- Description
- A strategy of only considering for investment companies that have already secured a lead investor or significant other investors/capital. This decision-making pattern can be mixed with others like Strong investment committee, Consensus (or Veto) or Conviction Does the Deal. Often this is an approach used by investors new to a stage, strategy or geography who are still building confidence in their own decision-making or are constrained by internal rules.
- Benefits
- Focused Sourcing: With Follow Only, the primary source of deals is often referred
- Lower Risk: the objective of the strategy is to lower risk by having fewer wipeouts or to avoid investing in companies that have little chance of raising further money, growing, or becoming large. If another respected and successful investor is leading the round, the expectation is that that firm has done the work necessary to determine the company is worthy of investment.
- Builds Confidence: If the GP is building confidence with a new strategy, brand, team or geography, the Follow Only strategy can act like training wheels before leading
- Builds Relationships: Particularly at stages or in geographies where there is less competition, an approach to possible lead investors stating that you will support their deals can be seen as attractive. It can be a way to build relationships for a new fund and/or a fund entering a new geography or sector.
- Less Complexity: Negotiating investment documents and putting together a syndicate are roles that are typically taken by a lead investor. If the GP is pursuing a Follow Only strategy, then s/he will not be required to manage this extra work and complexity.
- Fewer Board Seats: Typically, follow on investors are not offered board seats and therefore the GP will have more time for other activities. Of course, the GP is relying on the board to perform well.
- Trade-offs
- Missing Allocations: with larger funds, they often will want to buy all the available shares in the round. This can leave little to none for follow-on investors that don’t have a previous relationship with the founding team. Even if the lead investor is open to having the GP participate, the founders may not know the firm or want to sell the GP shares.
- Capped Upside: The GP faces a risk of adverse selection of not being offered the very best deals which can be much of the upside of VC.
- Less Glory: if an investment is successful, the “credit” will often go to the lead investor.
- Examples
- Correlation Ventures
- SV Angels had a fund that invested in all YCombinator participants