Let me explain why you should never ask anyone to be your lead investor.
First, if you’re talking to a venture capital firm that writes large checks (>50% of the round size you’re seeking), just ask them to commit to investing. Let them know they’re wanted. If they want to invest, they’re going to want to lead and will throw out a term sheet. You never have to ask them to be your “lead investor.” That’s what they do. Once they decide they’re in, they will want to define the round and establish a deal favorable to them. You don’t have to ask them to do that.
Smaller investors all go in the other bucket, whether they are microfunds or angels. By definition, they’re not as credible of a lead investor generally speaking, since they’re less than half of the rounds capital. Perhaps one of them has a big name or other advantage, which will lend credibility. But you should still never ask them to be your lead investor. Instead, you should ask them to commit. Commitments build momentum. Momentum leads to oversubscription. Oversubscription leads to competitive terms. Many rounds close with no clear lead investor, especially at seed stage. Asking everyone to be a lead investor before they commit just creates unnecessary friction. The person you’re asking doesn’t want the extra responsibility, the extra work, nor the extra risk to their reputation. It’s simply not in their best interest, unless the deal is hot and clearly about to get done. And this is not the case when you are early. If your round is overcommitted and made up of smaller checks, someone is eventually going to throw out terms or you can do that yourself when you have enough momentum to close. The trick is not to stall that momentum by asking investors to take on the extra implied responsibility of being the lead investor. Just ask them to commit.
Now, I recognize that as you’re out there pitching, you’re hearing from investors something that sounds like the following. “Come back to me when you have a lead investor.” The natural response is to go and ask everyone you meet to be your lead investor. Please, please, don’t do this. Instead, recognize that this investor is simply taking a free option, asking you to come back once the deal is happening. They have no incentive to commit today, and they don’t want to be the first committer when there is no incentive. So go back to the investor that said that and work through it. “Will you commit assuming I have a lead investor before closing?” The magic here is that you can take away the concern, not that you can solve the problem (finding a lead investor).
Also recognize that having “terms” is different from “having a lead investor.” You can establish terms any time, although I recommend you do this only once you have momentum. Take early commitments before terms are fully established if you can. After all, you’ll have more negotiating power when you are oversubscribed than when you have no commitments.
In short, there is never a reason to ask anyone to be a lead investor. Just ask them to invest, build momentum, and make terms the last thing you figure out instead of the first thing.
