When it comes to types of venture capital instruments, party rounds are as controversial as they come. A party round is an early-stage financing round, usually occurring between the pre-seed and Series A stages, that includes a laundry list — or “party” — of individual investors. It’s different from a more traditional round, which may look like it’s led by one or two institutional investors with a few participating investors also taking part.
The investment vehicle has been around for over a decade and has been a subject of debate for just as long. The positives are obvious: With more investors on their cap table, startups have more avenues for distribution, introductions and advice throughout their lifecycle.
The cons are more complicated. Is the party-round investment as helpful as capital from fewer, more commitment sources? Are there too many cooks in the kitchen? Is it a negative signal that this startup had to raise from dozens of people instead of one high-conviction partner? During a downturn, is a party round all about the confetti and no allergen-friendly appetizers?
While the argument is nothing new, the current market introduces dynamics that make party rounds a little more complex than just bringing a few of your favorite founders and thought leaders onto your cap table.
Party rounds are popular because we want them to be
Party rounds are part of the unbundling and productization of venture, a trend often described as “the democratization of venture capital” — emerging fund managers can turn to party rounds as a way to get allocations in hot rounds, break into the investment world and build up a high-signal track record.
On the founders’ end, party rounds are popular because it’s a simple way to fill out the rest of a financing round with well-known names. Instead of getting the founder of Clubhouse to lead a $10 million round in your social audio app exclusively for Monstera lovers, you may be able to get them to cut a smaller, $10,000 check. Beyond the power from high-signal investors, party rounds help founders get some built-in distribution and marketing support. Investors are more likely to retweet or share your product if they have financial ties to your success.
At the end of the day, it seems like a good deal: Investors can spread their money across more deals and gain access to rounds too competitive to lead, while founders can land key distribution and signal from more than just the biggest check writers out there.
So why is it so complicated?
It’s about signal, not style
In 2020, VSC Ventures’ Jay Kapoor noticed that a “major downside” of party rounds popped up when 10 to 15 funds appeared on a cap table, many of which were brought in by a lead investor.
A fund that historically writes $3 million checks, he posited, may write a $500,00 check as an “option bet” alongside smaller funds, which would invest $100,000 to $500,000. In other words, the investor makeup of a party round can get fragmented not because it’s full of emerging fund managers who can’t afford to write bigger checks, but because it’s a nice way for generalist investors to bet on a sector without needing the buy-in of an entire partnership.
It’s a hard balance during a downturn. Because party rounds feature no lead investor in a traditional sense, Kapoor said, “No one leans in and says, ‘Hey, this company needs a bridge round of $1 million — everyone I brought in and co-invested [with] needs to step it up, too.” The big-name investors in the round may provide a signal in an up market, but because no one leads, there is no institutional backing or support for the elusive extension round.
Party Round, a venture-backed startup that helps other startups raise party rounds, raised a party round itself. Beyond the fact that we’re all wondering how that line got through the editing process, Party Round’s very meta story makes it an interesting character to bring into this conversation.
Jordi Hays, co-founder and chief executive at Party Round, admitted that party rounds can hurt struggling startups that lack a clear lead investor when they need extra funds — or just advice. Hays added that “many investors would prefer to put those resources toward a company that’s winning or that they’ve staked their own brand on as a firm.”
That said, Hayes suggested that the utility of investors varies. Not everyone needs to be your speed dial support system.
“When raising our first round, we curated a mix of people that could help our company get early traction and help us build our audience on social media,” Hays said. “Some of our investors were founders who would give credibility to the product and use it themselves, others were investors who could introduce us to potential customers, and others simply retweeted content we posted.”
It begs the question of whether fragmentation challenges are worth the diversification benefits. Sumukh Sridhara, head of founder products at AngelList, defines party rounds as collecting 25 checks, ranging between $50,000 to $75,000, from venture scouts and early-stage funds. While he agrees with the sentiment that this shows a lack of one fund with lots of conviction, Sridhara offered another argument.
“The counterpoint to the ‘single fund writing a big check is good’ is that founders find that angels are actually more helpful than VCs,” he said, citing Pipe founder Harry Hurst’s poll. The entrepreneur helped create AngelList’s roll-up vehicles (RUVs), which allow founders to add a number of individual angels and operators to their cap table with only a single cap table entry.
“Our intent around RUVs was not focused on party rounds and more about allowing founders to accept value-add angels,” he said. The median size of an RUV is $200,000, but there have been some companies that do an entire round through an RUV, often still anchored by a couple of larger, individual angel commits.
The takeaway
I love when debates actually make a difference, and in this case, they do. It seems like the definition of a party round has changed over the years, partially in response to many of the dynamics that appear when there’s no specific lead investor in a financing round.
Today, a party round is broader: It includes the round that contains more than a couple dozen angels, but also rounds that are anchored by a lead and filled out by a few dozen angels. With the downturn reminding folks of the importance of focus, signal and high conviction over spray-and-pray investment, we may see more of the latter get adopted, while the former return to an outlier type of raise.