invited in 2 firms to participate on a smaller level. It will be interesting to see how these dynamics play out over time. My theory is that with up to 3 firms at the table early, each of which is willing to work to help the company, then it should be de-risking to have a slightly larger institutional syndicate. And with 2 firms taking board seats, the dynamics surrounding inside rounds are no more stressful then they are in most cases with a straight co-lead structure. Would I have 3 VCs on a board early? Absolutely not. Is 2 ok? I think so, and so far my experience has been positive in this regard.Roger

    1. Fred

      We have done these three way deals roger. They can work wellBut that’s the upper band of my comfort zoneLooking forward to the big data conference

    2. Mark Essel

      Continually iterating the model, good to see Robert. The complex adaptive system of venture investing bears strong resemblance to other naturally organized systems.

  2. LIAD

    if pile-in’s effectively prevent any single VC from having a large enough stake to really roll their sleeves up AND lock-out additional VC’s joining in later rounds, perhaps also creating an artificial price ceiling – what’s the main appeal of them for entrepreneurs save for the obvious ego enhancing one?

    1. ErikSchwartz

      In a previous company we ended up going one with 3 firms for a 1M round because of geographical reasons. The firms where we were are very small, we essentially had every single VC in Maine in the syndicate because most of them only invest 250-500K and had very small reserves.One could argue that they’re not really VC firms, they’re more like angels with all the downsides of VC.In retrospect we should have moved the company to Boston.

    2. fredwilson

      You got meI don’t get it

  3. Andrew Romans

    Fred, I disagree with you for some deals from both the perspective of the VC and that of the entrepreneur. for a capital intensive deal such as a biotech, cleantech or ambitions D2C mediatech deal both the investors and management should hope to get enough cash around the table from day 1 – Series A to get to the finish line. if one fund is nearly out of cash they should not be invited to the series A party. I don’t want to see a pay to play problem down the line and nor do the VCs. For these type of transactions deep pockets and clubing up is a good thing.From the perspective of a successful serial entrepreneur she may want to establish a “balance of power” from day 1 playing the ueber egos of the VCs off one another and establish a trans-Atlantic syndicate.Counting percentages is not the point. IRR is the point and getting into carry while you are still youthfully healthy is the point for the investor. Clearing liquidation preference and not letting your VC’s pressures direct bad BoD decisions is the point for a veteran entrepreneur in cases of the large syndicate.Andrew Romanstweeting @foundersclub

    1. fredwilson

      I see your point about capital intensive deals. I wrote a post a few weeksback outlining the two different VC industries – cap intensive and softwaredriven. I an happily in the latterAs for your other points, I don’t want to be in a fake partnership with anentrepreneur. Clearly some VCs don’t care about that

  4. Harry DeMott

    You are certainly right about one thing – which is that it is very hard to get an outside round done with a lot of insiders around the table – unless that round is priced high enough – or is large enough – that the existing guys feel that they are protected (either little dilution – or the ability to put more $ to work).Another dynamic that you don’t mention here is how the balance of power can switch in situations like this from the VC’s to the management – as it becomes easier to split the interests of the VC’s depending on where they got in – and how much in reserve they have.

  5. Peter Beddows

    I’m inclined to agree with you in principle Fred, particularly along the lines that “too many cooks in a small capital deal”, such as many web ventures seem to be today, may even lead to a possible scenario “diminishing returns”, not in exit equity value per se but in the effective value of VC experience and expertise that would subsequently get contributed to the venture that is often just as much value to the founders and the venture’s potential for success as is the cash injection.On the other hand, as Andrew Romans suggests, if the venture requires significant levels of capital investment as more likely would be the case with a Biotech, Cleantech, etc., type venture, then the need to share the risk along with the need for substantial capital may, by the very nature of such an undertaking, require a syndication approach to funding but, historically if I have read your posts correctly, such high-cash, non-web based ventures do not appear to be the kinds of business ventures that your firm would typically have an interest in pursuing.

    1. ShanaC

      Are we building large scale web products efficiently- I mean they have to scale rapidly and we are seeing complaints for a number of products. Further, I keep wondering if consumer web trends will come to pay off in business web land- it hasn’t quite yet, and that is a shame. It also needs hire investments initially.

      1. Peter Beddows

        It does seem that there is a tremendous amount of “web app and business development” going on right now across the country from prodigious Y-Combinator output in SF to plenty of activity in LA and even some here in San Diego together with obviously a lot of development activity going on from Boulder CO to Boston and NYC amongst several other centers of development activity ~ almost at, if not actually more than, the level of web development at the height of the dot-com era.No doubt that some of these developments, such as Tereza’s HonestlyNow, address a very interesting personal service based need that should appeal to a significant audience in due course and its type of service offering probably separates it from the more general social media applications but with so many in the mill at present, one cannot help but wonder if there is going to be one heck of a race ahead for any of them to quickly realize any significant market share and certainly the competition will ensure that they will face serious challenges in reaching for the kind of results that fb or twitter have accomplished in the effort of attracting a critical mass of users and ultimately yielding an exit valuation of any substantial size.It is going to be interesting to watch.

    2. fredwilson

      Yes to everything you say. You nailed it

  6. Guillermo Ramos

    I think all depends on the VC strategy: very hands on approach, “spray & pray”, opportunistics, etc. The key question is the role that each VC will play after the investment, as there are some VCs not willing/able to be active.

  7. RichardF

    I’ve seen boards with 6/7 VC’s represented (Biotech, and as a result of at least two rounds, not a single series A) and the investor relations work that the CEO has had to do in that situation was a full time job and a real detriment to them running the company. Board meetings weren’t much fun either!Difficult to be an added value VC in that situation also.

    1. fredwilson

      Ughh. Sounds like a root canal

  8. JLM

    From an entrepreneurs perspective, the unsaid issue is the effectiveness, expertise and behavior of VCs as board members.There is no end to the “added value” sagas that some specific VCs can bring to a board — they are after all watching and protecting their own investment and that is a great motivator to pay attention.Having sat on a number of boards (public, private, non-profit, trusts), I am frankly a bit surprised to see the lack of value given to appointing a “professional” board member to represent the VC’s interests.I think that VCs miss an opportunity to tap into expertise — expertise which VCs often simply do not possess having not run businesses in many instances — available from retired business persons.The care and feeding of boards and the effectiveness of board members is a subject of which an entrepreneur should be a diligent student.

    1. akharris

      We’re trying to figure out exactly what to do with our board now (though we’re starting with our advisory board). We’re breaking that up into our needs, and then trying to find appropriate people for each. For instance, we’d like to have a teaching expert – so we’re talking to highly experienced teachers with knowledge about school systems.My question is how you really figure out if the person you’re talking to is “right.” I have a better sense of how to do that with employees, because I’ve seen what good and bad look like from a hiring perspective. How do you figure that out for the first time with a board of any kind? Do I just need to build that experience?

      1. JLM

        The CEO is going to be working for the Board, so in some respects you are hiring your boss.I think you are on the right track looking for industry experience in the company’s arena or industry. But be careful not to value somebody who knows how to turn a wrench the same as somebody who knows how to be a CFO for a plumbing company.Finding board members is like finding a wife. You know it when the right one comes along. BTW, never sleep w/ a board member. Just kidding!I think it is equally important to follow simple rules for meetings, keep exquisite files and generally respect sound corporate governance rules for boards. Committee assignments are important — nominating, compensation, audit, etc. Stay away from “operations” committees.Get to know your board members away from the board setting and visit individually w/ them when you have a contentious issue to come before the board. Don’t ever ask a question that you don’t already know the answer to.

        1. akharris

          Great advice, thanks JLM.That last part is going to be especially tricky. I love asking questions to which I don’t know the answers. But that’s really about learning and gathering knowledge (you should see some of the emails I send to our CTO). This is more about making decisions relevant to your company, and you need to know where each of the board members stand ahead of time. There’s some necessary politics in there, but I think it’s more about gathering intelligence. You can cross a river without scouting for a shallow point, but there are way better ideas to go about it.Still, though, do you find that once a discussion is open in front of the full board, it will often get away from you? Best laid plans and all that?

          1. JLM

            Send out the board meeting agenda and materials well before the board meeting.Call each board member to ensure they have received it and initiate a conversation on any potentially divisive issues. Get their take on it and carefully count noses.Go to lunch w/ your best supporter and your biggest pain in the butt.Manage the meeting carefully.

          2. Peter Beddows

            “Go to lunch w/ your best supporter and your biggest pain in the butt” … at the same lunch table or on different occasions?I’m in favor of the “together” option: You’d probably learn a lot more but you would need to be a skilled diplomat would you not?

          3. JLM

            Two countries separated by a common language.While it certainly would be fun, I caution to have two lunches separately with each.The danger of the word “and”! LOL

          4. Peter Beddows

            Thank you. I almost missed your reply JLM, having been out of the office most of yesterday and dealing with a consequent backlog today but I have to say that I loved it. I could even add that the language dyslexic is further exacerbated by the fact that you are now in Texas and I’m now in California: What a combination! {grin}Re the questions of lunching: Yours is a doubly good answer ‘cos I enjoy taking people to lunch, even breakfast and/or dinner: Talking over a meal can be so enlightening; giving appearances of being relaxed while asking searching questions and listening intently and carefully to results. Doing just that was just one invaluable aspect of yesterdays activities that took me out of the office.I’ve always considered myself to be far more of a people person than I ever would be a computer nerd. In fact, I originally got involved with computers – aside from an early electronic building project – only as just another means to a business end: They are just another vehicle like a car ~ that’s probably a sacrilegious statement to someone like Mark Essel and any one that loves Ruby? LOL

  9. reece

    in surfing, this is called a “party wave.”the lineup is crowded, everyone wants a piece, and when the wave comes, everyone takes off – dropping in on and snaking each other and there’s no room for anyone to do anything cool. the result?despite being called a “party wave,” no one gets to have any fun.back to VC – i do wonder if more VC’s co-investing will lead to more transparency and reputation building (a plus for everyone)… and who knows? perhaps this will impact/change the investing model/norms altogether.p.s. – here’s the extreme example…

    1. JLM

      Old School 14′ Hobie days — first guy to make a bottom turn owns the wave. Guy to the left and on the bottom has ROW on right break. Guy to right has ROW on left break.Saw plenty of fist fights when somebody turned above a rider.Those old big boards were dangerous and less maneuverable than the little ones in use today.I get a kick out of seeing what goes for a “long board” today.I still sport the scars from ulcers earned from knee paddling.But those were the days!

      1. reece

        Interesting – never heard the 1st bottom turn clause…Love those big ol’ boards though. I worked in LA for a while and got to surf a 12′ Robert August (that belonged to a friend who was still surfing at 82!) on a great point break North of Malibu. So much fun on that thing…

        1. JLM

          I never could afford the “best” cult type boards. I remember with great clarity what it took to buy that $150 Hobie and it was my prized possession for a great number of years.82 and still surfing, wow!You need some real waves to make a big board perform. I spent a month at Rincon (PR, not Point) — heaven!

      2. akharris

        I’m waiting for the comment on which you cannot post authoritatively. In the last week, I’ve seen: choosing a board, options plans, welding, oil rigs, and now surfing.

        1. JLM

          I’m a little light in my loafers on social media! And I know nothing about coding having last touched that subject w/ something called — Fortran! LOLI know a lot about a little and little about a lot. But I am trying.

          1. fredwilson

            I put myself through MIT writing FORTRAN code

          2. Mark Essel

            I began with c and fortran in 1996, but quickly moved to c++, and stuck with it since then.Now I’m amazed at what some of the higher level languages are capable of, in such a terse and syntactically pleasing format (ruby, javascript, python)

        2. fredwilson

          He’s the MVC for a reason

    2. fredwilson

      That’s awesome ReeceI will no longer call this a pile onParty wave is so excellent

  10. Hemang Gadhia

    I think part of the issue is that (at least for a seed round) entrepreneurs have had it beat into their heads that more VCs is better because of signaling risk and more leverage for the next round. While there may be some truth in that, I think that it misses some of the negatives. In addition, there has to be a mutual understanding of both parties’ needs and entrepreneurs should understand that one of the things VCs need is to get to a decent equity stake after all is said and done in order for the investment model to be sensible.

  11. DGentry

    Do deals with 5+ VCs mean that none of them thought it was a great investment, but went along for other reasons?

  12. akharris

    Aside from the negative effects on the advice/leadership aspects, do you think that larger syndicates yield artificial inflation on valuations? I know that in a public market, when everyone wants to buy something, the price goes through the roof. When a lot of people want it bad, that price loses it’s relationship with reality. The closest analogue to VC funding I can think of from that perspective would be LBOs. Look at what happened to RJR Nabisco – the ever larger syndicates of circling buyers drove valuations and debt burdens to reasonably absurd levels.I’d picture similar things happening in highly illiquid VC scenarios as well, though, perhaps, more so. If you try to fit everyone into the same tent, then everyone wants to make sure it’s worth their while, which means that they’re going to expect a lot more value than they might have otherwise. Is that right?

    1. fredwilson

      Price irrationality does often go hand in hand with the “party wave”Thanks to Reece for my new name for this phenomena

  13. Dan Ramsden

    I wonder if this “pile on” trend is happening as a direct result of the micro-VC bubble that is beginning to emerge… one of the basic tenets of which is to “spray and pray.”If the thesis is to invest in many, many deals, (like, 50+ per year, or more), then it is impossible to diligence or even take charge of more than a small fraction of these, individually. So maybe some investors take comfort in syndicates, hoping that others will pick up the slack. Unfortunately, I think the slack is as a result prone to be unpicked altogether… because there is really no lead and ultimately no accountability. What’s worse, everyone assumes there is.In many ways, this environment reminds me of that which led to the sub-prime mortgage bust, which is rearing its head again (i.e., foreclosure moratorium) because of botched up paperwork.

    1. ShanaC

      That, and because so many of these companies are so small, I think even smaller than in previous periods of time.

    2. fredwilson

      They are related phenomena

  14. ckemper

    So very true. This above is exactly why this latest trend of bigger VCs investing in small club rounds is a disaster in the making, both for the entrepreneurs as well as the VCs investors (the LPs). VCs claim that they’re investing in these early angel/seed rounds for the optionality of later rounds, but that’s clearly a theory that’s not practicable in reality. Insider-led rounds are rarely a good thing for the founder/common shareholders or a feasible thing in great or poor times.And, for entrepreneurs, having too many VCs in a club early on somewhat precludes you from bringing new VCs on down the road, which comes with new & different thinking. VCs will make all sorts of arguments of their value add, but ultimately a company should expect very little from a VC that’s historically invested with substantially larger check sizes from the same fund. In fact more bad than good can come from this in my experience. If a deal is a good deal, then the VC should be wanting to take up as much of the round as possible (ie, either you believe in it or you don’t).

  15. chris dixon

    Great topic. I assume you are talking about the “VC party angel rounds” like Pulse. As you say, a few things will play out:- No outside VC will price the round since they will obviously just be stalking horse- No more than 2 inside VCs will be able to lead and get to their customary minimum 15% ownership- If the company is killing it, they will be fine and get a good valuation. If the company is doing badly, they’ll probably die. As usual the interesting cases will be the 80%+ of companies that are doing pretty well.- In most of these cases you have some VCs with better reputations than others. Their posture will have a heavy impact on the other VCs decisions.- My guess is that the ultimate game theoretic outcome is having ~5 VCs will be a signal amplifier. Hence the variance for valuations in the next round will be greater. In a bidding war the valuation could get higher than market price, and in the negative signaling cases it could be lower or no financing might occur at all.

    1. Matt A. Myers

      “My guess is that the ultimate game theoretic outcome is having ~5 VCs will be a signal amplifier.”So are you suggesting this would be a good or bad thing? Depends if in a negative or positive situation?Why do you think in a negative situation it could be lower to no financing? Would fewer VCs being involved be more likely to want to try to save the investment? I’d hope I’m never in this situation of course, but just trying to understand.I always enjoy reading so I’ll try to pull as much from you as I can, graciously of course.Thanks.

      1. Mark Essel

        If the higher rep (defacto lead) doesn’t want to compete/invest for any reason the other VCs will follow. And since there’s no outside investors coming in, there’s no funding.

        1. Matt A. Myers

          Fair enough, thanks Mark.

    2. Hemang Gadhia

      Don’t see the negative signaling as an issue. If you have ~5 VCs in your earlier round and can’t get any of them to follow on, your business probably has issues and should be retooling or unwinding anyhow.

      1. chris dixon

        I didn’t say none of them would follow on in a decent/good company, just that valuation would have a wider variance than if you had a true market process. If Sequioa + 4 lesser firms invest and Sequioa decides not to follow on, the company may get funded but valuation will likely be lower than market value.

        1. Hemang Gadhia

          Totally fair point Chris. This is why my mom told me to be careful about the company I keep. Or in this case, the VCs that I choose.

        2. ShanaC

          But that’s a larger issue with how startups are built today, I’m not sure they’re built for massive size/eat up the world. I keep thinking we’re in an R and D bubble.

          1. Matt A. Myers

            Some are built for massive size/up up the world. 🙂

  16. PhilipSugar

    I can’t imagine getting five people to agree on anything.I especially can’t imagine the time sink. In my experience every investor no matter how small feels its their right to call up and ask specific questions/require some specific form of reporting/have some other demand for time like going to meetings/talking to a portfolio company etc.If you’ve done multiple rounds implying you are now quite big you’ll a staff to deal with it…but out of the gate??I’m not busting on investors here I’m just pointing out a fact. The same holds true if you had a ton of people give very small amounts of money in a friends and family round. Its really hard/people don’t like hearing it to tell somebody that’s given you money…..look I know from your perspective your request is the most important thing in the world, but sorry there are only so many hours in a day so you can go take that request and pound it in the sand. That is much more polite than just never doing it, but I guarantee you aren’t going to make friends either way.

    1. Peter Beddows

      This expands upon just one of the issues to which I was referring in my “too many cooks …” comment earlier.

      1. PhilipSugar

        Totally right and all of those cooks are “inside” your company. Inspired me to write a post about getting “outside” your company.

        1. Peter Beddows

          Where did you make that post Phil or is it a work in progress yet? Like to read it.

          1. PhilipSugar

            justanentrepreneur is my blog. I prefer to post reply’s much more than original content, but occasionally I get inspired to post. I have no idea how Fred is so creative.

          2. fredwilson

            I insist on writing something every day. I work at it

    2. Matt A. Myers

      I never thought about investors calling to check up … but now that I have, I can imagine I’d like it; It’d be a good motivator and chatting for me focuses me and gets me on track.

  17. Eric Leebow

    This is an interesting post! I’ve seen entrepreneurs recruit 10 smaller investors, and it looks bad as they don’t have one main VC investor on board, and then they will have all these investors to turn to someday. Less investors with more of an impact can be more, as it will have a greater impact on the long term and future investors. Google is a great example, they just went from an angel investor in 1998 to 2 VC investors, and then have subsequently made the company grow from there, and IPO in 2004. A lot can be said about that, as well as it’s IPO.

  18. Mark Essel

    This post arouses fond memories of the Garett Whore Mansion. Please don’t be put off by the crude title. The mansion was a ludicrous and fantastic location in an old rpg I played with friends. The building was impossibly large containing entire nations within it’s boundaries. One of the thematic events was a periodic thundering herd of female joggers that would surge through the area bringing havoc to all who would stand in their way.Pardon the non sequitir, but the image of so many investors greedily jockeying for control of a startup just fired off those neurons.

    1. Peter Beddows

      Again expanding upon just one of the issues to which I was referring in my “too many cooks …” comment earlier.

  19. msuster

    Thank you for writing this. I find myself coaching entrepreneurs on this point at least once / week now. I usually say, “if you become Zynga then all of your 7 VCs will list you in their Twitter bio and in their fund raising decks but if you’re like 99.8% of businesses and things take longer to work out then your 7 VCs will naturally start spending their time on businesses where they own a larger percentage. What you will have is no leader to take charge.”I understand why people who haven’t seen these things play out would feel otherwise. I once did. In my first company I had 9 investors. In my second company I had 1.

    1. Tereza

      Hey Mark. From pure logistics, the thought of managing 9 investors — plus customers, employees, etc. — gives me hives!Less is more.

      1. Peter Beddows

        Interesting way of picturing that scenario Tereza but certainly makes the point clear: Agreed.

        1. Matt A. Myers

          She has a way with words. 🙂

    2. fredwilson

      excellent pointon Zynga, the first round was co-led by USV and Foundrythe next round was led by Avalonthe next round was co-led by KP and IVPi don’t think there are any other VCs in that dealbut those five came in over multiple rounds

      1. Matt A. Myers

        Is that because that level was their expertise or you all kind of took a round of leadership to do your part?

        1. fredwilson

          Its hard to say why it happened that way

          1. Mark Essel

            Maybe another post, or just details of what leading rounds means for VCs when they all have to pay up for each financing.

  20. jv

    I understand the economic incentive, but I’ve always looked at this as an issue of control. When my first company was in the process of raising money, partners at VC firms and Angels had a lot of side chats with us like this:- Angel: If you take money from Angel A, I most likely won’t invest. He’s created too many issues in Series A negotiations when he’s allowed to talk, and tanked a few deals.- VC: If you take money from Angel B, we most likely won’t invest. He’s created issues with other financings for us in the past, and its not worth dealing with him again.- VC: If we invest, we’re mandating a board seat. If another VC invests, they’re going to mandate a board seat too. If a third invests, etc. We’re not going to let another VC have a board seat if we don’t, and we’re not going to have a situation where you’re adding board seats to offset this.Perhaps these were all techniques for scaring us into not divvying up the round , I’m not sure. But the arguments were all valid , logical , and backed up by their previous dealings.

  21. Chris McDemus

    I think that 3 firms in a syndicated venture round is the cap. Beyond that, I think you can run into potential issues. If you have 3, it is likely that all of them have worked together before and you don’t have to waste any time with everyone adjusting to how the other firms interact and conduct their business. If you get beyond 3 firms in the syndicate, it’s likely that some of those firms have not worked together before and the group dynamic could be questionable. Especially when the shit hits the fan, like having a down round. In the early 2000’s I saw a few deals with the larger group where no dynamic existed and the down rounds that occured back then were toxic internally because dividing lines were drawn. From the administrative side, having more than 3 is like herding cats when it comes time for consents, scheduling board meetings and the like. This is particularly true if no one VC owns enough of the round to make the call under the financing documents for the entire Series when it comes time for approvals. I’ve also seen the scenario where you have 5 or 6 funds, with one having the bulk and the balance only having like 10% or so and, in my experience, some of those 10% owners require more hand-holding than their 10% was worth.As it relates to board size, my opinion is Series A and below never more than 3 board members (one VC, CEO and either a joint appointment or appointed by Common Stock). Series B and beyond never more than 5 members (two VC, two Common Stock (with one usually being the CEO) and a joint appointment).Chris

    1. fredwilson

      All spot on adviceI will add that VCs, like everyone else, show their true colors when theproverbial shit hits the fan

    2. Matt A. Myers

      Great blog roll – some names you’re missing, but keeping it in mind. 🙂

  22. Ethan Stone

    The trend to larger syndicates both reflects and encourages VCs relying on others’ participation to justify theirs. There’s legitimate comfort in knowing that people you respect will be helping the company develop and that they agree with you on the company’s prospects and valuation. The downside is the temptation for the people involved to loosen their investment discipline, knowing that they’ll have a good excuse if things go wrong (“X and Y thought it was a good deal, too”). Anyone who is mainly relying on a stake in the carry to get paid is still likely to be focused on success, not excuses, but not everyone involved may be in that situation. That’s especially true as the funds get bigger, the management fee gets more significant and the pressure to invest the fund builds.That’s from the VC side. From the entrepreneur’s side, I agree with the comments above: The downsides of lots of investors who need attention, make trouble, and might suppress participation and valuation in future rounds, but who aren’t very motivated to help, seem to outweigh any upsides. The only exceptions are if the capital needed for the round is so huge that a small number of VCs just won’t be able to pony up (even if the investment is broken up into tranches tied to milestones) or if each VC is adding something very specific and important, other than capital.

    1. fredwilson

      Investing in something because someone else is investing is stupidIf you can’t evaluate the opportunity on your own you should not beinvesting in the sectorInvestors should invest in what they understand not what others understand

      1. Ethan Stone

        Agreed. It is worth considering why people might be doing it if it isn’t a good idea. My general point is that the bigger the group, the greater the temptation to slack off, both in your investment discipline going in, and in your supervision, mentoring and assistance going forward. You don’t have to set out to rely on other people’s judgment to fall victim to that temptation.

  23. riemannzeta

    “One or two VCs on your board is OK. Four or five is a disaster.”There’s some psychology research on group decisionmaking that suggests that three is the optimal number for most group decisionmaking. Beyond that you get redundancy or personality dynamics that dominate.

    1. Matt A. Myers

      Specifically for VCs or any group maybe larger than 3 but including 3 individuals with same expertise / interest?

  24. herve

    I was about to say that ideally you should have one new VC per round, so 1 in round A, 1 in B and after round C you do not need VCs anymore but later stage animals. Each one would fix the price per share of the new round. Then I looked at my archive and saw that indeed it is more 2 VCs in the first round maybe as someone said above to dilute or balance the VC ego. Google was a good example with KP and Sequoia in the B round after the A (angel) round. Now Yahoo only had sequoia in the 1st round so did Cisco. But Atheros had Foundation and August in the A round and then NEA in the B. Sun had USVP and West Coast in the A then Kleiner and TVI in the B. In Europe, Skype had Mangrove and Bessemer first then Index and DFJ. mysql had local VCs first then Index again and Benchmark. So I would not be surprised that the real success stories had a maximum of 4 VCs at the exit. Let us agree on max. 2 new per round and you have some historical perspective. My experience is that already 4 VCs is really tough to handle for everyone… 6-7 is just a nightmare you want to avoid!

    1. fredwilson

      Great historical data analysisThanks for doing that

  25. Gaurav

    But, all the involved investors will try and gain out of their already invested money. There might be more rounds of wishful thinking, but that will eventually help the company in focusing on their positives.

  26. William Mougayar

    What’s the ideal partner firm you would invest with?

    1. fredwilson

      there is no ideal

  27. Mohan

    Mr. Wilson, have you seen Steven Carpenter’s teardown of the Etsy business model, if so what do you think of it?http://worldaccordingtocarp…Thanks

    1. fredwilson

      i had not but let me tell you that it is an impressive piece of workwow

  28. paramendra

    “The pile on seems to be gaining attraction for both entrpreneurs and VCs.’ Groupthink? Herd behavior? The lazy way to invest?

  29. paramendra

    But I will not say yours is the final word on the topic. With the recent angel, super angel phenomenon, and the fragmentation and the specialization, and the more hands on stuff, maybe there is something to the fish schools. I don’t know what, but I would prefer not to jump to conclusions. You obviously have a great track record, and these are words of wisdom, but I would be on a look out for some emerging micro trends.

  30. Hana

    Hello all,building on this conversation, I wanted to add an ‘academic spin’ to support some of the arguments circulating in the comments with empirical evidence. There is a study (not mine) that examines VC investment decisions in U.S. ventures founded between 1989 and 1993 (and tracks their exit events through 2004).Relevant to this discussion, the study finds that large syndicates not only (1) DO NOT enjoy higher success rates (as measured by IRR) but in addition (2) suffer difficulties in termination of the investment (hence the title of the study: “throwing good money after bad”). Moreover, the author finds that:1)the likelihood of a VC firm terminating an investment declines as it invests more rounds in a venture, even though the probability of success and the average IRR also decline. In short, on average, it turns out that VC firms may not behave so as to maximize profits in sequential investment decisions (despite the best intentions to do so!). 2)larger VC firms (higher number of employed VC professionals) may not necessarily enjoy higher rates of success but may be adversely affected by the increase in intraorganizational politics If someone is ready to digest 39 pages of academic text, which offers both qualitative interviews with VCs, and empirical evidence, here is the reference:Guler, I. 2007. “Throwing good money after bad? Political and Institutional influences on Sequential Decision Making in the Venture Capital Industry”. Administrative Science Quarterly, Vol. 52: 248-259.Academically yours :)Hana

  31. Duke

    The founder group should somehow maintain a 15-20% position all the way to full maturity. This requires a founder group to keep pace with growth and cash needs I find convertible debt as good leverage to maintaining ownership with the conversion trigger based on a gross sales number