Solution: have the lead investor perform like a lead investor.
Conventional wisdom and good sense would argue that it is good news for an early stage biotech company to announce the backing by a large investors syndicate (4 or more). Indeed, the fact that many smart people are independently deciding to invest into a company, contributing their cumulative expertise, networks, and cash, validates the potential of the start- up, powering it for success. This is all true, however this blessing comes with some caveats, that entrepreneurs need to keep in mind.
Anecdotical observation and analysis done on samples of European and American start-up companies backed by 4 or more investors seem to show a disproportionally high number of "problem companies", in comparison to the control group, comprising companies backed by only 2-3 investors. What?? Really?? Agreed, there is a possible bias, playing against the observation: problem companies usually go through more financing rounds, ending up having more investors around the table, so large syndicates would be a mechanical "consequence" of the problems. However, the sample can be adjusted to include only companies that were backed by many investors coming in at the SAME round, not over many subsequent ones. The observation still holds true. Fewer successful companies than in the control group. Does this make sense? How can 4 smart people be more often wrong than 2 comparably smart ones? Maybe a couple of thoughts to break this apparent paradox…
The first simple explanation is that the 4 backers are not really deciding independently of one another; maybe 1 or 2 have come to independently validate the upside, but usually the others have been decisively influenced by the lead investors. So in reality the validation of the upside is not warranted by 4 independent brains. Ok then: but this doesn't explain why this sample should be worse off than the 2-investors backed companies: it should be at least comparable.
Here a key that could explain the "cost" of having 4 backers. Every venture fund is like a living organism, with a defined lifetime (usually 10 years). During its lifetime, the fund goes through highs and lows, periods of repeated realisations and successful exits and periods of prolonged droughts: this impacts reserves management and the fund's risk reward attitude to decision making. Also, a fund in its first year of life will have a longer term attitude in respect of strategic decisions to be taken by the portfolio company, while a fund in its 5th or 6th year, for example, will start looking at paths to liquidity. All these considerations impact the specific agenda of the investor, in a way that can be largely seen as independent from the performance of the portfolio company. At any point in time, there is a defined probability that any two funds may have diverging agendas; when the funds around the table are 4 or more, it is mathematically predictable. This is when closely held portfolio companies hit the issues of shareholders disagreeing about the next strategic step, whether it is the next round of financing or a transaction with corporate partners. Hence delays, stress and wrong decision making.
What do we make of this observation?
Whilst we don't think that 4 investors is bad news for a company, we do think that it should be much better news than it currently is. The cash resources of 4 investors are a strategic asset that companies should not underestimate. The good news is that the observation sample includes a group of companies for which the 4 investors-syndicate seems to be working well. This is due to the presence of a clear lead investor within the syndicate, as demonstrated by a clearly higher equity stake, or by a unique involvement in the executive management of the company, this functions as a catalyst in decision making and prevents many of the "stall" situations that can be observed otherwise.
In addition, empowering a lead investor to play the lead investor role decreases the risk of delegation of responsibilities and dilution of the sense of accountability towards the entrepreneur, that can sometimes be observed in large syndicates made of equally heavy investors.