Why A Lead Investor Is Critical

U Posted by Admin
\ January 17, 2014

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.

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