The "Lead Investor"
One of the most misunderstood concepts in the venture/startup world is the concept of the "lead investor". I got an email from a friend yesterday who I won’t name because I am not sure he wants his financing efforts blogged about openly. He said that he’s got indications of interest from a number of investors but they are all waiting for a "lead investor".
I told him that what he has is a bunch of followers who have no real conviction about his business because if they did,they’d step up, negotiate a deal, and get their money into his company. But instead they are going to sit on the sidelines, wait until someone with conviction shows up, and then try to get in alongside the investor with conviction.
Those kind of "sit on the sideline" investors are worthless to you if you want to get a financing done. They don’t impress the kind of investors who have conviction because investors with conviction are going to want all of the deal for themselves (or their friends they will bring in alongside of them).
If you are raising a financing of any kind, spend all of your time looking for a lead investor. Qualify every meeting upfront. If the investor won’t lead, don’t take the meeting.
Here’s what a lead investor will do for you:
1) they’ll raise their hand and say "we are in".
2) they will negotiate price and terms
3) they will hire a lawyer, negotiate documents, and get the deal closed
4) most of the time, they will take a board seat
5) they will work on the investment after the deal is closed
6) they will be your first call when you need to discuss something with your investors and they will help you manage the rest of the group (if there is one)
In short, your lead investor does all of the work for the investment syndicate, is your financial partner, and is focus of your investor group. When thinking about an investment, focus all of your effort on your lead investor and they will make the rest happen for you.
There are plenty of situations when there are "co-leads". This happens for two reasons, one good and one sort of lame. The good reason is when your deal is ideally suited for two investors (in my mind always a good thing if you can make the economics work), the investors will pair up and do the deal together, usually on a 50/50 basis. It’s typically two firms/investors that have a history of working together and you’ll often get both investors on your board. That’s the way Bruce Golden of Accel and I did comScore, for example.
The "sort of lame" reason is that investors often keep score of "lead investments" for their investors (limited partners). Investors like to be able to say that they "led" some large number (like 80%) of their deals. That gives the impression that they generate their own deal flow and don’t rely on the generosity of others. I think its lame because it causes investors to play games with words and muck up the concept of "lead investor". Most investors who rely on the generosity of others won’t be around for too long. You can’t generate top quartile returns in the venture business by being a follower.
In the venture capital business, there is only one sustainable investing model. You have to be a lead investor. You have to have conviction about what you are doing. And you have to lead.