- Short Description:
- Some GPs choose to invest in deals where there is already an identified lead investor. If the check size is small relative to the total round size targeted, it can be easier to include the Follow On investor, particularly if the decision process is quick and does not require a lot of work on the part of the company.
- Benefits:
- If you can successfully build relationships with key investors or others who refer these days, there are fewer sources to manage.
- You are more likely to screen out the very worst deals, as those companies are less likely to find a lead investor.
- Can remove some of the politics of decision making especially for government-affiliated VCs.
- Trade-offs:
- While you may screen out many of the worst deals this way, you are unlikely to get the very best deals as the firms that are leading often will keep them for themselves. (This can depend on the stage and the current market situation. For example, this can be less true at early stages, currently, seed in California.)
- Deal pacing and decisions often are different. Often you will have to settle to less access to founders, employees, and customers and be asked to make a decision more quickly. Therefore, you will likely want to maximize speed in decision making. (As a side note, maximizing for speed can lead some investors to focus on the deal dynamics and signaling effects rather than the fundamentals of the investment.)
- As the target check sizes increase as a percentage of round size, it is harder to find room for Follow Only investor and they may be forced to change strategies.
- Examples:
- Correlation Ventures
- various government-affiliated VCs
Sourcing: Follow Only
