RAISING VC MONEY: From one or more VCs?

I have a hot startup facing one of two paths: Accept money from one VC or follow a second VC who will syndicate the round (use two or three VC firms). What is better?

And what should the CEO do for the next round? Use the same VC(s) or seek new ones?

Here is what I have observed works and causes difficulties:

• One VC can work -- if your deal is HOT. The classic example is Sequoia doing Cisco. The end result was a lot of wealth for everyone. The trick is that most deals are not hot. Most run into difficulties that hinder raising capital at lofty prices round after round. That says multiple VCs are wiser than a single VC.
• A single VC in the seed round is dangerous, but common. Good news: one VC believes in your idea (but 12 others have "passed on your deal"). Bad news: you are an orphan that only one VC is foolish enough to invest in. The trick here is to get a reasonable valuation (because your story is not attracting waves of VCs). You can expect to be exploited on pricing when a confident VC is solo in your round. You must know what exploitive terms are.
  
• Great VCs do solo rounds. Even the icons of VCs do single VC deals, often because they see a quick opening to getting cheap shares AND are confident of raising a follow-on round for a lot higher value and when the company needs a lot more cash.
• Follow-on VC rounds with multiple VCs require a fresh VC to take the lead and set the valuation. This is to avoid getting the first lead VC to be accused of exploiting the startup. So you need a first round VC that is attractive to follow-on round VCs. This is not always done (notably not in China at the moment), but is the practice of the quality VC firms.
• Competition is the entrepreneurs' best friend. I have a startup deep into raising its first VC round, after two angel rounds. There are six quality VCs competing to generate term sheets to present to the company. That competition generates the best offers: Valuation, special conditions (terms) in the paperwork, networks and connections, wisdom managing a startup and so on. So I recommend you start with a list of 6 VCs and keep an active list of 6 going until you have at last two or three eager to generate term sheets for your round.
• Extreme pricing is your enemy. Too cheap (VC gets a great deal) or too expensive (angel priced it too high) can both make your next round very difficult to consummate. Follow-on investors do not like a windfall profit to be generated for the prior round VC. And your over-priced, supportive, friendly investor may face needing to take a slap in the face (reduce his number of shares) to get the next round of investors to do the deal.
• Beware of running out of cash and taking bridge loans. Prepare your capital raising plan with many months of extra time to raise the cash you need. Get ready to miss payroll and miss it even if you lose face, are embarrassed or feel a failure. The old adage is "You are not an entrepreneur until you have missed payroll." Join the club. And be careful of what you sign up for with a bridge loan (some extra cash from an investor to make payroll). The terms in the fine print may block you from taking a good deal from a VC you like. And it may cost you a lot of shares (twenty percent discount on buying shares in the next round).
• VCs run in packs, like wolves. They form groups and compete aggressively with other groups. It is not a nice guys game. So get the groups to compete for your deal. Pit them one against the other. NEVER tell a VC what other VC firms you are talking to, never, never , never. If you do, you'll lose the competition for your deal.

So what helps overcome the issues raised above?

Here is what I recommend to my startups:

1. Forecast all your rounds of financing up to the IPO. Put it into an Excel spread sheet. Try QuickUp.
2. Include all the shares you need for your stock option pool up to IPO.
3. Set the company valuation for each round of planned financing.
4. Decide your "deal busters" in advance, before starting to raise money. These include minimum valuation of the company, minimum and maximum cash you will raise in this round, terms of the deal; especially vesting for your shares and special liquidation rights for investors. And so on.
5. Get tips from your lawyer, other CEOs and a startup coach if you are using one.
6. Plan your campaign. Expect it to take 6 to 9 months to complete. It is not like buying fast food. It takes a long time, much longer than you want, especially if you want a deal favorable to you.
7. Get to know VCs in advance. Spend time studying them, seeking opinions from others, learning their styles of investing and managing CEOs.
8. Have courage. It takes guts to grind through the process, face missing payroll, receive endless questions and criticism. But that is life in the real world of startups. Welcome to the club.
9. Stay flexible. VCs are very creative and can craft a package deal that can surprise you and fit your needs.
10. Know when to stop. There are occasions when you need to throw in the towel and go back home, rethink your business and ask why your desired deal is not attractive enough to investors.

BOTTOM LINE: In general, multiple VCs are better when doing a round of venture financing, but not always. To get the best deal, plan it. Get advice from experienced entrepreneurs and the people working with them. Crank your numbers in advance. Become an expert on term sheets and their consequences. Get ready for difficult negotiations. When you do that, you'll add a strong element to your unfair advantage.