
Party Rounds - kogir
http://blog.samaltman.com/party-rounds
======
cperciva
_It turns out that investors are generally about as involved as they are
invested. [...] In a typical party round, no single investor cares enough to
think about the company multiple times a day._

This sounds like something which is obviously true; but I'm not so sure: In
particular, it seems to me that an investor's involvement is likely to depend
as much or more on their investment _as a fraction of their assets_ as it does
on the absolute size of their investment. If I invested $100k in a startup, it
would be because I _really_ believed in it, and I would help them in any way I
could; but if Warren Buffet invested $100k in a company he would probably
forget about it before lunch.

To the extent that "party rounds" involve large investors throwing their spare
change into a pot, I agree that they would certainly not be productive; but if
a party round allows small investors who would provide advice and assistance
disproportionate to their assets to get involved, it seems like it could only
be a net positive.

After all, nobody expects that an investment of only $20k means that YC won't
provide much help.

~~~
sama
Definitely true--if someone invests a lot of their money, they'll focus. The
problem comes when a 500MM fund makes a 100k investment.

YC is somewhat different, since all the investments we make are the same size.
And, I'm biased, but I think we work pretty hard.

~~~
asanwal
"The problem comes when a 500MM fund makes a 100k investment."

Interestingly, after crunching the data, this is not true.

In reality, companies who receive money from a larger, multi-stage fund
actually raise follow-on financing at a higher rate than those that raise only
from dedicated Seed VC firms who presumably care more as they're more invested
(or that's what they'd like you to believe :)

While Chris Dixon (prior to joining Andreessen Horowitz) and others have
championed the idea that large funds don't care and are just investing in seed
rounds as a call option for future rounds, the data just doesn't support this
contention.

We were as surprised as everyone else when we found this.

Full research brief we published on this here -
[http://www.cbinsights.com/blog/trends/seed-venture-
capital-f...](http://www.cbinsights.com/blog/trends/seed-venture-capital-
funds)

Disclosure: I'm co-founder of the firm, CB Insights, that put this research
together. We sell data to VCs, LPs, etc.

------
sethbannon
There are a few serious advantages to party rounds that this post doesn't
mention:

1) Party rounds generally lead to greater founder control and more founder-
friendly valuations

2) In party rounds, founders get to date VCs before they settle down. Choosing
a long term VC partner / board member is hard. Party rounds allow you to
experience working with many investors before deciding who you want to partner
with for the long haul.

3) Taking a lead investor in a seed round creates a serious negative signaling
risk that party rounds don't -- if you have a lead and they pass on your
Series A, raising will be much harder.

4) You can often close a party round much faster than a round with a lead
because the diligence processes are faster. This means you can get back to
doing what matters -- building your business.

I don't think there is a clear optimal choice here -- there are plusses and
minuses for the entrepreneurs both ways.

------
midas
One important aspect of party rounds that this post leaves out: not everyone
comes to the party at the same time.

Party rounds usually happen because investor A is interested and invites B and
C, who invite D & E, and the situation repeats itself over days/weeks. All
along the way, the founder is able to angle for better terms (and price!) as
investors realize they have less and less leverage.

By the end of the party, it looks like a waste since investors D, L and R were
the best fit and could have covered the whole round themselves. But, what
brought investors D-R to the table was everyone who came before them. We can't
go kicking them out of the round now! So, everyone takes a group picture
(Techcrunch announcement) and makes it sound like they're so cool that they've
always been partying together; nobody needs to know that most of the people
showed up at the end and can't really remember the founder's name that they
used to get in at the door.

tl;dr: One important aspect of the party round is that founders get better
terms and less stress by signing investors as they arrive at the party. To the
founder, that may be worth it.

Thanks for another great blog post Sam, keep 'em coming!

~~~
pclark
I didn't realise party rounds were formed like this – if anything I thought
the opposite, that if you had a lead then they'd help bring on additional
valuable investors.

I thought party rounds were just when a company has 4 VCs + 20 angels = $1.5M
seed, vs. a company that raises a seed where there is one clear lead.

------
jvrossb
For companies raising $1.5 mil or less, from my (very limited) anecdotal
observations it seems like investors have a base usefulness that may or may
not fluctuate as a function of the amount they have invested. It also may or
may not fluctuate depending on how interesting your startup is, how much they
like you, how often you run into each other at social functions, etc...

From what I've seen (certainly a small sample, so may be wrong, curious to
have others chime in) there are investors whose lowest possible usefulness
(they invested the smallest amount they ever invest) still exceeds other
investors' highest possible usefulness (however invested they would be if they
were responsible for the entire round - $1.5mil or less). As a result I see
the appeal of a party seed round - you increase your chances of getting
investors who are useful by nature.

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Alex3917
"It turns out that investors are generally about as involved as they are
invested."

I suspect that if an entrepreneur raised money from a few thousand people on
kickstarter (or similar) and then asked them all to help with certain things,
they'd get a lot of people willing to do stuff. Maybe only 1 in 100 per ask,
but if you have a couple thousand people reading your emails then that's more
than enough. I don't think there's anything wrong with party rounds, rather
that with the way they're currently done it's just too small of a party with
the wrong people invited. You need a lot of people who really like the product
and want to see it succeed, rather than a small number of people who like
bragging about the fact that they're investors but who don't really have that
much money.

~~~
mathattack
Managing that army of volunteers becomes a job in it's own right.

~~~
samtp
So raise an extra 50K and hire someone to do it.

~~~
wtvanhest
People who manage investors are typically the highest paid person of anyone in
business. Very few people can be relied upon in place of the CEO, CFO in that
communication. $50k won't buy you much.

~~~
mathattack
Exactly. Investor management takes time and attention away from sales and
product management. Event if it's rallying a large group of volunteers, that
person is getting pulled away from other vital tasks.

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bastian
Find one or two strong leads to commit to your round. Make sure these are
experienced angel investors. Make sure they love what you do. Make sure you
love working with them. Fill the rest of the round with people committing to
smaller amounts. In my experience, it is hard to set a limit here. Do what
feels right. If someone offers you money along the way, do take it. You can
care about your valuation later and the way bigger risk of your business is
running out of money. Spent 80% of your investor time with your leads. Limit
the money you take from VC's in your angel rounds. Just my two cents.

------
adambenayoun
I've heard a different take on this from an entrepreneur who raised several
time in the past. His strategy was to raise small amounts for 20-30 angels
investors at the seed round with the assumption that when he needed more money
it would be easier to ask from someone who already invested 25k to double down
on the investment than from someone who invested 100k (which is probably high
for the average Angel).

------
blobbers
Though I appreciate the logic of having a single or small group of 'good
investors', this only applies if one is able to attract said 'good investors'.
If one is unable to attract the attention of 'good investors' (assume the
start-up has a good idea - being unable to attract 'good investors' is a
separate problem), and only 'bad investors' are available it would be logical
to try to get a lot of 'bad investors' so that they would not be able to
individually influence the company. Thus party rounds make sense in that case
don't they?

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pmikesell
I think another key point is one that was only partially touched on in this
thoughtful post. When you go to raise your B round, this party round A is
going to look "different" than what the B investors are used to seeing.
Anything that looks "different" creates some amount of impedance on the deal.
B round investors are used to seeing a few familiar names from the A, and at
least part of their diligence is based on if they want to work with them or
not.

This doesn't mean don't do it - it's just another point to consider.

------
groby_b
Here's my (decidedly cynical, I know) take on this:

Sam's model makes sense if the investors actually care about the product and
are able to at least somewhat judge & shape it.

If, on the other hand, funding startups is a lottery for the big payout item,
party rounds make sense for investors. And the same goes for the company side
- if you just hope for the big acquisition, at first glance guidance matters
less than runway.

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7Figures2Commas
I think the focus of this discussion ignores an important point: some of these
companies, perhaps a decent number, raise these rounds because they probably
wouldn't be able to get fewer investors to pony up the full amount they're
seeking.

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HistoryInAction
I wonder what this implies for crowdfunding?

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goronbjorn
What are some examples of party rounds?

~~~
peloton
There are more recent examples but to make it interesting, I'm going to
reference this TC article from last fall which uses these examples: Exec,
Socialcam, Pair.

Exec was led by Sam Altman!

<http://techcrunch.com/2012/08/27/party-rounds-excellent/>

