How to Find a Lead Investor
Introduction by Ray Brimble:
I have been involved in a lot of fund raising over the past couple of years, both for my own deals, and as an investor in other folks' deals. The emphasis tends to be on the total amount raised. However, as Alejandro Cremades says in his article, "How to Find a Lead Investor," sometimes finding a lead is the most important step toward also finding the total amount of investment you seek. But its about more than just money. If you are a start up, wanting to invest in start ups, or just like to learn more about that world , jump into this quick read to find out more.
Content by: Alejandro Cremades on October 2, 2018
Originally posted at: https://www.forbes.com/sites/alejandrocremades/2018/10/02/how-to-find-a-lead-investor/#7f23e8b761fe
How do you find a lead investor for your next round of fundraising?
Finding a lead investor is a critical part of any startup fundraising campaign. Unfortunately, it isn’t a factor many entrepreneurs really give much thought too until they are deep into their efforts. So, how do you find a lead? Who should they be? How do you close the deal? What if no one is willing to step up to the plate?
The Importance of a Lead Investor
Securing a lead investor is vital for 99% of startup fundraising rounds. Without one you may not get any traction. You may just spend months spinning your wheels before having to go back to the drawing board. Those are precious hours that are being sucked away from your ability to code and market and clock up real customers and sales.
If you’ve already attempted to pitch or raise money there is a good chance you’ve already been told to come back when you get a lead investor. Most VCs, angels and angel groups are all going to want to know who your lead is. It may be one of the first questions they ask. Few want to go first. Yet, after you secure this position everything can fall into place like a line of dominos.
In fact, once you have a lead you should include the terms and the capital that you are raising in your pitch deck with a reference to the individual or institutional investor that has priced the financing round as social proof. This will help to increase credibility and trust with prospects.
For a winning deck, take a look at the pitch deck template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash. Moreover, I also provided a commentary on a pitch deck from an Uber competitor that has raised over $400M (see it here)
Fred Wilson of Union Square Ventures even goes as far as saying “Those kind of ‘sit on the sideline’ investors are worthless to you if you want to get a financing done.” Instead he suggests “if you are raising a financing of any kind, spend all of your time looking for a lead investor.” Even more firmly, he suggests not going to investor meetings unless they are willing to consider a lead position.
What’s a Lead Investor?
A lead investor is the investor who will be the first to fund your round. They’ll be the biggest investor in a fundraising round. In early stages they’ll typically take on more responsibilities than others.
This may be an individual or corporate investor depending on the series you are focused on.
What does a Lead Investor do?
As described in my book, The Art of Startup Fundraising, these investors won’t just step up to be in the lead, and put up the bulk of the capital. They give your startup and funding request legitimacy and social proof, lower perceived risk for others, and create confidence in your venture.
They will also often:
Negotiate terms
Hire a law firm to handle the paperwork
Advise your startup
Take a seat on the board
Make introductions and connections
Help structure future fundraising rounds
Help manage other investors
Bring other investors, financing and distribution channels
Participate in follow up funding rounds
Who Should Your Lead Investor be?
Who makes a good lead?
If you’ve raised money before, then your lead from your last round is a natural fit. If they aren’t willing to participate, that’s a bad sign and red flag for anyone new. Unless this new level of funding is just out of their league.
To take this pole position, investors don’t just need to like your math or visuals. They need to be almost blindly passionate about you as an entrepreneur, and/or your mission. They have to be believers. They have to have have a strong mental buy-in.
Unless you are working on a pre-seed friends and family round, your lead probably isn’t going to be your grandmother. Entrepreneurs are best served if this role is taken by someone with industry experience and respected in the sector or at least in the investment arena. They may be a notable angel investor, head of an angel group, executive or attorney for a related company, or have had a successful exit themselves.
Things may work even more smoothly if your lead has been a lead before. At a minimum it should be obvious that they need to have the money, and be ready to act. Be working to qualify them in advance.
Check out my Forbes article on finding the right investor for more criteria for pinpointing your ideal lead.
How Much Should Your Lead Take?
Opinions vary widely on this. There are many variables. Expect most to take 25% to 50% of the round. Venture Hacks is a little more bullish, saying “Lead investors want at least half the round—and they often want the entire thing. If they don’t want the entire round, they will help you find followers (and some leads will even close before you find followers).”
When to Start the Search
After you’ve run into a bunch of potential investors who have pushed you off until you find a lead, is not the time to start the search. Be efficient and get the best return on your time by focusing on the lead first.
Smart entrepreneurs will start this search, screening and nurturing process a quarter or more in advance. Knowing your targets ahead of time will also help you in preparing the highest converting pitch deck and messages. Don’t think you are going to just get off a discount flight to San Francisco, pick up a Jeff Bezos style puffer vest from a vending machine to put over your pajamas and score millions by knocking on doors and demanding meetings.
Closing the deal can take months of feeding messages into their subconscious, building real relationships and convincing them that you are the one.
Where to Find a Lead Investor
There are many ways find targets to aim for and to connect with them, including:
Introductions by other entrepreneurs and investors
Investors who have a history of leading funding rounds
Online investment platforms
Networking
Social media networks
Email
What if you can’t find one? There are alternatives. This may be a partnership of smaller investors, crowdfunding, bringing in a pro to help you secure financing or funding, or a duo to share lead position, like Warren Buffett has done with recent JVs.
I am a serial entrepreneur and the author of the The Art of Startup Fundraising. With a foreword by ‘Shark Tank‘ star Barbara Corcoran, and published by John Wiley & Sons, the book was named one of the best books for entrepreneurs. The book offers a step-by-step guide to...
Alejandro Cremades is a serial entrepreneur and author of best-seller The Art of Startup Fundraising, a book that offers a step-by-step guide to today‘s way of raising money for entrepreneurs.