Seed “Party Rounds” Not Much FunAug 27
For a bit of time, seed financing rounds involving many investors were the rage. Here’s a recent TechCrunch article that highlights the downside of the “party round” approach (click here). Here is an excerpt:
Counter-intuitively, Party Rounds are not much fun for founders. In fact, this type of structural round can be extremely detrimental….The risk that a company takes when structuring a deal this way is huge.
So, why do some investors pursue such rounds? TechCrunch quotes a start-up CEO, whom I think captures the risk-reward payoffs accurately:
From the investors’ point of view, it’s very difficult to tell whether something at the seed/series A stage is going to get traction. A few hundred thousand is less than 1/100th of your capital and buys you an option on future rounds if it takes off. In this case, the upside is potentially infinite as you can throw your weight behind the winners and the downside is relatively limited.
At Kepha, we’ve always resisted “party rounds”. We simply don’t think it is a win-win for the entrepreneur and the investor, in our opinion (read “Seed Companies Are Not Lottery Tickets”). I mean, how do we look the entrepreneur in the eye and think, “There’s only a 10% chance that we will keep investing?”
The article is worth reading. Many thanks to Brad Feld for Tweeting the link this morning.