Contingent Investment Commitments And The Quest For Lead Investors

Founders will have undoubtedly heard this confusing, frustrating phrase: “I’d love to invest, so long as there’s a lead investor.” Oh boy. I have been there, on the receiving end. It sucks. The knee-jerk reaction is to wonder why, oh why is this person so afraid to invest in my startup — Do they not believe in me? Are they too chicken-shit to say “no”? Are they only interested in social proof? Now, having spent time on the investing side, I have a new perspective on this. I have, myself, been thrust into the position of uttering those dreaded words — “yes, I’d love to be along for this ride — so long as there’s a lead.” I knew as I soon as I said it, this was happening. How did it come to be, going from loathing a phrase to using it earnestly, sincerely? I’ll explain.

I invest very small amounts of money. That money is mostly not my money. The model I promised my LPs is that I’d be one of the last checks in a round given the level of small-ball I’m playing. In some deals, there is significant product risk or go-to-market risk. And, in evaluating those risks, someone in my role has to think about the danger of a sunk investment cost. The specific fear in this case is your money goes into a black hole and the company won’t be funded fully or without a strong lead who is invested with the right incentives. In those cases, unless there’s a miracle, the investment may vanish. In some deals, I assess the risk and feel comfortable taking it. In others, I don’t have that same secure feeling, even though I may love the founder, the product, the vision, and so forth.

Stepping away from me and my example, these few experiences have opened my eyes to why countless other founders hear this frustrating phrase, over and over again. The common mantra you read on Twitter or Hacker News is that leads don’t matter, that founders just need money and they’ll figure everything out. The problem with this is that most startups are destined (percentage-wise) to flail and fail. A strong lead in a deal, even if small, has enough incentive to guide the team to good milestones (especially first-time founders) and/or to pick up the phone and make a critical BD deal or acquisition happen. Here, the lead acts, in part, as an insurance policy to protect the founders’ initial equity stake.

In the heat of the moment and the mind-numbing back-and-forth of a fundraise, this crap can make any founder go crazy. That’s why I’m writing this — I know it’s a hard process, especially when trying to attract the right people to the deal, so hopefully this post shines a light on some of the dynamics that may be at play behind the scenes, and so that founders don’t take it personally when they get an arm’s-length offer. The search for the strong lead may be elusive, and some founders will succeed without ever finding one, but in the majority of cases, the founder-lead relationship is critical to instill confidence around everyone else (investors, key first hires, potential BD partners) around the table.

There’s also an emotional, hard-to-explain, chemistry-based interaction at play. There are a number of strong investors who lead deals, whether it’s seed, Series A or beyond. When those types of people lean into a deal, part of their calculus is assessing their compatibility with the founder(s). There are countless occasions where an investor wants to participate in the company as an investor but doesn’t want to be the lead, and this can be difficult for founders to understand because they’re “all-in” for their business and the investor who doesn’t lead is at arm’s-length. I’m sure I’ll face this dynamic head-on later in life. That’s why I’m taking lots of shorter, practice-swings, because I believe in order to be strong, decisive, and act like a lead, one needs to see a high-throughput of people and opportunities, and through that flow of people and deals, when special opportunities come by, and there isn’t a split-second for hesitation available, I want to be ready for it. Right now, I am the furthest thing from ready. Leading an investment is a great skill, and one that has been incorrectly minimized in today’s alleged popular wisdom.