Now, when raising the next round in venture is so much harder than it was during the Crazy Times of late ’20-early ’22, an important but subtle issue is coming up for a lot of start-ups.
The subtle issue is this: A Weak Investor Syndicate.
What does this mean?
A Weak Investor or Syndicate, or group of investors:
- Is all tapped out and has little to no more money to invest in the company. This can happen even with great funds and investors.
- Is unable or doesn’t want to do its pro-rata.
- Has a big fund as a very large investor that doesn’t really want to invest anymore, or isn’t really involved; This is especially an issue if you took a pre-seed or seed round from a billion+ fund. They often don’t really care that much about their seed investments. 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 happen even if you have the best VC 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 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.
- Third, ask your VCs what happens if you need a bridge round? Just ask. In fact, ask early. It may sound like an awkward question, and perhaps it is, but the earlier you ask, the more theoretical (and less awkward) it is. More on that here.
- 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 you have to change your operating plan. You have a Weak Syndicate, and that just is what it is. You likely didn’t even know before.
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.
And if nothing else, keep your burn rate that much lower if your existing investors are mostly tapped out. Your existing investors are often your investors of last resort in tougher times. If they are maxxed out, you just can’t let the gas tank go into red.
A related post here:
(note: an updated SaaStr Classic post)
Published on April 15, 2023