Back in 2014–2015, we sent our first companies to a small US accelerator called Y Combinator. We discovered the American way of doing Seed rounds: they were raising what we’ll call fractional rounds with SAFEs; whereas in France we were still only closing “priced” Equity rounds at the time.

We realized our friends across the pond scaled a smart approach to seed funding. YC had been innovating with today’s famous SAFE (Simple Agreement for Future Equity) — which was even easier to implement than convertible notes.

The SAFE was a fantastic innovation for startups as it postponed the costly and heavy administrative burden of doing a priced equity round at a later stage, taking into account the reality that at a seed stage, anything and everything can happen to a company. What’s more, it enabled companies to fractionalize the seed round among different people they meet over a period of several months, meaning that you can invite investors onboard gradually with no specific deadline or closing date by which they have to be either in or out. In France, the SAFE has been copied with the creation of the BSA-AIR (Accord d’Investissement Rapide), which gives companies an alternative to doing institutional “Priced” rounds. (*)

We leveraged these fractional instruments for Spendesk, Upflow, and even Aircall’s seed rounds. It made it possible to have Angel investors come on board at different milestones of the company’s life cycle and enabled us to continually fundraise, in a gradual manner. For Spendesk, confident in the traction the business was gaining, we were willing to raise funds progressively at successively better terms, reducing our overall dilution — both for founders and ourselves.

What’s more, with the rise of productised syndicates and Special Purpose Vehicles (SPVs), AngelList being the leader in the US market, the trend to run Seed rounds with only angels has become an incredibly attractive option to consider.

So what advice would we give founders debating whether to go for institutional seed rounds or only raise with angels? We’ve broken the benefits and downsides of ‘Fractional’ Angel-only rounds at Seed-stage so you can make your own decision.

Let’s take a simplified example:

You are raising a Seed Round of $3M to fund the next 30 months.

Option 1 — Institutional: your investor wants 20% of the company and proposes $3M for $15M post-money valuation.

Option 2 — Angel: you raise in 3 rounds with angels:

First round: $1M at $15M post-money valuation
Second round: $1M at $20M post-money valuation
Third round: $1M at $25M post-money valuation

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Option 1: 1 round with institutional investor

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Benefits of fully fractional Angel Rounds

Create a community of ambassadors. VCs typically want to own 15% to 20% of the company. Therefore they don’t leave (much) room for lots of angels to join in a round led by VCs. Angels on the contrary (being operators or not) do not require an ownership target in your company, so you can create a large community of ambassadors.

With Angels the admin part is fast. When the angel is good to go, you close them quickly with an eSignature and you’ll have the cash in the bank. The process with VCs might take longer as their investment comes with a term sheet you need to negotiate, pass due diligence and only then is the deal done.

You have the option to reduce dilution. Funding doesn’t need to happen in a set number of months or weeks. This means that your company grows as you fundraise. And if your company grows at a faster rate than expected, you might rethink your fundraising process: you might not need that extra cash and might end up raising less and getting less diluted. That was our hypothesis at Spendesk. In the early days, when you’re looking for PMF, there are entrepreneurs who might prefer raising progressive rounds — the great added value with the progressive rounds is that you master dilution.

You get to leverage operator angels. The individual investors who have specific sector or industry expertise through previous experiences as operators. Not only do they invest in companies, but they are also very hands-on with founders and bring their skills and advice to add more value.

Raising with a wide variety of operator angels as folk (eF19) or Crew (eF20) did is beneficial for founders as they can now leverage a huge amount of skills that they previously didn’t have in the team. This doesn’t happen without effort. You’ll need to engage with operator angels, as they are by definition quite busy people 😉

No signalling risk. Signalling risk typically happens when a multi-stage fund comes into the seed round creating an expectation that they will lead the next round. If the multi-stage investor decides not to invest in the next round, then this sends a very negative signal to the rest of the investors.

You get to postpone board-level types of meetings and decisions. Most institutional investors will ask to be involved in board-level decisions. If you see having board meetings as a task, a duty that holds you back every 6 weeks, then favour angel investors rounds. Angels do take time and effort to engage but it will be up to you to keep them involved, as Angels are typically more passive.

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The downsides of Angel Rounds

The risk of progressive rounds. Small progressive cash injections have lots of upsides but if your business is not delivering on the metrics, it might be hard to convince Angels to join in a second wave. You might even need to raise cash at a lower valuation (a down-round) in some negative scenarios as illustrated below. So only raise progressively if you’re confident that you’ll be able to raise consistently on good, improving terms.

Example of a negative scenario with angel investors where you need to do small down-rounds

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No institutional investor soundboard. The flip side of not having a board is the absence of a large institutional investor with the expertise and advice they bring. Some founders need a soundboard to gain perspective, be challenged, and reconsider where they stand. Institutional investors not only provide a large chunk of money but also participate in the governance and structure of the company from day 1. A soundboard with that level of experience is very difficult to have with only business angels.
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A lot of stakeholders to manage. Having to onboard a large number of business angels can quickly turn into an admin nightmare in the long run. AngelList and tools like Cabal have done a tremendous job with helping founders syndicate & animate their angel investors. And we’re on a mission to do just that with Roundtable in Europe, making it easy and efficient to bring an unlimited number of business angels on-board.

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Looking ahead
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Angel rounds are an exciting trend that is here to stay. Founders & early employees of unicorns have been, are, and will continue to cash out and these people are willing to help fund a new generation of entrepreneurs.

There are a number of tools that make it easier than ever for business angels to team up and invest together and for founders to onboard large amounts of angels on their cap-table seamlessly.

The question shouldn’t be whether an angel-only round is better than an institutional-priced VC round, but whether the people backing will be the ones to add value.

You might also gain the best of both worlds like folk did: they benefit from operator angels investors and also raise with a large institutional investor. The two are not always mutually exclusive.

Whether it’s angels or a VC firm, you need individuals who will challenge you and bring you to product-market fit. That is the bottom line.

(*) At conversion there was no need to calculate the interest rate linked to the note. Interest rates loop in some complexities as postponing a closing for 2 days implied to run all the maths again. Interest rates are also triggering taxable events.