Time to Party (Round) – the what, why, & how of party rounds

Jason Yeh
November 1, 2022
#
Fundraising

That is the “what” of party rounds.

Let’s go into the why and more importantly, the how of party rounds.

First, some additional history.  For many years party rounds were both uncommon and frowned upon. In the days before SAFEs, there wasn’t an easy way to create an investment vehicle that investors felt safe (pun intended) using that wasn’t generated by a committed investor. 

The landscape has changed over the last 5 years. At one point during 2020-2022, power over the fundraising process swung dramatically over to founders. Even with the market correction of 2022, founders have more flexibility to influence their own fundraising destiny than in the past.

Why so? A few reasons:

  1. The ease and flexibility of the SAFE
    After the launch of the SAFE in 2014, founders had an easy way to invite smaller checks to participate in an investment without a large lead investor putting their stamp of approval on investment details.
  2. Explosion of capital sources
    The explosion of new investors (smaller funds, solo GPs, SPVs, operator angels) has added more competition for deals and more dollars happy to take parts of rounds without leads. With that, founders now have more ability to set terms. Term setting used to be the main blocker for pulling a round together that relied on a “lead investor.” 
  3. Evolution of standards and common practices

Part of the reason party rounds weren’t done in the past is just that… they weren’t done. Investors tend to shy away from things that don’t fit their expected mold. The frothy years introduced party rounds to the market in large enough volumes that standards have shifted towards greater acceptance of party rounds.

So how do you do it?

The keys to closing a party round are threefold:

  1. Establishing that it’s happening
  2. Showing demand and scarcity
  3. Driving to a close

Establishing that it’s happening

This is easiest when there is an investor who actually wants to write a check.  And when I say “actually,” I mean not just blowing smoke up your ass.

If you have one of those investors, no matter the size, you can have a conversation with them about terms.  If you agree on terms with this one small investor, you can then start collecting their money AND going to others with the terms that were set with the first investor. 

If no one has formally committed to investing, you can start easing into it by having light suggestive conversations with investors who have shown some interest. Tell them you’re having conversations with other investors who are also interested in investing smaller checks. This shows they’re not on an island by themselves.  From there I would ask them if they’d be interested in joining a group doing the deal at a $XM cap.

Have that conversation with every smaller investor who’s lightly in until you find one of them who says they would be interested in doing it at that deal. They likely will say “provided others are in” but it’s still enough to get started!

Showing demand and scarcity

Once you’ve established it’s happening with that verbalized interest, you can go to all other parties and tell them you have terms that you established with the first interested investor and interest to fill up the Y million you want to raise.

Like with other processes, you should do this all at once so you can credibly mention you’re talking to all these investors about filling it. This is a mini run of calendar density!

Driving to a close

Closing out a party round can be challenging.  In a traditional round, you have the gravitational pull of a big lead to close out the round. With that you can set the closing date to when the lead closes/wires and just dictate that everyone else joins at the same time.  

In a party round however, you have many small investors who even after verbally committing, will need a nudge to actually wire (many nudges probably). The pressure you apply will rely on FOMO, reputation risk, and plain ol’ project management.  This usually becomes a dance of signaling other investors are about to close, then communicating when investors actually close, and signaling more are closing… until it’s all closed.

Drawbacks

There are real reasons party rounds weren’t super popular back in the day and it’s not because of some VC conspiracy to withhold capital from entrepreneurs.  In fact the same drawback of party rounds from 5 years ago still exists today.  

When the company is doing well, hitting milestones and growing towards another round of funding (or profitability), party rounds work just fine.

It’s when a company is not hitting all its marks and having problems that party rounds start showing cracks.  When a company needs help, will any investor in a party round own enough of the company to have the motivation to roll up their sleeves and help?  If they have the motivation to help, do they even have the ability to help?  In particular, do they have the firepower or capital reserved for an extension to bridge the company to the next round of funding?

My Opinion / Last words

I don’t think party rounds are the best option for founders, but if a founder’s only option is a party round, then it IS their best option… and I support that decision. Usually, if a founder can get to a party round that usually means they didn’t prepare hard enough to land a traditional lead.  So my real advice is to do the work to prepare in advance and speak to enough investors so that when you close a deal it is with a strong lead who will support you through ups and downs. 

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