There was something of a group hug this weekend among a few of the more prominent and active digital media early-stage investors. It started with with a mildly critical blog about the VC equivalent of Hollywood’s “let’s do lunch”, which turns out to be a potentially more alarming alternative, “let’s do a deal together.” The gist of this was that, just as “let’s do lunch” implies a throw-away remark that is meaningless, the other alternative has become equally meaningless to the detriment of venture capital syndicate building. This theme continued with a thoughtful follow-on blog about why syndicated deals may be diminishing in popularity, at least from that author’s perspective, and a third article still that touched on a number of syndication themes in specific examples of transactions completed.
An interesting aspect in this string of blogs, which are commentaries on one another, is that despite some protest to the contrary each makes reference (in some cases in the follow-up comments underneath the article) to joint investing, though few if any references to the contrary (i.e., going truly solo). Now, this may well be because the spirit of discussion is to demonstrate that the syndicated deal is alive and well and all the love in venture world still lives if one knows where to seek it… but I question whether the goal of syndicated investing in new market realities is really such a noble objective at all.
I am reminded about the recently completed round for the start-up Hot Potato, which although a “seed-stage” financing, amounted to some $1.4 million and involved a rather sizable group of co-investors, both individuals and funds. I touched on this one in a previous article here, but the point I am hoping to make again, as evidence keeps mounting, is that the VC math problem as illustrated earlier this year in a series of blog posts that really should be bookmarked (1 and 2), is not going away, and may in fact be increasing.
When I say that the problem is increasing, I mean this because the capital required to start a new venture and to operate at least up to a point of demonstrating traction, is continuously diminishing. So, the idea of investor syndicates, which by their very nature imply multiple pools of capital that need to be put to work, is in such an environment more and more problematic because, if anything, these need to be reduced.
If early stage investing is like acquiring call options, an argument made here before, the size of venture capital funds and resulting hurdles and minimum investment targets makes it challenging enough to adhere to an amount and valuation discipline consistent with option value, before throwing syndicates into the mix. So while we can appreciate the desire to seek out like-minded individuals and increase the brain-power around the board room, perhaps it would be better for all involved (including the entrepreneur, note for a separate article idea) to maintain a certain fiscal discipline by going solo, at least initially.
