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.
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.
ACCESS THE PITCH DECK TEMPLATE
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.
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.
I cover how to find investors in detail in the video below.
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!