The “lead investor” dance

The term “lead investor” is often code. Just like the word “quaint” is code in the real estate business for “small.”

Let me know when you have a lead investor.

Loosely translated, these words often actually mean “I’m not ready to commit.”

You see, many angel and seed investors view it as their job to establish a “free option” on investing in your company. They have no incentive to commit early so they tiptoe up to the line of commitment, making sure not to cross it. By telling you that they’re potentially “in” if you have a lead investor, they establish the free option to decide later. After all, they are so close to commitment, you’ll likely come back to them first once you do have a lead investor. It’s a way that they feel safer and don’t have to be an early committer.

Fight through this using direct communication. Break it down. You can ask them what it is about a lead investor that will cause them to commit. Perhaps they will say they want well defined terms. Perhaps they will say they want to ride on the due diligence and pricing of a professional. Perhaps they will say that they just need to see the terms.

Ask them to commit with the assumption that you’ll later have those things. Tell them you’d never hold them to their commitment if they didn’t like the terms once they’re established later. If they truly want to invest and they want to be helpful, this is what actually helps you. Commitment, even if it’s soft based on assumed conditions that you’ll ultimately satisfy.

And if you’re an investor, consider no longer using the “once you have a lead investor let me know” gambit. You can be much more helpful by simply defining the conditions under which you will commit to invest. And if you’re not ready, just say you’re not ready and be clear about what you need in order to make the decision. And most of all, if you’re a no, just say no! That will save everyone some time!

file under: Startups

16 responses to “The “lead investor” dance

  1. Spot on, David. Is there an ‘artistic’ way to employ an “if you don’t commit now, I’m not coming back when I do have a lead” gambit?

    1. i don’t think that’s what you want to do. instead, i think you want to make it safe for them to commit now. take away all their fears rather than threaten them.

      1. I hear ya. I like the mindset, however, of “get to ‘no’ as quickly as possible.” Not too quickly, of course, but the reality is that the vast majority of the investors you pitch are most likely going to be ‘no’s, even with a lead. It seems some investors are intractable they won’t commit (even conditionally) and they won’t say ‘no’. A bunch of these can be a burden on the mind of a founder and a time sink as they continue to spend effort pursuing them… instead of pursuing true opportunities and (imagine this) working on the business.

          1. Yes, very good technique, David — assertive but polite and very effective. Isn’t it surprising (in a good way) how often you’ll here “oh, no, sorry… I’ve been meaning to reply… really busy… but yes, I’m interested I just have a question.” I count this as a great tactic for “getting to ‘no”.

            A definitive ‘maybe’ is, as you say, potentially useful as well as you make progress. I suppose I could endorse a “getting to maybe” strategy as well. 😉 Just get to something!

  2. More investors need to hear this message 🙂

    Alternative responses from investors..

    a) “No”
    b) “No” – with more transparent details about why
    c) “I can’t help you raise your round, do you have other investors who can?”
    d) “I’m not comfortable setting terms, would you be open to taking another investor I’ve worked with who is?”
    e) “I’m not sure how to get comfortable with __RISK X__, how have other investors gotten comfortable with it?”

    Responses to investors…

    “Thank you for your time”
    “Yes, will you commit once ___c, d, or e__ is answered?”

  3. This is something I’ve never been able to understand, and really happy to see this post come out. The overwhelming majority of investors I’ve met are outspoken with their opinions on your business but can’t seem to commit on their own — being an investor or not. Great piece, David.

  4. This is great. When committing with no lead, there are a couple of negative scenarios that can happen, but can be mitigated:

    1) The entrepreneur is unable to pull together the size round they want and decide to just take the commitments they have and try to close them, even though that amount of capital isn’t enough to feel comfortable it will get them 12-18 months of runway and hit the milestones they need for the next round.

    2) If a lead does come in and set terms, very rarely the terms can cause the committed investors to get uncomfortable with the deal.

    Either of these could result in the situation that no investor wants to be in where they have to back out of a commitment, hurting their reputation and leaving a bad taste in the entrepreneur’s mouth. I think the fear of that situation is a big reason why lots of investors “wait for a lead.”

    The solution is the same as you outlined for the entrepreneurs, ensuring there is transparency around the parameters of the commitment and that in either of the scenarios above it is acceptable for the investor to “uncommit.”

    1. exactly. in your scenario, it’s easy to say “i commit to invest $100k, assuming the final terms are ultimately acceptable to me and you raise at last $1m.” (or whatever).

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