Startable – Healy Jones’ & Prasad Thammineni’s Blog

One of the more important venture fund raising decisions a startup entrepreneur has to make is around their Series A VC deal syndication strategy. Specifically, an entrepreneur needs to decide if he or she wants to raise capital from a single venture capital firm or “syndicate” the investment with two or more funds at once. VC deal syndication is a pretty funny dance, with the entrepreneur trying to get VCs to converge, and venture capitalists trying to feel out each other and the company to see how/where/when an investment might come together. Given the added complexity of getting two VCs at once, many entrepreneurs consider raising capital from a single fund and screwing the whole “syndication” thing.

Venture funds of the size of Atlas (my employer), about $400 million in the current fund (Atlas Venture VII), can easily cut the check for most reasonable Series A rounds. However, most Series A rounds are syndicated. I would postulate that startups with two strong Series A VCs are in a much better position than firms that raised capital with only one VC, and have outlined some of the reasons for and against syndication at the Series A. Some of these reasons are magnified given the difficulty in the current capital markets.

(While I think most people coming to this blog are familiar with basic VC terminology, as a reminder the first institutional investment in a startup is usually called a “Series A” investment, the second is called the “Series B,” etc. Also, when I say first institutional fund raise I am specifically talking about the first investment in the startup where a formally organized venture capital firm provides some of the cash invested.)

Reasons to Syndicate:

1. More potential capital for your business. There is a limit to the amount of capital that a venture fund can commit to any given startup. If your company has two VCs invested in the Series A, the theoretical amount of capital available to your startup is greater.
2. Protection. Your startup’s chances of having an existing Series A investor participate in the Series B is doubled if you have two VCs from your first financing round. This is a critical point. If an outside investor is to join the Series B they look to the Series A investor for continued support of the company – if the original investor, who has worked with the management team for months, no longer wants to support the company then the assumption is that there is something very wrong with the company. If you only had a single Series A investor and that fund or partner is no longer in the business then your startup could be in serious trouble. Venture funds DO implode and partners ARE poached (or pushed out ) from top tier venture firms more often than you’d think. Orphaned startups – good ones too – can be sometimes left to die. The best defense is to have two initial venture firms.
3. Easier Series B #1. Some VCs have a reputation of keeping their good deals 100% to themselves, so if they encourage a portfolio company to seek capital from other VCs then the company in question is assumed to be a dud. 
4. Easier Series B #2. It is often easier to get a difficult Series B done internally (without an external investor participating) if you have two syndicate partners vs. a startup with only one. The basic explanation for this is that neither of the original syndicate partners will want to get their initial stake washed out by the other. If one puts money in the B then the other often ends up participating. I’ve seen this happen, and it is pretty slick from the entrepreneur’s perspective, but not so much from the VCs. So much for the “wisdom of crowds.” Or maybe it’s just a commentary on VCs.
5. More contacts/introductions. Pretty obvious, the more connected investors you have looking out for you the better.
6. More smart people on your board. Ditto.

Reasons against Syndication:

1. Harder. Getting a single VC to close is difficult. It could be even more difficult to get two firms interested at the same time. Additionally, if two firms start to work closely together and one backs out the other can get spooked – “what did they see that I didn’t??” The only defense against this is to work with VCs who aren’t sheep (easier said than done…)
2. Loss of deal competition. If you had two venture funds competiting on investment terms you very well may be able to work your deal terms to a more favorable spot. In a perfect world you’d have a couple of syndicates circling your startup, but obviously that’s not the easiest thing in the world.
3. Investor dynamics. Venture capital firms are a bit like chickens, always concerned with their pecking order and social status. Some VCs don’t want to syndicate with certain other funds, or worry about who the “lead” investor is or who gets mentioned first in the press release, etc. Thankfully, I’m not a chicken, and did I mention cock-a-doodle doo.
4. Board dynamics. With a syndicate you’ll have to vet two board members. Chemistry is ridicously important, and you’ll have to worry about it with two people and two funds.

I’m sure I forgot things, so welcome comments.

I guess I should do a post on HOW to actually get a syndicate together, but this is enough for this post for now!