This question often plagues both entrepreneurs and investors as they look at a particular round of investment. There are many obvious reasons why a company should look to bring in or not bring in more than one investor. However, it’s important that the management team think through the implications not just for that investment round but also for the future as the company grows.
One of the primary reasons that a company may need to approach multiple investors is the amount of capital that the company needs to raise. When the amount is high, it is usually easier to get the round syndicated than to find one investor to make the complete investment. Further, having multiple investors in the company becomes a boon during recessionary cycles when it’s hard to raise external money and the existing investors need to provide the capital to bridge the company through the bad times. This became particularly evident in the last couple of years when it was very difficult for companies to raise capital and had to be supported by existing investors. Any investor after making an investment usually keeps some additional capital as reserves to invest in the company in future rounds. During down cycles, these reserves get depleted fast and having multiple investors essentially increases the overall reserves available for the company.
Another important reason to get multiple investors is the increased reach and assistance that two investors will bring in vis-à-vis a single investor. This can be very important when your company and your markets are in two different geographies. Take, for example, a global advertising network that may have its operational base in India but needs to address advertisers and publishers indifferent countries. Having one investor to help grow the company operationally and another investor to help market the services and open doors is a perfect combination. Another option, however, is to find a single global investor with presence in multiple countries where partners in different offices can play these roles.
While there are these upsides to having multiple investors, the obvious downsides are the extent of dilution, fear of losing control and the overheads of managing multiple investors. These things become really important when the company is still in its early stages of development. Let me explain this with a scenario.
Typically, investors look to maintain a certain ownership in an investment (usually around 20%). If you raise your first round from one investor and dilute say 40%, that investor would be more willing to reduce the ownership to 25-30% in the next round of fundraising as opposed to a scenario in which two investorseach own 20% post first round. In the latter scenario,with an additional 20% being taken by the new incoming investor, you may end up diluting close to 60% of the company – whichcan be onerous.
Another practical reality that many entrepreneurs may not be aware of or often overlook when they are raising money is that more the number of people on the board, more difficult it is to come to a conclusion on sensitive issues. This problem gets exaggerated when you have two investors who are not looking eye to eye on the board. I have personally seen this play out in a few situations – something that can be a fairly difficult thing for the management team to handle.
Lastly, these negatives that I have highlighted for multiple investors don’t hold true when there are angel investors in the mix – either as an angel only round or angels alongside an institutional investor. This is because angel investors think very differently from institutional investors in terms of retaining a certain ownership and also the tenure of the investment. In fact, angel investors can be helpful in providing the necessary credibility for other investors (angel or institutional) to invest in that or subsequent rounds.
So as you go on to strategize your fundraising, do keep in mind the pros and cons of having multiple investors. Happy fundraising!