‘Headless’ Rounds Ride Into Town, Helped by Kevin Rose

On Tuesday, TechCrunch reported that celebrity entrepreneur Kevin Rose has raised $1.5 million for his startup, Milk, from a “wide syndicate of Valley elites.”

“Wide” may be understating things. Fully 24 angels participated in the round at what I’m told was a pre-money valuation of $15 million. Among those on the star-studded list: Twitter cofounder Evan Williams, Zappos co-founder Tony Hsieh, actor Ashton Kutcher, and Mike Arrington of TechCrunch.

The news wasn’t wholly surprising, given the way things have been trending. Not only has the number of angel investors been on the rise — the matchmaking service AngelList has ballooned from 80 accredited investors at its start roughly a year ago to more than 500, for example — but angel investors as a whole have become far better organized, all of which has eased the bundling of lots of checks.

And there are plenty of reasons why Rose would want such a deep bench of glitzy names attached to Milk. Easy access to his investors’ companies and networks is just part of the package. It’s also typically the case that “the more people you cram into a round, the more control the entrepreneur retains,” says Angellist co-founder Naval Ravikant, who is himself an active seed-stage investor.

Indeed, Josh Felser, co-founder of the seed-stage venture firm Freestyle Capital, suggests that the kind of elastic investor network assembled by Rose isn’t built for major company changes. ”If you don’t need anything from your investors, then having a lot of them is fine, or if you need a lot of little things, having a lot of them is fine.”

Still, the sort of “headless” round that Milk’s funding represents – no one pitched in more than $250,000, according to one investor – is beginning to look like a troubling new wrinkle on the seed-stage scene.

Just one concern is that such a broad net of investors can lead to leaks about proprietary company information. Another is that investors with small stakes may not take as much of an interest in what’s going wrong at the company. “When we invest with a lot of [co-investors], we can’t afford to be as active,” says Felser, whose firm recently led the $935,000 seed-round of Byliner.com, bringing in eight other investors to fill out the financing. “We want to be more involved when we have more capital at work.”

That might be good for entrepreneurs like Rose, who formerly co-founded Digg and may not want investors meddling in his affairs. But it may not be as beneficial to younger, less experienced founders, like those coming out of Y Combinator — many of whom are seemingly being encouraged to embrace bigger syndicates.

Hipmunk, for example, a startup whose software helps people search and filter their flight search results, has raised $5.2 million over three rounds of funding since last August. It has 14 investors. Zencoder, whose software converts video into Web and mobile-compatible formats, has raised $2 million from 15 investors since February of last year.

“The problem with having [so many] investors is that when it comes time to raise another round, get bridge financing, or sell the company, no single investor is incented to take the lead and help you make it happen,” says Ravikant.

Worse may be those cases where the investors are all trying to take the lead. “It’s the same old problem that you run into with VCs,” says economist and angel investor Paul Kedrosky. “It’s the old martini rule. One VC is good, two is better, and three is a disaster. The same logic applies with angels, though with angels you could double it.”

Serial entrepreneur and angel investor Caterina Fake agrees in part. She says that in her experience, “some investors are more engaged than others, and the number of investors doesn’t have any effect on that.” She also volunteers that on a fundamental level, it’s “a pain for an entrepreneur to manage a lot of investors.”

So what’s the ideal mix? In Ravikant’s view, it’s “one lead investor who accounts for half of your round, and a couple of smaller players who are known to be helpful splitting the rest.” Felser echoes the sentiment. “Whether we take the lead or join [someone else’s round], we don’t invest in a company where there isn’t someone minding the store.”

Most ideal of all, suggests Fake, is an entrepeneur who can strongly influence the engagement of investors and advisors and board members — no matter how many are involved in the company.

It’s a point that Harvard business professor Josh Lerner seems to support. “I’m sure you can find dilettante angels who don’t take the responsibility seriously,” he tells me. “But I think you can find examples of dilettante VCs who don’t either.”