So I’ve been spending a bit more time than usual talking to entrepreneurs raising capital and venture capital firms investing in early stage companies, and there is a trend that I am trying to wrap my head around.
The trend: large venture capital firms are issuing term sheets committing to invest between $500K and $1.5M in early stage companies, and then offloading anywhere from $100K-$500K of the round to professional angels and seed funds.
So the question is, why are they doing all the work to find/negotiate/invest/and then shepherd these investments, only to let smaller guys piggy back on their deals?
I’ve got a couple potential answers:
1) They want to reduce their exposure to the investment by syndicating the deal, but as capital requirements come down for building companies, there isn’t really room for the syndicate of yesteryear. It used to be that a Series A round would frequently be split between two large venture firms, each invest half the capital with the confidence that future funding requirements would be high enough that they’d both be able to put real money to work behind their bet. But now that the $2M A round is being replaced by $500K seed rounds, and the $10M B round looks more like a $2-5M A round…VC’s are choosing to syndicate with partners who can afford to invest in the first round, but whose coffers aren’t deep enough to go heads up in the second. What that means is that the VC leading the deal, should this deal be a winner, doesn’t have to fight with another deep pocketed investor for an outsized portion of the next round (read: they’ll have an early option to increase their ownership).
To read the full, original article click on this link: The Emergence of VC/Angel Syndicates « Jordan Cooper's Blog: startups, venture capital, Jumppost
Author: Jordan Cooper
