We’ve been talking a lot about how to land investors but how many investors should you look to get? There is definitely an appeal to a large number – you’d have a lot of smart people around the table, you wouldn’t have to ask too much from each investor, and it would signal strength to outsiders.
But Mark Suster, general partner at GRP partners, believes the cons of a large number of investors outweigh the pros.
Investors who take only a small stake haven’t signaled that they believe it’s their deal, and they could easily become preoccupied with other investments that have a bigger impact on their portfolio. On the other hand, if your start-up takes off, you’ll be stuck mediating a fight between a handful of investors all wanting a larger stake.
So what number works?
Suster suggests no more than five investors, and that’s at the absolute maximum. For five to work, most of the investors should be smaller funds and not looking to invest after your first round. One investor might also work. But if the relationship deteriorates or you hit a bump in the road, you could be left with nothing.
Suster advocates for the middle ground: a deal between two investors. Be aware though that each investor will likely want 25 to 33 percent ownership for the significant commitment of time and resources. In this case, the middle ground may be the highest ground, but there are still some pitfalls you need to mindful of.
Always have a lead. No matter how many investors you have, make sure to have a lead. If no one is the lead, then no one is on the hook, no one will corral other investors, and no one will have enough skin in the game to care.
Do your homework. You need to know when their fund was raised, how much capital is produced, how much is already allocated, when they’re raising their next fund, and what their reserve strategy is. And you need to know this information quickly. You can get much of it by calling other portfolio companies and then confirming with your investor.
Assess compatibility. Watch out for those investors who start vying for ownership percentages right away. If they make a bad first impression, what kind of impression will they be making in tough times?
What do you think is the right number of investors? Let us know in the comments!