An interesting phenomenon exists in the process of raising venture capital. While larger investors are typically the focus throughout the majority of the fundraising process, at the last minute, entrepreneurs are incentivized to attract smaller investors into their round.
Investors who write large checks are typically perceived to be more attractive to entrepreneurs raising a round from venture capitalists. (In the current market, to me a “large” seed stage investor is one who writes at least $500K and more typically greater than $1 million checks. For series A rounds these are typically $2-5 million checks.) There are a few reasons larger investors are highly sought after: they often define the terms of the deal and they can de-risk future financing needs.
But what is often more important to the entrepreneur who is deep in the fundraising process is that a large investor can stop the pain. By filling out a round, a large investor can enable a founder to close out the fundraising process, ending the seemingly never-ending distraction of their capital raise. When a large investor commits, you’re typically close to redirecting your focus back to building your company.
However, after the term sheet has been signed, when most of the capital is committed and the total amount of investment the company can accept during the round is now fixed, smaller checks typically become far more attractive. Smart entrepreneurs turn to maximizing the operational support they’re likely to receive from their investor base within the limited amount of dollars to be invested in the company.
Investor value-add can come in several forms. Some investors might be able to bring industry knowledge or operational advice to bear, while others can open doors to customers, partners or potential acquirers.
Whatever the form, value-add doesn’t correlate tightly with check-size. Smaller investors (often entrepreneurs-turned-angels) can often add as much value as partners at mega-funds. That’s a good thing as large investors typically don’t leave much room available in the round excluding other large investors from participating.
As a result, once smart entrepreneurs have the majority of their money committed and know the maximize size of the round, they typically focus on squeezing smaller, high-value-add investors into the deal. And, for many angel investors (like myself), these are our favorite deals as the financing is de-risked and we can focus on helping the founders out.
Where this can go wrong is if you recruit smaller angels who take more than they give. Excessive information requests or other types of asks from your smaller investors can quickly make their involvement in the company a bad deal.
The best angels, however, understand that they’re along for the ride and that their primary role is to support the founders in any way asked. When you find partners like these, you’ll be glad you took their money.
So, when you’re off to raise your next round don’t ignore the angels you meet along the way. While courting them in the beginning of the process can feel like a distraction, having a few choice angels on deck can make optimizing your round in the final days quick and easy.