Syndicated rounds: When you can’t find a Series A lead

by Janelle Tam6/24/2020

Series As usually require a founder to secure a single large investor: a lead. This is because the Series A is usually a company’s first priced round, which is when crucial terms around governance and control (like board composition) are decided.

Having a lead makes it easier to agree on terms: you negotiate 1:1 with the lead and everyone else follows. It also simplifies the fundraising process: all you have to do is convince one person to believe in your vision. A lead investor can also be a key ally when raising future rounds.

Seed rounds do not have this dependency — founders can close checks as they are offered. This requirement drives much of the difference in the dynamics of fundraising at the seed vs. Series A. In a seed round, smaller cheques add to fundraising momentum; the less space there is left in a round, the more pressure there is to commit capital. In Series As, these smaller commitments are not useful unless they are used to trigger a syndicated round, which is tricky to pull together.

In a syndicated round, there is a small coalition of investors writing similar sized cheques. Because no one has stepped up to lead the round, it is a bit like a game of chicken where no single investor wants to commit until the others do. It’s also much harder to negotiate with multiple parties to find terms and pick a board member that everyone will be happy with.

However, if you’ve run a full process and haven’t found a lead, pulling together a syndicate can be a good Plan B. (We’ve even seen a few cases where pulling together a competing “offer” from a syndicate triggered a term sheet offer from a lead.) If you’re in this position, here’s how to do it:

(1) Find interested investors

In the course of your hunt for a lead, you’ll likely have collected a set of investors who say they are willing to participate but not lead. These investors are good targets for a syndicated round.

The problem with investors who say they’ll participate but not lead is that, as Paul Graham advises:

“When an investor tells you “I want to invest in you, but I don’t lead,” translate that in your mind to “No, except yes if you turn out to be a hot deal.” And since that’s the default opinion of any investor about any startup, they’ve essentially just told you nothing.”1

These investors may still be convinced to participate in a syndicate, but only if the round is de-risked by the participation of other investors. Which brings us to step 2:

(2) Apply pressure to convince investors to commit to a syndicated round

You’ll end up needing to play investors off against each other until enough of them come in to give you the money you need. Here are a few strategies we’ve seen YC founders use that have worked well.

  • Start by getting a bunch of “yes”es for smaller cheques. Typically, it’s easiest to secure these initial commitments from your seed investors, since they’re already invested in your success. Rely on those early commitments to help you make more progress on your round by providing introductions and references.

  • Get bigger name investors to set terms. Use that to get commitments on the same terms from others. Investors love to jump on a bandwagon with a respected investor, even if she is only putting in a small cheque. Alternatively, the investor putting in the biggest cheque can set the terms of the round.

  • Continue to track and communicate the percentage of the round raised. That percentage is a proxy for the level of investor interest in your round. As you raise the percent of the round committed, continue to let investors know. If this number goes up fast enough, it creates the sense that your fundraise has momentum.

  • Use insider investor offers to fill out the round to apply pressure on new ones. It is powerful to be able to go to new investors and say that you already have commitments from your existing investors to fill out the round. Founders have told us that this created the simple psychological perception that the round was closed or oversubscribed, triggering a number of offers from investors that had been dragging their feet. These founders were able to do this because their existing investors were supportive. Of course, your ability to make this claim is dependent on your insiders, so this is a discussion you should have with them.

  • Keep committed investors engaged while you close out the round. Without a lead, the round is unstable. Like dominos, one investor pulling out could cause the entire round to collapse. That’s why even investors that have committed will likely be antsy until the round closes. Mitigate this by staying in touch with them, and keeping them up to date on how your round is progressing.

We’ve seen syndicated rounds succeed most often with formidable founders, who are able to overcome the challenges of not having a lead by convincing investors through sheer force of argument or impressiveness. In fact, we’ve increasingly found that beyond metrics and running a good process, the level of a founder’s perseverance and grit is an important leading indicator of whether or not she will be able to raise successfully.

Ultimately, how you raise money is less important than actually raising money. Even though syndicated rounds take more time and effort to pull together, it can be a great strategy to accomplish what’s most important, especially in today’s economy — getting the money you need to build a great business.

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  • Janelle Tam

    Janelle was the program manager for YC’s Series A program. Prior to YC, she was an associate consultant at Bain & Company where she worked on projects in consumer products and venture philanthropy.