Mon, Mar 18, 2013

Quick Note on Investments

Time and time again I come across the same misunderstanding: First time entrepreneurs often think that a financing round is done by a single entity (a single angel investor who shells out $200K or a single VC firm investing $2M). Usually this is not true. What you find is that you have one lead investor (who is often the one being reported in a blog post or press release) and a bunch of other investors putting money into the company at the same valuation.

Investors do this to spread their risk (smaller bets spread across many startups). Startups do this to get to a larger pool of investors (who, at least in theory, help with their network and expertise).

Why does this matter? Simple. You don’t ask an investor to pluck down the full amount — instead you ask them to lead/participate in your round for a total of X dollars. If nothing else it shows that you understand the game and are not naive about the wondrous world of startup finances. :)

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