The way startups raise their initial round of funding is changing, and it might hurt them in the long haul.
Traditionally, companies aim to receive large amounts of funding from a small number of investors. As Y Combinator partner Sam Altman writes in his blog post, the venture capital model is shifting toward “party rounds,” where many investors (sometimes as many as 50) put up small amounts of money.
This can become a serious issue for startups that need not only money from their investors, but also the opportunity to plan for the future with their added guidance. Altman argues that the best investors take a step back when companies need space to do their thing, but are nearby to help when needed — such as when planning the next round of funding.
And with party rounds, it often becomes the case that no one investor is making the startup a priority. Instead, they’re minimising risk with their sheer numbers, always thinking that someone else will take the fledgling company under its wing.
That’s not to say that party rounds can’t produce successful companies, or that nowhere in the room full of investors is someone willing to go the extra mile even though they’re not putting up huge amounts. But it’s less likely, and startups seeking their initial round of funding would do well to remember this potential downside.