Defining Non-Lead Investors

To grasp the concept of a non-lead investor, it’s essential to first comprehend what distinguishes a lead investor. While the term may seem straightforward, many founders are unaware that "Lead Investor" lacks a formal definition by entities like the NVCA or any legal framework. Its meaning is somewhat vague. In my previous analysis contrasting leads with co-leads, I described a lead investor as one who typically:

1. Holds at least 50% of the funding round.
2. Establishes the terms of the investment.

With this understanding, a non-lead investor can be defined as anyone who possesses less than 50% of a round and does not provide a term sheet.

How Non-Leads Function and What to Expect

Non-lead or follower investors often rely on the diligence and conviction of lead investors. While this might seem critical, it’s worth noting that even lead investors sometimes depend on the insights of others (consider the Theranos case, which warrants its own discussion).

This approach allows non-leads to save time and resources in the selection process. If a respected lead investor backs a deal, a follower can simply say, "That’s good enough for me," and invest. However, this reliance also necessitates that they cultivate stronger relationships with both founders and lead investors, who serve as both the sources of investment opportunities and gatekeepers. It's crucial for followers to recognize this power dynamic and leverage it to their advantage.

In my experience, follower funds usually have two primary strategies to gain access to deals: greed and guilt.

Greed signifies the follower fund's capability to convince a founder or lead investor that they can contribute to the company’s success. However, since few VCs offer truly differentiated value, this argument often falls flat, leading us to...

Guilt becomes the more common tactic these funds employ. If they have been supportive or complimentary, founders may feel an obligation to include them in funding rounds. While this may seem trivial, it is a reality in many fundraising scenarios.

Leveraging Non-Leads to Your Advantage

The key takeaway from this discussion is that non-lead investors, at the outset of a fundraising campaign, typically offer limited value on their own. Founders often afford more deference to investors than necessary. I recommend that founders maintain a posture of being pursued, particularly with non-lead investors.

If a follower fund expresses even slight interest, founders should seize this opportunity to make requests. Ask them to connect you with additional investors, introduce new business opportunities, provide strategic advice, or refer potential hires. By doing so, founders can compel these investors to demonstrate their worth and deliver value.

This brings us back to the initial red flag. It’s remarkably easy for a non-lead investor to superficially express enthusiasm. Phrases like "This is fantastic!" or "I’m impressed!" are common, yet they often lack substance. Even a statement like "I’d love to invest" carries little weight, as it implicitly suggests, "…if you secure a lead." They can easily retract verbal commitments if the lead doesn’t meet their expectations, citing changes that occurred after your discussion.

If a non-lead investor genuinely wishes to participate in a funding round, they will actively assist in finding a solid lead and take steps to help you consolidate the round. If they fail to do this, consider it a warning sign. 🚩🚩🚩

Be pursued,

Jason

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Section 1.1: The Definition of Non-Lead Investors

Non-lead investors are often overlooked, yet they play a significant role in the fundraising landscape.

Subsection 1.1.1: Visualizing Non-Lead Dynamics

Section 1.2: Engaging Non-Leads Effectively

Discover strategies to effectively engage non-lead investors in your fundraising journey.