Party rounds (2013)

I have experience with party rounds. There are tradeoffs between them and rounds with a traditional lead. The problem is that the advantage of the party round is early, while the advantage of the traditional round comes later. (That dynamic leads to many perverse outcomes in different situations, because we all discount the future to some extent.)

The early advantage of a party round is that you can raise it at all. If you go for a traditional round with a lead investor, then everybody is waiting for a lead, twiddling their thumbs, hoping someone else will do DD, but maybe that someone never comes... The power is in the hand of the potential leads to say yes or no. That's a bad position to be in as a founder, and can lead to acute disappointments and wasted time during those periods when your startup is hot.

With a party round, the founder can put pressure on investors and create scarcity. A stream of checks comes in, and ironically, the more you raise as the party round progresses, the more people start offering you bigger and bigger, lead-size, checks. (This tactic should be combined with "moving the goal posts", or expanding the size of your round so there is always just enough left to be desirable, but so much that it is daunting. No one wants to the be the first money in, but many will compete to get the last slice.)

That is: Party rounds are a very effective way to create momentum in fund-raising and put the power in founders' hands.

But then you have the money, and you don't always have any single investor who is highly committed to you. I have also experienced this.

You should not underestimate the support that a skilled, experienced and committed investor can bring you. The problem is, most founders don't always know who those investors are, and there are a limited number of boards that they will choose to sit on.

I wish smart folks would do better in terms of pointing out these generalized lessons as though they're universal.

The reality is that party rounds, like any form of funding, have positives and negatives, and whether they're good depends on who's funding and who's being funded.

If you're starting a company like Cameo, having a party round of athletes/actors/celebrities is likely more valuable than a regular round of traditional VCs.