Are you fundraising and wondering how to find a lead investor?
Too many entrepreneurs focus on the quantity of capital they can raise rather than the quality of the investors at their disposal. This is no more apparent than when trying to find a lead investor for a startup.
With the right lead investor in place, startup founders increase their chances of producing a successful end product. In this article, I’m going to describe exactly what a lead investor is, why entrepreneurs should care, and how to find a lead investor that works for you and your business.
The Ultimate Guide To Pitch Decks
What is a Lead Investor?
Defining what a lead investor is, is not easy. The reason for this is that numerous business websites, startup crowdsourcing platforms, and business gurus give different answers to that question.
The truth is, all of these definitions are correct and used regularly, so it’s important that you understand them. I’m going to give you the three most common definitions so you’re good to go in most situations when discussing this with others.
One definition is that a lead investor is an investor who puts the largest amount of capital into your business during one round first representing at least 20% of the entire funding round. Another is that this only applies to investors putting forward the largest share during a syndicated round.
You’ll also see some businesses refer to lead investors as those who step up to converse with, represent, and organize the other investors collectively.
The final often-used definition is that a lead investor is the first person to invest in your business. This doesn’t mean that they put in more money than anyone else, but it does mean that they had the courage and faith in you and your business to put up capital first.
When it comes down to how to find a lead investor, I prefer to think of lead investors as those investing the largest amount of capital, but it’s important that you understand the other definitions to avoid confusion.
Before finding a lead investor make sure you have all your materials in place. Remember that storytelling plays a key role in fundraising and you will need capital to scale things up. This is being able to capture the essence of the business in 15 to 20 slides. For a winning deck, take a look at the 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.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
Why Lead Investors are Important
The right lead investor provides advantages to your business. These include:
1) Social Proof
Investors are far more likely to offer capital when they see that others have already done this. It’s not necessarily a kind of peer pressure, but rather, knowing that other investors have put forward finances, provides more confidence in a start-up’s business model, market research, and potential for a lucrative ROI.
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Whether angel investors or venture capitalists, investors spend their time looking at large numbers of great business pitches. For this reason, they don’t spend that much time on each individual one. To reduce any pitch fatigue, investors look for a shortcut or sign that one pitch is better than another. One of those shortcuts is that a good lead investor is already on board.
This is one of the critical factors when thinking about how to find a lead investor. If a lead investor has a reputation either as a general business person or within a start-up’s niche, then subsequent investors are more likely to put faith in that lead investor’s judgment Later investors are far more likely to put forward capital if they see someone they trust has already done so.
4) Absence Causes Worry
If there is no lead investor, this will make potential investors nervous. This is especially true if they know you have carried out many other business pitches with no results. The absence of a lead investor in such a circumstance, tells others that there is a problem either with your pitch, your team, or your business model.
5) Investment Size
Just as the existence of a lead investor encourages subsequent investors, so too does the amount of investment already placed in your business. If your lead investor has offered a substantial amount of capital, this generates more confidence. If your lead investor has only put up a small portion of what you need, this can deter some potential investors from pulling the trigger on a deal.
Another reason lead investors are important, is that they can act in an ambassadorial role for your business. They can talk with other potential investors and be more persuasive about the future prospects of the target business.
In a similar way to diplomacy, the right lead investor may open up doors for you and your business. If they have the right contacts in place, they may be able to find other investors within your niche or even other talented individuals to take positions within your business.
Lead investors often contribute the most to a startup outside of the capital. For example, they will assist with legal paperwork, interact/manage other investors, participate in future fundraising rounds, and provide critical advice
How to Find a Good Lead Investor
When it comes down to how to find a lead investor, you need to research as much as you can. Go on websites like Crunchbase and see who are the investors that are actively investing in your space.
Go for those investors that have placed investments in the last 6 to 12 months to make sure they have dry powder. Then find a portfolio company founder that has received one of those investments from them and reach out to connect for feedback. At the end of the conversation ask them for an intro to their investor.
When you get on the phone or have the meeting with the founder of the portfolio company follow these steps:
- First, establish the background relatedness. Make sure you have done some research on their past backgrounds like schools they went to or hobbies. Check this on their Instagram account or Twitter.
- If there is anything shared on the background like you went to the same school or you support the same team mention it and establish that personal connection there
- Then compliment them for their journey and how much you admire them. Nice tap on the back.
- If there is anything of value perhaps a suggestion on something they could do on their business mention it as a kind token of appreciation. People are always very inclined to folks that express interest in helping them with their problems.
- Introduce yourself in less than 5 min. Personally as well as your venture. Ask them what they think and how they see the space evolving.
- Then mention that you are thinking about the fundraising process and ask them how it was for them and if they have any tips.
- Then it will go smoothly into them talking about fundraising and perhaps they will mention some of their investors. At this point, you say that you would love to get feedback from their investors if possible and if it is possible to get an intro. Offer them a blurb on you/business to facilitate that introduction.
- Then wrap up the call on a high note and showing appreciation and follow up with the blurb and thanking them for their time via email.
At the end of the day, the best way to find a lead investor is to prioritize your pitch list. This is a list of investors you either have or are going to approach to pitch your business. Rank this list from most useful investor to least useful investor and work on the list from top to bottom.
The investors best suited to be your lead will vary depending on your own preferences, but I would highly recommend prioritizing investors based on the following measurements:
- The capital they have at their disposal.
- How likely they are to invest in future fundraising rounds
- The investors who already have a history of being lead investors for other businesses.
- Their knowledge and experience of your chosen niche.
- The opportunities they can open up for you in terms of personnel and reaching new investors.
- Their diplomacy skills if taking a lead with other investors.
These are just some of the ways to identify who should be your lead investor. However, actually securing that investor is more difficult. Beyond creating a killer pitch and asking for a meeting, you can try asking for an introduction via a mutual acquaintance or entrepreneur who will vouch for you.
When you are in the fundraising process and figuring out how to find a lead investor, remember that If you fail to secure anyone on your list you should never lose heart. Often, the lead investor you needed most ends up being someone you didn’t even consider. Opportunities always await!
I cover the topic of how to find a lead investor in detail in the video below which you may find interesting.
FULL TRANSCRIPTION OF THE VIDEO:
Hi, everyone. This is Alejandro Cremades, and today we’re going to be talking about how to find a lead investor. A lead investor is ultimately going to make it or break it on any equity round of financing, which is one of the most important things, and it is essentially what makes 99% of the rounds actually happen. With that being said, let’s get into it.
So, what is a lead investor? A lead investor is that investor that is going to come in and is going to lead your round. It’s going to be the first money in, and essentially, it is going to help in creating that umbrella in which everyone else is going to come in and invest under whichever those terms are. Because ultimately, the terms of your round are going to be negotiated by the lead investor, and those are going to be the same terms in which everyone else is going to be investing under.
In terms of what the lead investor does, there are many things. In fact, I’d like to describe them and break them down for you. Those are the following things:
1) They negotiate terms.
2) They hire a law firm to handle the paperwork.
3) They advise your startup, they take a seat on the board.
4) They make introductions and connections to perhaps other investors.
5) They help structure future fundraising rounds.
6) They help manage other investors.
7) They bring other investors, financing, and distribution channels.
8) They participate in follow-up funding rounds, amongst other things.
Who makes a good lead investor? At the end of the day, you’re going to have two types of investors. You’re going to have the Follower, which is going to be the one that invested in other people invest in your round, and then you’re going to have the Lead.
In terms of the Lead, this is going to be someone that really believes in your mission, in where you’re heading, someone that has the domain expertise and that can contribute, and also, someone that has a very good network that essentially you can leverage for either future fundraising rounds, for getting your company acquired, other people that you may need to recruit that they have in their network, and also, for distribution.
This is someone that brings much more than the money itself. Essentially, those networks that you can leverage so that in 18 to 24 months, which is where you’re going to be heading your next financial cycle, they can help to accelerate unlocking whichever milestones that you have in front of you.
How much does a lead investor put in? A lead investor is going to invest anywhere between 20% to 30% of your round. They don’t care about anyone else. They don’t care about who else is investing. They just want to invest. They believe in you. They believe in your project, and they’re just going to jump in. That is essentially a lead investor. They’re going to put whatever amount of money is required to kickstart the round of financing, and in many instances, they want to take over the entire round of financing.
When it comes to when to start the search, you need to start as soon as you have the idea of doing a round of financing. If you think that in 18 to 24 months, you’re going to require more money or in 6 or 12 months, or whatever that is, you need to start asking for meetings with those people that you think are going to be a good fit.
The way that you go is you go asking for advice, for building the relationship, and for this coming from them. Eventually, when you’re going with them and following-up every couple of weeks to tell them how great their advice and their feedback once implemented, how incredible the outcome was, they’re going to feel like they’re a part of it. They’re going to feel like they’re helping you to build the business, and it’s what gets them excited.
It’s going to come from them and say, “Hey, by the way. Are you looking for money?” Then, at that point, you’re going to say, “Yes.” They’re going to put whatever amount of money that is, and then you’re going to bring the other people that were giving you advice to also jump in. That’s how you establish the sense of urgency. At the end of the day, when it comes down to searching for these people, you want to do it as soon as possible, as soon as you know that you’re going to have to raise a round of financing.
There are many ways to find a lead investor when it comes down to where can I find a lead investor? These are the following ways in which you can find that lead investor and get them engaged. You can get those lead investors by:
1) introductions by other entrepreneurs and investors.
2) investors who have a history of leading funding rounds.
3) online investment platforms – equity crowdfunding, etc.
4) networking events offline or online.
5) social media networks. You can find their email or their LinkedIn profile and send them a note directly.
You don’t need to find a lead investor to get the round started. If you don’t see that you have a lead investor coming in, you can always build and syndicate yourself, meaning a group of investors that may have an interest and give them fair terms so that they come in, and you can get that round started.
Hopefully, you liked this video. If so, make sure that you hit the Like button. Leave a comment below and then subscribe so that you don’t miss out on any of the future videos that we’re going to be rolling out, which happens every week.
Then, don’t forget to check out the Inner Circle, our fundraising training program, where we help founders from A all the way to Z when it comes down to fundraising. There you’re going to find live Q&A sessions, agreements, templates, a community of hundreds of founders all over the world helping each other, and I think you’ll find tremendous value in it. So, thank you so much for watching.