Are piggy rounds not good for founders? Here's what the data says on multi-stage VC signaling risk.

Hunter Walk of Homebrew Ventures has a good post about Piggy rounds and Party rounds up on his blog.

Piggy rounds, per Hunter, are those where a larger early-stage or multistage funds offer to do 80-100% of a company’s seed round.  He suggests that Piggy rounds are sort of the new Party round which was a thing in 2012/2013.  Party rounds being those that have a large number of investors without a lead investor.

Hunter’s view on Piggy Rounds is that they’re not good for founders.  He writes:

I don’t think Piggy Rounds are good for most founders because they reduce optionality too early in a company’s lifecycle. Because these rounds are mostly coming from multistage VCs who are counting on you to shoot for a “venture-scale exit,” you’re resolving to be an eight or nine figure business waaaaay before you know what that means. You’ve also got signaling risk for next round.

To his credit, Hunter acknowledges that he might be “talking his book” (he is arguing that something that, if correct, would benefit his business).

We’d looked at the data around signaling risk earlier and whether large VCs in a round hurt or helped, and the data actually suggests that Piggy Rounds are not bad for founders. More concretely, companies that raise their seed round from larger funds actually have a higher rate of follow-on investment than those that raise a seed round from dedicated seed funds.

The gap was quite significant, in fact.  When a seed VC backed company raised a round just from a multi-stage fund, they raised follow-on investment rate 54% of the time while only raised follow-on financing 32% of the time when taking seed money from a dedicated seed fund.

seed VC follow-on rate

There are, of course, some explanations & caveats:

  • There are lots of seed VC funds emerging of varying quality.  The follow-on rate is inevitably higher for the top tier Seed VC funds as much like VC overall, seed VC funds will follow the venture capital power law trend.
  • The data above is for seed VC vintages through Q2’11.  Since some additional seed vintages have matured since then, It is conceivable the trend has changed since then.

We’d also looked at the data behind party rounds a while ago as well.  While the narrative suggests that they’d be bad for companies, i.e. nobody has enough “skin in the game”, the data paints a different picture.  Companies that received a party round actually raised follow-on financing at a higher rate than non-party round companies.