Venture Capital

Secure That First Investor, and the Rest Will Come

Magazine Contributor
Entrepreneur Contributor
3 min read

This story appears in the June 2014 issue of . Subscribe »

The $19 billion acquisition of WhatsApp by Facebook fascinated me not just for its sheer size but because the primary investor, Sequoia Capital, went it mostly alone. This is highly uncommon in the "me, too" world of venture capital, where everyone appears to invest as part of a syndicate. Indeed, the typical first question out of a VC's mouth when talking to a startup about investing is, "Who's leading this?"

The question points to a paradox about VCs in general. Everyone wants to tout that they're the best at sniffing out the next WhatsApp, but when it comes to putting money behind that startup, they want some other firm to have skin in the game first.

Nobody in the VC world likes to go it alone. In the eyes of entrepreneurs, this makes VCs look like a scared bunch, but there is a rationale to this: It hedges risk. By syndicating an investment--even if the total amount invested is small enough for a firm to manage on its own--there is a bigger pool of funds available for future funding rounds or, alternatively, a reduction in losses should things go south.

The more investors at the table, the more they can share the cost and time of conducting due diligence and hammering out term sheets.

This is what venture capital firms do at their core: research and negotiate. And it's incredibly time-consuming. When faced with the choice to either take a deal from start to finish or work on one that is even partially vetted, the latter will save a VC precious amounts of manpower. A prenegotiated deal with a lead investor potentially curbs the need for diligence altogether. Since many deals die at the negotiating table, if late investors don't like the terms being offered on the front end, they can walk away without having to put in the time to get to know what, exactly, they're walking away from.

This is why securing that first investor is critical to your fundraising efforts. The time that a lead investor puts in to research your company and its market potential sends a signal to the rest of the VC world that you've got an idea that's good enough for peers to devote precious time and resources toward investigating.

I bring up this herd mentality to make you aware that it's foolish to pitch an all-or-nothing investment opportunity to any firm. Instead, take that first offer (if you're lucky enough to get one), and keep pounding the pavement for more dollars. If I know my business, you'll find a lot of people who once said "No thanks" suddenly saying "Tell me more."

More from Entrepreneur

Grow Your Business at Entrepreneur LIVE! Join us on Nov. 16 in Brooklyn, NY, to learn from legends like Danica Patrick and Maria Sharapova, pitch our editors, meet with investors, and potentially walk away with funding!
Register here

One-on-one online sessions with our experts can help you start a business, grow your business, build your brand, fundraise and more.
Book Your Session

Whether you are launching or growing a business, we have all the business tools you need to take your business to the next level, in one place.
Enroll Now

Latest on Entrepreneur

My Queue

There are no Videos in your queue.

Click on the Add to next to any video to save to your queue.

There are no Articles in your queue.

Click on the Add to next to any article to save to your queue.

There are no Podcasts in your queue.

Click on the Add to next to any podcast episode to save to your queue.

You're not following any authors.

Click the Follow button on any author page to keep up with the latest content from your favorite authors.