[ibimage==29019==Medium==none==self==ibimage_align-left]
Question: What do you think about party rounds? Good/bad for the entrepreneur? Investor?
Let’s begin by defining “party rounds” as a form of early stage fundraising, which lacks the presence of a “lead” investor (to set terms and generally help syndicate the round). Instead, companies often set their own terms and raise capital from a consortium of smaller investors (which generally consists of individuals; sometimes funds will participate with a small commitment).
With the loosening of SEC restrictions around public fundraising and solicitation, offline syndicates and online platforms like Angelist, are resulting in successful compilation of party rounds from angels around the country. In fact, the new Angelist Syndicates program even allows an investor to collect “carry” from promoting a funding round to other investors, without having an institutional fund at the helm.
Party rounds may be beneficial for the entrepreneur when a seasoned fund is not structuring the deal - favorable valuations (higher if it is set by the company), less diligence requests, preferential structuring (such as accelerated vesting) and post-investment control dynamics/governance (no Board rights), may be items that no single investor will care to argue. Additionally, the entrepreneur will benefit if the investor group ends up providing a network of advisors with deep domain experience and contacts. If venture funds have passively participated in the round with small amounts of capital, and the company executes, the VCs who are in the deal, and already know the team, will want to follow onto the next round (resulting in less dilution for founders and a higher valuation).
Entrepreneur’s may face a negative experience when faced with financing challenges – individual investors may not have reserves to bridge a company, or the rolodex to call on for future financing rounds. Individual investors may lack interest in actually helping the company beyond providing capital. During operational challenges, the entrepreneur would benefit from “roll up the sleeve” investors who have pattern recognition/experience to deal with the situation. Finally, entrepreneurs should realize that the administrative burden (unwieldy cap table, legal docs, etc.) can be substantial (although Angelist is making this easier).
For the party round investor, the benefits for an institutional investor differ versus an individual. For the institution it provides a sneak peek into a company for a future funding opportunity - its team and its performance - without committing too much time or capital upfront. For an individual the party round provides exposure to a “cool” asset class, historically inaccessible, and, if a larger investor comes on board in the future, a large step up in the valuation of the company may occur. Additionally, it also provides a way for individuals to give back to entrepreneurs around them. However, VC's are usually able to appreciate the ups and downs of the entrepreneur's journey and handle setbacks more readily having seen them before, but individual investors need to realize that capital can easily be lost and positions can be marginalized. For individuals and investors alike, they should always make sure they are comfortable with the team, product and industry, prior to investing.
Each week the team at Pritzker Group Venture Capital answers your questions about startups, raising capital, technology, and entrepreneurship. Submit your own question and see more answers here.
.jpg)
