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When raising startup capital, finding a "lead investor" is the most critical first step.
A lead investor is simply the first person to put money into your deal. They aren't necessarily the person that puts all the money into your deal, but they are the first step in the process that makes the rest of the process take flight.
A Lead Investor Is Social Proof To Other Investors
Investors look for particular signs when evaluating startup opportunities to support. One sign is whether anyone else has already made a commitment to the deal.
Investors have a very limited amount of time, so they look for signals like this that tell them "Hey, someone else has looked at this deal, vetted it to some extent, and thought it was worthy of writing a check."
That says a lot. Or the converse, which is "No one has apparently been interested in this deal enough to commit any amount of capital."
Given the two situations, the investor often looks at the deal that already has some social proof.
The Lead Investor Shouldn't Be Your Mom
Aside from having a lead investor, the quality of the lead investor is also important.
If you're going to a new investor and saying "My mom gave me $25,000. She thinks I'm handsome." That's not going to provide much social proof, other than that your mom really likes you.
Although family money is often the most accessible cash available, it's not necessarily the money that's the signal. It's the source of the money. Investors are also looking for a lead investor commitment that is someone that would be a little more objective with their checkbook.
Family money is great. It just won't buy you "lead investor" status.
The Size Of Their Commitment Matters
Let's say the size of your raise is $200k. Ideally you'd want the lead investor to contribute a meaningful amount of that raise. "Meaningful" means different things to different potential investors, but in general consider a number north of 15 - 20%.
If the check size is too small, it starts to send another negative signal that reads "If this deal is so great, why did the first investor commit so little?"
Remember that these are questions you often won't get the opportunity to actually answer because new investors may just move on to the next deal automatically.
Don't "Shop" Until You've Got A Lead
Typically a lead investor will be someone you know pretty well or someone that is within your social circle. The follow-on investors will often be strangers
Before you start to make the rounds amongst lesser known investors, you really want to focus on zeroing in on your lead investor first.
That commitment will be a critical piece that will make shopping to newer investors easier, because it will separate you from the pack of other startups that don't have one.
If you're just putting your initial startup plan together and you're wondering what a proper startup marketing budget should be, first recognize that if you haven't launched into the marketplace, you're still testing. You're not ready to budget at all.
Your initial budget should be highly segmented into small budgets that are used for testing, until you figure out what works.
A Few Thousand To Start
For example, if you're going to use Google Adwords, you should plan on segmenting a budget of $1,000 into a few smaller tests. Once you figure out what works (this could take months) then you can put together a more structured budget as you understand potential results.
What you want to avoid is just budgeting $10,000 per month with the assumption that you know how it will perform.
Therefore, consider a startup budget of a few thousand dollars, with the understanding that you really don't know what your budget should be until you've run your tests.
Test, Refine, Repeat
Don't get hung up on having all of the data and costs ready before you launch. No one has that kind of foresight. Just recognize that there will be a point in the not-too-distant future where you'll need to ramp up budget.
Until then, keep it small and focus on testing, not long term budgeting.
(This article originally ran in Forbes)
There's a popular misconception amongst first time entrepreneurs that sharing an idea without signing a Non Disclosure Agreement (NDA) will lead to some version of the Social Network, where Mark Zuckerberg steals the Facebook idea and becomes a billionaire.
The mythology sounds horrifying, but the reality is much different.
In short - investors don't sign NDAs. They won't sign your NDA. Asking them to will make you look like you don't know what you're doing, and there are a few reasons for that.
No One Wants Your Idea
You may have the world’s most amazing idea. It may be a complete pile of rubbish. Either way, it's not about ideas.
Investors want Entrepreneurs, not ideas. Anyone can come up with a great idea, but very few can actually pull them off.
It's not that Mark Zuckerberg just happened to steal an idea for social networking. It's that he was the most capable person to actually pull it off. It's not like he was the first (Friendster, anyone?) or the most successful at trying first (Myspace, anyone?).
A clever idea may pique an investor's interest, but that isn't worth getting worked up about an NDA over. You've got plenty of other hurdles.
Too Much Deal Flow
Investors see tens, hundreds or thousands of deals. Signing a NDA could potentially prevent them from having a meaningful discussion with any potential investment after yours.
Should they choose not to invest (and most won't) they would be stuck with the liability of a legal contract with you that prevents them from finding more deals. That provides zero upside from them.
Don't Make Life Harder
Imagine you're an investor looking at hundreds of deals. You find one that looks interesting and you reach out. The startup responds by saying you need to sign a NDA.
Do you go through the hassle of signing a NDA or do you just move on to the hundreds of other startups who aren't asking for a document that no one ever signs? You can probably guess.
It's hard enough to get an investor to pick you among hundreds of other deals. Don't make your life harder by insisting on them signing a document that they don't need to.
You Can't Enforce It
The power of any legal agreement is proportionate to your ability to enforce it. Do you plan on suing investors in the near future? Do you think the power of the document you've asked them to sign will give you adequate grounds to enforce that suit?
Focus on what you can control, which is what information you show them and what aspects of the business you are willing to share.
Share The Cookie, Not The Recipe
If your idea is so easily stolen that just hearing the concept is enough to allow anyone to replicate it and launch it better than you, than you've already lost.
There is little protection in just a concept, so unless you've got a secret recipe behind it, signing a NDA doesn't do you much good anyhow.
You should be able to openly share the concept idea with anyone, since as soon as you launch everyone will have a taste of it anyhow. If there is a secret recipe behind the concept, then by all means don't share that until you’ve gotten to know the investor better.
Very few ideas have a secret recipe, however, and you’re more likely to be explaining why you can defend this concept once it's launched.
What To Really Worry About
All of that said, there are some things you should consider protecting as you shop your idea around to investors.
Investors who have investments in similar companies to yours could present a challenge. You are essentially providing them with competitive information that they are free to share with their other portfolio companies. Most honest investors will decline the meetings based on those grounds in the first place.
The other thing to worry about is the dissemination of your information. Pitch Decks and Business Plans can get shared incredibly easily. It's helpful to have a method to grant and revoke access online if possible, or to only present the key documents in person on your own laptop.
You’re going to have plenty of challenges in attracting investors, don’t let your lack of access to them be one of them.