Why VC Unbundling is Great for Founders
Over the past three years, the number of early-stage VCs has exploded. Driven by the rise of operator angels, solo-capitalists and rolling funds, today’s startups are greeted by unprecedented competition at the Pre-seed and Seed stages.
That’s great for founders.
Aside from the obvious fact that increased competition helps shift the power dynamic towards startups, today’s early-stage investors are increasingly turning to specialization as a way to differentiate. For founders, this unbundling of venture capital presents new choices.
Historically, the singular goal for founders was to maximize deal terms: raise the most money at the lowest dilution. Conventional fundraising wisdom held that founders should drive towards as many term sheets as possible in order to pit the VCs against one another and drive up valuation.
Recently, more and more top founders are taking a different route when raising early rounds. Rather than using the leverage that results from multiple offers to simply drive up deal terms, they’re using it to manifest an “ideal” syndicate for their round.
As an example, one founder I know recently completed a significantly oversubscribed Pre-Seed round for her new consumer-focused startup. By properly preparing and running a tight fundraising process, she had 5 term sheets within 2 weeks, including two that were for the full round. During her process, she developed a strong connection to the partners at two of the smaller firms and felt that they would be a better fit. In the end, she turned down the offers from the larger funds and manifested a syndicate co-led by the two smaller firms. This strategy had the additional benefit of enabling her to bring in more angels and micro-funds than she otherwise would have.
The fact that more founders are choosing to create syndicates highlights another shift in early-stage venture capital: the stigma around “party rounds” is all but gone. In the past, having no clear lead was seen as risky due to the lack of available follow-on capital. “If things go south,” the narrative went, “no one will bail you out.” While that can still hold true to some extent, it’s far less of an issue that in previous years, particularly at the early stages.
Free of the stigma of syndicates and with an unprecedented number of early-stage funding options, I expect we’ll see many more founders raise “non-traditional” Pre-Seed and Seed rounds in the years ahead. For founders looking for more than just capital, today’s unbundling of VC is a welcome shift.
(And one more reason why it’s essential to prioritize and thoroughly prepare for your fundraising process.)