Why Lead Investors Aren't Critical in Today's World

by Tam Pham July 21st, 2022

How many VCs does it take to screw in a lightbulb? 

“Well, who’s the lead?”

man in black polo shirt smiling

It used to be a big deal if a founder’s lead investor was a firm like Sequoia or Kleiner Perkins. 

But the world has changed.

Today, entrepreneurs can raise money from a variety of sources, on their own terms, without needing a big-name lead investor. 

How is this possible?

To answer that, I interviewed Eric Bahn (co-founder of Hustle Fund). He took me back ~25 years to see how the landscape has changed. 


Getting a “lead investor” doesn’t matter (as much) anymore

Back in the day, founders who wanted to raise had fewer than 100 VC firms to choose from. And only half of them were reputable. 

As they pitched, founders looked for two things: a lead investor and co-investors.

A lead investor typically covers 30% - 80% of the total amount of a given round. In exchange for being the lead, they get a bunch of equity AND they set the terms. 

The lead investor determines things like what the valuation will be and who gets paid out first in the case of an exit (you can probably guess).

Once the founder has secured a lead investor and their co-investors, everyone signs the contracts at the same time. All the investors send money at the same time. 

Rinse and repeat for the next round of funding. 


What’s the problem with this?

The main problem was that VCs had all the leverage. And they cared a LOT about signaling –basically, their opinion on a startup was based on whether or not a reputable firm was backing them.

If a founder secured a lead investor from a reputable VC, other investors would jumped on the bandwagon. If the startup couldn't find a lead, other investors tended to back away.

This forced founders who needed the money to accept the lead investor’s terms... or face the possibility of not raising any money at all.

This type of leverage made VCs lazy.

Back then, many VCs were momentum investors. Instead of doing their due diligence as independent thinkers, they waited for signals to influence their decision. 

“As soon as you get a lead, let me know…”

Because the VC world was so small, founders didn’t have much leverage.

Those who spoke out against unkind VCs, or fought to get better terms, risked being blacklisted. 

Founders who needed to keep raising money were incentivized to not tell other founders the truth about predatory investors. 

Yeah this sucks.


What has changed?

The first big change was when Y Combinator popularized SAFE Notes.

A SAFE stands for Simple Agreement for Future Equity and is basically like an IOU: 

I give you money now. When you do a bigger round, this IOU will convert into actual equity. 

There’s no legal paperwork. The contract has basic terms. The founders receive the money now and everyone essentially punts the discussion for later. 

Founders loved this because there were fewer hoops to jump through, so they could raise money faster and more efficiently. 

The second big change was a dramatic increase in potential investors. 

Instead of 100 big firms, there are now thousands of funds looking to invest in amazing founders (like us at Hustle Fund).

There are also more and more angel investors, thanks to an influx of education on how to invest personal money into startups (like Angel Squad). 

Or founders can choose to crowdfund, go through an accelerator, or raise from friends and family. 

Because founders have more options, they often choose to work with investors for reasons beyond money.

“Money is cool… but how else can you help me?”

The VC world has transformed into a service industry.

A16z was one of the first firms to serve their community through education and mentorship. Nowadays, it’s common for funds to hire specialists who can be of service to their portfolio founders. 


Final thoughts

The old model of raising money was bad for founders since it left them with little power and leverage. 

The changes in the VC ecosystem give more opportunity for founders to raise money AND it forces investors to be better at their jobs. 

So… how many VCs does it take to screw in a lightbulb? 

Well, it depends on what the founders decide.

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