In a recent conversation with a young woman founder, I was asked whether founders should raise their first institutional round from multiple investors (a “syndicate” round) or close with a single investor. Considering less than 2% of VC money went to women founders in 2022, 0.5% down from 2021, is the additional effort of raising a syndicate round worth the incremental benefit? Both options have their pros and cons, and the nuances of each approach should be carefully considered before making a decision.
Single Investor – Pros
- Streamlined process – Even disregarding the changing fundraising environment, the preference for raising from a single investor can be appealing because it has the advantage of a more streamlined process. It can help save time otherwise spent raising funds from multiple investors.
- Resources – If the investor is strategic and can provide valuable resources such as industry connections or expertise, a single investor round may be more beneficial.
Single Investor – Cons
- Fit – If the investor is not a good fit for the startup, it can create tension and strain the relationship between the startup and the investor.
- Follow-ons – If the investor is not able to fully fund the round (happens rarely, but it can happen), the startup may have to go back and raise additional money from other investors.
- Signaling – Signaling risk if the investor loses interest in the startup. At best, if you are one of their best performing startups, they will lead your next round and help bring other investors in. At worst, they may not participate in your next round which will give pause to other potential investors. Time and resources saved during the first raise may be paid in double over the next.
Syndicate – Pros
- Diverse Perspectives – Multiple investors can provide a diverse range of perspectives and resources, which can be beneficial for the startup. For direct-to-consumer companies, early investors – especially those with social media presence – can help advocate the product to the market. Experienced angels can also beta test the product and provide contextual feedback vis-a-vis other early stage competitors. For enterprise companies, the right selection of investors can help with introductions to B2B clients. At the very least, engaged investors can serve as cheerleaders, amplifying the startup’s social media presence.
- Dependencies – Reduces the relationship risk for the startup as it is less dependent on one investor.
- Percent to close – Increases the chances of closing a round and securing the necessary funding.
- Customers and Partners – Signal to potential customers and partners that the startup has support and backing from multiple investors.
Syndicate – Cons
- Time to close – Can be more time-consuming and complex. The startup will have to negotiate with multiple investors, and terms may not be consistent among investors.
- Additional thoughts – founders will want to keep in mind:
- How much equity and control existing shareholders are giving up.
- Whether the most strategic investors have enough skin in the game to want to devote their time and energy when the going gets tough.
Though the exact split of syndicate vs single investor rounds isn’t known, it is rare for startups to have a single investor in their first institutional round of financing. The decision of whether to raise money from one investor or multiple is not a one-size-fits-all solution. Founders should carefully consider the merits of each approach in the context of their specific situation, taking into account the market trends. It’s important to weigh the benefits of a streamlined process and a more favorable deal against the potential drawbacks of a strained relationship and a lack of diverse perspectives and resources. Ultimately, the goal should be to secure the funding needed to grow the business while maintaining control and equity for the founders.
Primary author of this article is Sonal Panda. These are purposely short articles focused on practical insights (we call it gl;dr — good length; did read). See here for other such articles. If this article had useful insights for you, comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are from the author(s).
