If you’re an early-stage startup looking to raise, a VC investor explains why it might be time to think about a party round

On Sep 19, 2023

You’re a startup raising capital between pre-seed and Series A and struggling to find a lead investor – have you thought about a party round?

But before we start the party, let me explain the purpose of a lead investor.

When you typically raise capital there is one investor who takes the lead in the process, usually invests the largest amount in the round and sets the terms and valuation. They will have significant influence during the round and often in the business through large ownership and/or a board seat.

Finding a lead when raising capital signals to the market that an investor thinks your startup is a good investment opportunity and this often inspires other investors with confidence to fill the round.

Pro: Set terms and valuation in conjunction with investors

So, what do you do if you don’t have or want a lead investor?

Why not set the terms and valuation yourself and attract a “party” of individual investors to join the round? Sounds easy right?

Often the terms and valuation will evolve through discussions with your first and second keen investors, so you can’t just set anything you like, it still needs to suit the market.

Then you keep pitching your raise to investors and collect as many as you need to fill the round.

Pro: Fill the round as you go rather than waiting for a lead

How is a party round similar to a SAFE? A party round raises capital in exchange for equity whereas a SAFE is an agreement for future equity.

However in both you can sign contracts with each individual investor as you go, which works well when you’ve landed on a reasonable valuation and terms that don’t get challenged later.

Both options can be used by early stage startups, along with convertible notes and priced rounds with a lead investor.

Pro: Use a party round between Pre-Seed to Series A raises

How is a party round different from a syndicate?

A party round is a group of individual investors who receive individual equity and give commitments usually in the hundreds of thousands of dollars.

Whereas a syndicate is a group of investors that pools their capital in an investment vehicle which owns the equity and typically each syndicate member invests in the tens of thousands of dollars.

Syndicates tend to invest in angel and pre-seed rounds.

Pro: No lead investor telling you how to raise the round or run your business

Con: No lead investor can lack positive signalling in the market

Con: No lead investor with “skin in the game” to strategically help your business

A startup we spoke to recently had a very large VC keen to lead their round however the terms they set gave them full control over the cap table and who else was allowed to invest.

Sometimes having a lead can hold you back or make you fearful as to their involvement in your business.

However, having a strategic lead investor that wants to work with you and help you expand your business through their networks is aligned with your goals. The signal of a lead is powerful and gives the gravitational pull to close other investors.

Con: Party rounds may not suit a down market and cautious investors

Which leads me to the conclusion that you need to weigh up the following when deciding how to raise any type of capital: what are the current market conditions, what stage are you raising and what suits your business best.

I would suggest with the current squeeze on capital the terms a founder can set for a party round will need to be well researched and adjusted for realistic valuation and terms.

Furthermore, the lack of a lead investor during these times of cautious capital may spook some investors.