Venture Capital

Do You Have a Weak Investor Syndicate?

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Jason Lemkin

Now that we’re in a Touch Less than The Best of Times, an important but subtle issue is coming up for a lot of start-ups.

A Weak Investor Syndicate.

What does this mean?

A Weak Investor or Syndicate, or group of investors:

  • Is all tapped out and has no more money to invest in the company.  This can happen even with great funds and investors.
  • Doesn’t want to do its pro rata.  Even if it has plenty of money; AND/OR
  • Can’t bring you good leads for the next round.  This can happen even if the current investors have fancy fund names.

Note something important.  This can, depends on scenarios, happen even if you have the best brands in your start-up.  And conversely, sometimes no-name funds can make a strong syndicate.  Social signals can be confusing here.

First, as CEOs and founders — you need to know this.  Because if you have a weak syndicate, in today’s markets, raising the next round likely will be harder.

So step one is ASK.  Ask your investors these questions:

  • First ask your VCs, how much money do you have left allocated to this investment?  Sometimes, a large first check means there isn’t much left for the following rounds.  This may be non-obvious.  If the amount of “reserves” is < 40-50% of what the fund has already invested, you are probably in a weak position here.
  • Second, ask your VCs, when will you, and won’t you, do pro-rata in the next round?  Some VCs don’t even do pro rata.  That’s OK.  You just need to know this.
  • Who has followed you in your past 4-5 deals?  And did you source that VC?  How did the investment happen?  Hooray, Sequoia came into the last round.  But did your Seed VC bring them in?  Push it here, for a real answer.

Then, you need to look at all your investors as a group.  They don’t all have to meet all these criteria.  Sometimes, it’s more than enough if one big, large fund wants to write another large check.  But you need to know.

Ok, now carefully think through your syndicate.  If it’s mostly tapped out, and you don’t hear a 100% commitment to pro-rata, and A-tier VCs aren’t routinely following them electively into the next round — then change your operating plan.

My advice in today’s market is to squeeze an extra 6 months of runway out of your cash if you have a Weak Syndicate.  Even if you’re already stretching things.  And also — build even more VC relationships yourself.  Invest even more time here.  Because you won’t be getting as much help from your existing investors as you’d thought.

Published on March 25, 2016
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