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.
fredwilson
· 2 years ago
excellent points Jay
if a VC from the other coast wants into a deal they should help find a local lead.
Fred
Victor Wong
· 2 years ago
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?
fredwilson
· 2 years ago
That's a big question that requires a long answer, but generally yes I agree with that observation
Fred
bsiscovick
· 2 years ago
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 - http://tinyurl.com/2rbxt4) 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.
fredwilson
· 2 years ago
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
Drew Houston
· 2 years ago
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.
nivi
· 2 years ago
Drew,
Your followers would not have been particularly worthwhile, with respect to your financing, if you never found a lead. The best thing they can do, with respect to your financing, is introduce you to other investors.
Confidence and social proof can backfire if you never find a lead: "These guys made it seem like they had a deal done but they never got it done."
JayR
· 2 years ago
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.
nivi
· 2 years ago
Fred,
What do you think about asking interested followers "Can you suggest any firms who would be interested in leading this deal? Could you make an introduction?"
Disadvantage: If they introduce you to a firm that decides to lead, the leader won't cut out the follower. You will end up with two investors and more dilution.
Advantage: An intro. Entrepreneurs really have a tough time getting introductions, in my experience.
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 suggestion
Fred
Dick Costolo
· 2 years ago
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.
fredwilson
· 2 years ago
and then there are the investors who did say no, realized they were wrong, and did get in the deal. :)
Daniel Ha
· 2 years ago
> Qualify every meeting upfront. If the investor won't lead, don't take the meeting.
Fascinating thing to keep in mind.
markslater
· 2 years ago
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!
Stuart
· 2 years ago
Another great article... thanks Fred.
Antman
· 2 years ago
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.
Mike Popovec, CEO Recruit U
· 2 years ago
It's interesting you mention the "lead investor." My company, Recruit U LLC (www.recruitu.com) 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.
Fred333
· 2 years ago
That is what investing is all about is risk and rolling the dice in a new company or idea.
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 InfoUsa.com , Harris Info Source, FNIN, www.InvestorInspector.com , www.BreadStreet.com , www.InvestorLeads.com 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.
SJ
· 1 year ago
To get a lead investor in often a numbers thing. There are many good sources of investor leads. My two favorites are: Fnin.com and http://breadstreet.com
All Comments
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.
if a VC from the other coast wants into a deal they should help find a local lead.
Fred
Shouldn't this conclusion imply that an entrepreneur shouldn't first look to a corporate venture capital division for funding?
Fred
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 - http://tinyurl.com/2rbxt4) 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.
fred
Your followers would not have been particularly worthwhile, with respect to your financing, if you never found a lead. The best thing they can do, with respect to your financing, is introduce you to other investors.
Confidence and social proof can backfire if you never find a lead: "These guys made it seem like they had a deal done but they never got it done."
What do you think about asking interested followers "Can you suggest any firms who would be interested in leading this deal? Could you make an introduction?"
Disadvantage: If they introduce you to a firm that decides to lead, the leader won't cut out the follower. You will end up with two investors and more dilution.
Advantage: An intro. Entrepreneurs really have a tough time getting introductions, in my experience.
What do you think?
Nivi
http://venturehacks.com
good suggestion
Fred
Fascinating thing to keep in mind.
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.