Investing in seed rounds can be very challenging. Ultimately the biggest reason is the amount of risk investing in one of the first rounds of a company’s financing. All risks present themselves- technology, market, execution, ad infinitum. So why invest in such a risky stage- easy, it has the most significant return profile.
One of the problems with the Series Seed capital stack is that usually, this is capitalized by a syndicate of investors. There are so many people around the table for the seed round for two main reasons.
1) Seed funds are smaller. This fact requires more bets in the portfolio, creating a smaller check size. This requires companies to raise from more than one fund to fill out the round.
2) Seed investors syndicate to de-risk themselves. The problem with taking the majority of the round is that if the company misses its milestones and needs more capital, the original seed investor needs to come up with all the follow-on money. So it would be a bad signal for a company to go out and try to raise without following on from the existing seed investors.
Having a crowded seed round can become problematic. It turns into what I call a “party round.” This means that everyone is voting with a consensus, and they’re generally isn’t any investor doing the work of company governance on the company side. The result is that the founder is left to execute with several investors chirping in their ears on what they should do without any thoughtful discussions with the founder on the strategy.
There isn’t a natural way to avoid this from happening based on how the current seed capital ecosystem works. Therefore, it is up to founders to ensure it selects a great lead investor if they are looking for a productive cap table. At DWP Capital, we do syndicate rounds, but we ensure we take up more than half of the preferred equity to show founders our level of conviction in the company and founding team.
