Companies That Receive Party Rounds More Likely to Raise Follow-on Funding

A “party round” is an increasingly popular and also derided type of seed round. By definition, a party round is a round of funding, typically a seed stage financing, from a large group of investors often without the presence of a lead investor. The conventional wisdom (which is 100% anecdote-driven) is that party rounds are bad for entrepreneurs because no investor is committed enough to care about the company. The argument goes that party rounds make receiving advice and raising follow-on financing more difficult because investors are less “invested” in the company (not enough “skin in the game”, etc etc).

But the data doesn’t support these claims. (The case was similar for the argument that seed rounds by large VC funds were bad for startups. Again, data trumped anecdote).

Let’s start by defining a party round as a seed financing round in which the investor syndicate includes 10 or more investors. Since 2008, we found 170 party rounds with a sharp increase in the past two years. And almost halfway through 2013, we are on pace to see a similar level of party rounds to last year.

Contrary to what the punditry have said, companies that received a party round from 2008 through July 2012 saw a follow-on financing rate of 53%. This is substantially higher than the typical 39% follow-on rate for all seed backed companies that we calculated in our earlier Series A Crunch Report from Q1’09 to Q3’12.

So raising money after taking a party round is not worse or more difficult. In fact, follow-on financing rates are higher for companies whose seed rounds were party rounds than the overall rate.

To compound things, companies that raise party rounds also close their subsequent financing quicker. Specifically, companies that raised party rounds took slightly under 12 months to receive follow-on funding while the overall average is slightly over 13 months.