Be your own “lead investor”
A common complaint of startup founders is that VCs take forever to do anything. This is especially true when looking for that magical “lead” investor, defined as someone who can put in a significant amount of money, agree on a term sheet with you, and if necessary, syndicate the deal in order to fill a round. At the seed stage, this complaint is lame!
THE BEST FOUNDERS LEAD THEIR OWN ROUNDS.
Let’s say you are trying to raise a $1 million seed round. The classic way of doing this was to speak to numerous investors, hoping that one will be willing to step forward as a lead investor by offering a term sheet for half the round ($500,000). But for most startups, it’s tough to get an investor to step forward, as many investors don’t feel comfortable without social proof, and want to know “who else is in” before committing. On the other hand, due to FOMO, most investors will ask you to keep them “in the loop” and don’t give a definitive no.
AIM FOR “MINI-LEADS”
This harmful dynamic of syndicates can be managed by finding a “mini-lead” willing to negotiate with you and by offering them a term sheet. Combining 2-3 mini-leads makes it easier for them to move forward, removes some of the investor fear of being alone in an under financed company, and allows you to tell others you are in term sheet stage. In fact, it makes it less likely that an investor will back out on their own, as they are now accountable to their co-investors in the round in addition to you.
Going back to the example $1 million round above, you offer a term sheet to one investor that typically writes $300,000 checks, a second investor that writes $200,000 checks, and a third more passive investor that writes $100,000 checks. Assuming you can get one respected investor to negotiate with you and the others to agree to the conditions that the first set, you now have a “lead”. By simultaneously reaching consensus among a few mini-leads around one term sheet, you can then proceed as a normal round and keep momentum, allowing you to more easily round-up the smaller investors.
NOT FOR EVERYONE
Of course, only the best fundraisers can pull this off, as negotiations with multiple party’s have the potential to spin out of control. But if you successfully manage this process, you can end up with more favorable terms than you may have otherwise received (since the initial terms started with your offer) and can end up with a nice base of “lead” investors for future support without facing the issues of a “party round”.