My good friend Charley says that I “don’t follow very well”. He means that I don’t like to participate in the Series B and C rounds of deals that have been funded by other venture capital firms in the Series A rounds. He’s right. I’ve never been very good at that style of investing and I don’t plan on getting good at it either.
When Brad and I wrote down the list of things we wanted Union Square Ventures to focus on, lead investing was near the top of the list. And there are a bunch of reasons why.
- Lead investing allows Union Square Ventures to establish the capital and governance structures for our portfolio companies. Once these are set, they are hard to change. And every firm has a preferred way to approach governance and capital structures. So the best way to get them the way you want them is to be there when they are set up. That means leading the first venture capital round.
- Lead investing allows Union Square Ventures and the entrepreneur to establish a positive VC/entrepreneur relationship. That relationship is critical to the long term success of the company and getting it right early on is easier than trying to fix it later on. Coming into a Series B or Series C round where there is a dysfunctional investor/founder relationship is a recipe for disaster.
- Lead investing allows Union Square Ventures to establish ourselves as strategic business advisors to the companies we invest in. We often help the entrepreneur determine the appropriate business model and strategy. We can often recommend new avenues for growth and profit.
- Lead investing allows Union Square Ventures to get to our target ownership or at least establish a path to get to it in future rounds. When you invest in the later rounds, there are already a number of investors who have the right to maintain their ownership levels so it is often hard to obtain a significant ownership percentage in those rounds.
- Lead investing gives Union Square Ventures the opportunity to work with the entrepreneur to determine the investor group in future rounds. Many venture investors can and do help the companies they invest in, but many do not, and some are actually a negative experience for the company. We have a good network of quality investors who we like to invest with and we can help the entrepreneur tap into that network, which results in the ability to build a quality syndicate over time.
- Lead investing allows Union Square Ventures to build “franchise value” in the successful investments we have made. We don’t and wouldn’t claim to have done the really hard company building work that entrepreneurs do. But as the lead investor, it will often be true that we were the earliest and most active venture capital firm in the deal. So when a company has a susccessful exit, like delicious did last year, the venture firm most closely associated with the company gains some “franchise value” as well.
There are plenty of other reasons why lead investing is important to us, but these are certainly some of the most important reasons.
So the investments we are most interested in are the ones where we can lead the first round of “professional capital” that is invested into the company. We are happy to follow angels and friends and family rounds. In fact, we have participated in a number of those as well. But if you are coming to us with the Series B or Series C round in a company that has been funded by other venture capitalists before us, it’s unlikely (but not out of the question) that we’ll be interested.