Multiple Startup Investors or Single Investors: Pros and Cons of Each
Should you aim for multiple startup investors or single investors when you are seeking angel or venture capital investment for your new business? Is raising all your money from one or two investors better for you than raising small amounts from a whole army of investors? There are differences of opinion on this, so let’s examine these options carefully before establishing which is the better.
Sometimes you don’t get the option, because if your new business seems promising, but is involved in a fairly competitive market, then many venture capitalists will be reluctant to fund you with all you need – but may be prepared to offer you one or two percent, just in case you succeed and make a bucket of cash. Quite often, the more venturous projects can also be the most rewarding.
However, that’s beside the point. Assuming you had the option, which should you choose? Are multiple investors going to give you a headache as your business grows, or are their combined talents going to be an advantage? Let’s look at the biggest is best argument first.
Multiple Startup Investors
Let’s assume you have accepted small amounts of angel or venture capital funding from multiple individuals and companies. Each one will be a shareholder in the company, or hold a stake in the company proportional to their investment. The bigger the seed round, the more likely this is to happen. One way to achieve this easily is through AngelList, a social network site for angel investors and startups.
AngelList is mentioned because it provides a good diversity of investors, each bringing something different to the table. However, you may have your own favorite funding site. Those offering startup funds can include venture capitalists, angels, founders of other companies and other individuals from all round the world. This would bring an international perspective to your company. Not that this means you must operate globally, although there is nothing wrong with that, but it does offer you a range of opinions and outlooks on your board.
Once you have your funding, you can work to get your shareholders involved in developing the business. If you have accepted startup funding from overseas, then these firms and individuals can provide you with a local presence in their own country. Their breadth of expertise in various markets could also offer you support by referring leads from their own market. They may also have answers for many of the multiple problems faced by startups in the early stages of their development.
The benefit of a platform such as AngelList is that entrepreneurs are able to target the type of investor they want on the team. This type of social network is not always advised as a platform for seed finance, although many have used it for startups very successfully. For many, the benefits of multiple investors with diverse backgrounds, both financial and geographically, make it worthwhile pursuing this route.
Two of the disadvantages of multiple shareholders, namely communications and board management, are becoming less relevant with new technology and communications devices. Those that advocate it find significant advantages in seeking multiple startup funding sources rather than one or two larger investors.
One single investor, or perhaps two, has provided the startup capital you need for your business. Why should this be preferred to multiple sources of funding? One immediate issue could be that not all investors will review progress at the same time. This may particularly be true if your funding involves venture capital companies that have fixed review cycles.
Another is if each investor has a different perspective on what is construed as ‘progress.’ If just one investor in your army of investors disagrees with a change in policy, then you will have a serious problem. Such changes are not uncommon with startups, where original targets are revised or strategies changed according to market circumstances.
There is also the issue of board seats. If you have 30 investors, a boardroom can become pretty crowded if they all insist on a seat. Then of course, nothing gets done. A single investor has only one vote on the board, but multiple investors gets messy in this respect. This can often be resolved by agreeing that the largest investor in a group is regarded as the lead investor, with whom the entrepreneur will communicate and who will get a seat on the board. However, this needs the agreement of all and a single investor is much less trouble in this respect.
Much of the increase in multiple startup investment deals is due to the relatively recent rapid increase in angel investors. They are actively seeking out deals and individual angels will typically invest a maximum of $25,000 – $100,000.They also form angel groups, when up to $750,000 and more can be funded. However, usually only one angel in the group will sit on the board and mediate between the group and the entrepreneur.
This is one way in which multiple investors can offer finance without too much disruption to the running of the business. In essence, this is the same as having one large investor. However, some companies need more than this – well over $1 million. In this case there tends to be more than one investor, generally venture capital being involved.
Multiple Startup Investors or Single Investors: Conclusion
Fundamentally, there is no best way. Many find multiple startup investors to work well for them, while others prefer to deal only with one or two larger individuals. Groups are also acceptable, particularly where one person represents the entire group. Nevertheless, there are advantages to be gained from having many investors from different backgrounds, particularly for startups intending to go global. However, getting back to the beginning, mostly you won’t get the choice.