Let’s face it: There’s a reason clubs will pay reality stars just to come hang out. People are more intrigued by a famous face. Silicon Valley might think itself above crass fame-whoring, but that doesn’t mean tech folk are immune to the siren song of social proof. Witness, for example, the rise of the so-called “party round.”
Today TechCrunch takes on the topic of these early-stage “family-style” rounds, where angel investors and VC firms pony up a bit of cash (often as a kind of option for later investments), but no one quite leads the pack. The process is compared to–what else?–high school:
Second tier VCs want to be in the same rounds as first tier VCs and third tier VCs want to get in on the deals offered to 2nd tier VCs. It’s all very high school if you think about it on any sort of anthropological level.
Only in the Valley: “I don’t know if I feel like going out. Who’s coming?” “Marc Andreessen.” “Well, why didn’t you say so?”
Hm, that triggers more recent memories, namely: standing in long lines outside clubs that, once you’re finally admitted, aren’t actually all that great. Because the problem with party rounds is that everyone has a stake but no one has a big enough stake to give much of a damn. There’s therefore little incentive for investors to step up when inexperienced founders face challenges.
This recent post from Chris Dixon argues they’re also bad for investors:
It’s hard to disentangle cause and effect here, but most likely there are a few causes: 1) higher-than-market valuations due to no lead investor there to negotiate and lower price sensitivity of investors “buying options” on the next round 2) small checks reflect lack of investor confidence which in turn reflect something else risky about the startups’ fundamentals 3) worse exits in the downside scenarios because investors don’t help out.
The thing about raging parties is that, all too often, one wakes up the following morning with a raging hangover.
