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.

#VC & Technology

Comments (Archived):

  1. obscurelyfamous

    > Qualify every meeting upfront. If the investor won’t lead, don’t take the meeting.Fascinating thing to keep in mind.

  2. Victor Wong

    I’m curious about why recent corporate venture capital investments in Internet startups seem to follow the lead of traditional venture capitalists (i.e. WPP’s involvement in VideoEgg’s funding). Does this reflect the older companies’ inability to figure out new markets and methods on their own? If they lack the conviction to go forward in their own related fields and must invest in others, then they won’t have the conviction to lead any investment.Shouldn’t this conclusion imply that an entrepreneur shouldn’t first look to a corporate venture capital division for funding?

    1. fredwilson

      That’s a big question that requires a long answer, but generally yes I agree with that observationFred

      1. bsiscovick

        I’m not sure I agree with the inference being made here. I would argue that corporates shouldn’t always “go forward in their own related fields” on their own, and often times it is much wiser to invest in smaller, more nimble companies.First and foremost, there is tremendous creative and innovative intellect that exists outside the walls of a company. Often times, the uniquely qualified minds necessary to solve a particular problem or develop a relevant technology aren’t on the company’s payroll. Rather than attempting to “do it all” themselves, some smart companies look outside their boundaries and harness external talent. Making venture investments in small, relevant companies is one way to harness that external human capital.Second, as mentioned above, I think it is poor strategy for companies to attempt to “do everything for everyone.” Focus and an honest understanding of core competency is critical to sound corporate strategy (no matter how large or small the company!). Sometimes companies want to enter new markets or extend their market opportunities (check out IBM’s venture wing – but they might not be best suited to develop such markets. Partnering with (or in this case, investing in) other companies whose focus and expertise complements their own is a way to integrate this strategy without overextending and losing focus.That said, my intuition is that corporate venture units aren’t the best venture partners (a conversation for another discussion…). I’m very curious to hear Fred’s thoughts on the pros and cons of corporate venture capital vs. traditional VC.

        1. fredwilson

          now is not the ideal time for me to post on corporate vs traditional VC. i am in the middle of several transactions with corporate investors and the experience is not the best. i think i should wait for a time when the wounds are not as raw.fred

  3. markslater

    that is very well put fred. The problem is that those with conviction are the few and usually the hardest to get at in your business!

  4. Stuart

    Another great article… thanks Fred.

  5. JayR

    There is one somewhat-legitimate reason for a fund to wait for a leader, and that’s geography. VCs like to stay within a day-trip of their portfolio companies. A VC on the East Coast may find a good opportunity on the West Coast, but would prefer to have a local presence involved with the deal. This makes some sense for both the remote VC and the company, especially if the company is early-stage, because a local VC is better able to leverage his/her base of contacts for hiring, networking, etc., and can get more heavily involved. But if the remote VC is really interested, they’ll take the lead in looking for the syndicate partner.In response to Victor’s remark about corporate investors, the answer is that smaller companies are typically better at innovation than larger companies. That’s true not just in Internet but in pretty much any industry where venture capital and innovation are important – life sciences, software and IT being obvious examples. Big companies tend to have processes and procedures that are not always conducive to the trial-and-error nature of developing new businesses. They’re much more comfortable making a bet when a technology or business has gained some traction or influence in the market. Unfortunately, that means that there are few corporate VCs who are willing to be the first money into a company, so pursuing them for a first round may not be a productive use of time.

    1. fredwilson

      excellent points Jayif a VC from the other coast wants into a deal they should help find a local lead.Fred

  6. Drew Houston

    I’m curious about the claim that ‘follower’ investors are worthless. Certainly, you need a lead to get things done. But many investors we talked to (particularly individual angels), for example, were enthusiastic about our idea but didn’t want to deal with the hassle of the lead investor tasks you listed above. They would rather let someone else handle the more mundane details and haggling and red tape and provide more specialized help, e.g. product help, intros, partnerships, or whatever particular value add that angel brings. And having several people say they were in for 25k, 50k, 100k gave us confidence, social proof (not for name dropping but just to say there were many parties interested), etc.

  7. Antman

    Great post, thanks. We have found the process interesting, we also have people waiting for a “lead investor”. I appreciate your insight as we feel validated in our decision not to give too much credence to these folks. What it has done is continue to give us a this feeling that there are few “true” V.C’s/Angels left but rather a large number of connected folks who are looking to get in as early as possible incorporating as little risk as possible. It has been a very interesting process one that has been as daunting, if not more so, as starting the business itself. Thanks.

  8. Dick Costolo

    good post. I would also add that investors saying that they are waiting for a lead are also saying “no” without saying no, as you’ve posted about many times in the past. They don’t want to miss out if this thing takes off (eg, “hey, we told you we were in, i hope you saved 10 percent for us!”), but they have no conviction and don’t want to say no in case they’re wrong.

    1. fredwilson

      and then there are the investors who did say no, realized they were wrong, and did get in the deal. 🙂

  9. Mike Popovec, CEO Recruit U

    It’s interesting you mention the “lead investor.” My company, Recruit U LLC ( also has been down this road with three different angel funds and two VC groups. It seems to me that this is a common practice these investment groups have because they don’t want to be the first to take all of the risk with a start-up project. If they can see that someone else has risked their behind on your company, for them it sends a signal they too can actually consider you for investment purposes. In all cases, the lead investor should invest $100,000 or more according to each of these groups. I find that to be a sham of an excuse and a lame reason to to invest in your idea. They want to invest of course in a runaway train of a success and diversify the risk associated with their investment – that is why they look to someone else that has done the “lead investor” work first.

  10. Fred333

    That is what investing is all about is risk and rolling the dice in a new company or idea.

  11. Leo

    An investor lead is a type of a sales lead. An investor lead is the identity of a person or entity potentially interested in participating in an investment, and represents the first stage of a investment sales process. Investor leads are considered to have some disposable income that they can use to participate in appropriate investment opportunities in exchange for return on investment in the form of interest, dividend, profit sharing or asset appreciation. Investor lead lists are normally generated through investment surveys, investor newsletter subscriptions or through companies raising capital and selling the database of people who expressed an interest in their opportunity. Investor lead lists are further sold to businesses by lead brokers such as , Harris Info Source, FNIN, , , and many others. Investor Lead lists are commonly used by small businesses looking to fund their venture or simply needing expansion capital that was not readily available by banks and traditional lending sources.

  12. SJ

    To get a lead investor in often a numbers thing. There are many good sources of investor leads. My two favorites are: and

  13. fredwilson

    i agree Nivi. if the “followers” want into the deal, they should introduce the entrepreneur to a lead investor who will bring them into the deal.good suggestionFred

  14. JayR

    Drew, I would argue that the “follower” investors you are talking to are most interested in the credibility of having a lead. Their investment decision is perhaps predicated more on the investor group than your company.