Quora Answer: Is It Possible to Have Too Many Investors for the Funding Round?

The following is my answer to a Quora question: “What is a good or ideal number of investors for a startup?  Is there such a thing as too many investors in a round?” 

You can have as many investors as you can get, as long as you know how to manage the capitalisation table, and have space for the next round of fundraising, if required.  You could have one investor, and it may be a problem.  For example, imagine a startup that has just begun.  It is based on an idea, and there is no product.  Because the founder is from a wealthy family, his father gives him $1 million for 1% equity.  On the surface, that looks good.  The problem now is that the company is now valued at $100 million. 

Along the way, the founder and his team develop a prototype.  They require further funding, and they cannot go back to his family.  How is an external investor going to step in with the valuation based on the pre-seed funding?  If that investor puts in $10 million, does it mean he gets at most 10%?  He is not going to accept that, and even if all parties are agreeable, you will have a problem when you decide to list, or someone decides to exit or partial exit.  Cleaning it up is onerous and expensive. 

There is no rule of thumb that states the upper limit of investors you can have for each round of funding.  It is not the number of investors that is an issue, but the value of the equity stake.  That value has to be considered for each subsequent round of funding in advance.  If you can manage that, you could have a hundred investors.  You simply consolidate smaller investors into investment vehicles.