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November 10, 2006

Should you lead or follow?

At a time when we are witnessing several follow-on financing rounds in India, Fred Wilson has an post on why his firm prefers to be the lead investor in the companies they invest in.
- 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 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 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.

Arun Natarajan is the Founder of Venture Intelligence, which tracks private equity and venture capital in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.