What is the correct number of investors to have behind your company? Judging by many of the high-profile start-ups of late – particularly those in Silicon Valley – you can’t have too many.
And it is not just the business founders who seem to think that a long list of venture capital (VC) logos at the foot of their websites is a good thing.
Given the number of institutional backers of Groupon, Facebook and Twitter – many of which will not have been involved in the early stages – VC firms also appear eager to pay a high price to be considered part of a global success story.
For example, Martin Varsavsky, founder of global WiFi network Fon, built an A-list group of backers for his venture.
These included Google and Skype – whose co-founder Niklas Zennström took a personal interest in the investment – as well as the VC firms Index Ventures and Sequoia Capital, plus a number of wealthy individual backers, such as Marc Andreessen, the co-founder of web pioneer Netscape Communications.
“Ideally, you don’t want one VC because it is too much control with one firm,†Varsavsky argues. He says it was important to have a mix of institutions that could offer funding and those that could offer experience.
“When you get a VC, you stop owning your company,†he explains. “You are trusting somebody with your creation... so you want two or three [investors] because you want a combination of expertise and diversity.â€
Get too many investors, and the management of your board will become too bureaucratic, he adds. “The most likely number to please both entrepreneurs and VCs I would say is three. If you have three, you will have five people on the board – including yourself and an independent – and this creates a balance.â€
However, even the best backers have limits.
In 2008, before the arrival of the iPhone made WiFi a must-have everywhere, Fon came close to bankruptcy when its backers refused to put in more money, recalls Varsavsky.
He used his own money to keep the business going, although he stresses that he was careful not dilute any of his backers.
Lopo Champalimaud, who set up the Wahanda website offering cut-price health and beauty treatments, now has 10 backers after three rounds of investment. His most recent round was a £3.5m fundraising led by Fidelity Growth Partners Europe.
But it is the quality, not the quantity, of investors that is important, according to Champalimaud. He points out that each of his backers has provided more money at each of his financing rounds.
One of Champalimaud’s early backers was Wolf Hengst of the Four Seasons Hotels and Resorts chain – which helped “a huge amount†in building his reputation in the travel industry.
“It turns out that half the general managers of the top hotels around the world were ex-Four Seasons,†Champalimaud says. “As soon as I said Wolf was involved, that gave us an enormous amount of credence.â€
Other backers, such as Brent Hoberman of Lastminute.com and MyDeco, have helped keep everyone’s eyes focused on the longer-term challenges, Champalimaud adds.
He has turned down other investors who he did not feel cared sufficiently about the business.
“It is better to get less of a brand but [a VC firm] that is really supportive for the stage your business is going through,†he says.
Another of his tips is not to involve institutional investors too early. “If you get one of the big VC firms in the seed round, and then they decide not to invest in the next round, it sets a really bad precedent for the business and makes others nervous.â€
Davor Hebel, a partner at Fidelity Growth Partners Europe, agrees with Martin Varsavsky that the ideal number of institutional backers is three.
“Often, in our business, we are happy to collaborate,†he says. “Different firms have different views and different skillsets that are really helpful for an entrepreneur, who is trying to get as much get advice as possible.
There is a tipping point, however, he suggests. “Once you get to four or more investors, they start to disengage because they don’t feel the same amount of ownership. You also start to get dissenting voices around the table and it becomes more difficult for the entrepreneur to manage the situation.â€
For some, though, the right number of investors is none.
Adam King and Jake Allen started their London-based tailoring business King and Allen in 2004 with £1,000 of their savings. They managed to grow to a turnover of £1.2m in four years using only the money they had in the bank.
“It encouraged us to look after every penny and to calculate every decision,†King says. “We also had, and still have, complete control over our direction.â€
The founders got their guidance from a mentor, who they pay “handsomely†for – and gladly, King claims.
“At the end of the day, when we come to sell, we will walk away with a 50 per cent share each, and that is extremely motivating,†he says.
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