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What is a Lead Investor & Why Do They Matter?

An investor, is an investor, is an investor… right?

Well, not actually, while many investors can help with providing value-adds or crucial investment - it’s important to note the key differences in investors and what that might mean for your raise. We lay it all out in this quick blog post.

“1,384 Lead investors found.” If you’ve been spelunking around our product, you may remember seeing that sentence or something similar.  Lead investors are an important part of closing a fundraising round. At FundBoard, we made a concerted effort to focus our efforts on lead investors because without one it can make reaching your fundraising goals significantly more difficult to achieve or manage. We looped in Bryan our resident fundraising aficionado for his take on lead investors.

TL;DR - let’s start with definitions

A lead investor is the firm that sets the terms of your round. which is another way of saying that they are your lawyer’s counter-party in negotiating the investment documents.

A co-lead investor is simply a set of lead investors — sometimes firms will work together to lead a round.

A non lead is someone who invests on the terms negotiated by the lead(s), and is basically entrusting to those leads the responsibility of fairly representing the entire investor group’s interest in valuation, rights, etc.

So how does this impact your raise and how you consider investors?

A lead earns the right to lead through a combination of check size and experience. Most of the time the lead(s) represent 50% or more of a transaction.  That said, there are some exceptions. For instance, well known investors that carry a positive impression may be an exception to the rule.

As our CEO, Bryan, put it, “if Fred Wilson (or another well regarded and credible investor) offered $5k on a negotiated term sheet, bet I could get another $1mm on his terms.”

And to this point, there’s nothing wrong at all in not leading, in fact the movement of non professional investors into our space and the corresponding wisdom to leave terms to folks that do so professionally is both profoundly important to addressing our ills, and a wise move.

This distinction is not often obvious to a founder, particularly a first raise founder. They don’t know to ask and in our experience the non-leads don’t often mention it as they get to know your startup.

Even if the founder has directly asked about average check size and follow-on philosophy, they may not understand the contingency of the non lead commitments, good faith and how real they may be. That is to say, without a lead to pull that capital in, you have precisely — nada.

The number of first raise founders we talk to that have $50-$250k of non lead capital committed to a $250k - $1mm round that have less than 10 lead candidates in their pipeline is more than it ought to be. As these dynamics are more widely understood, then it helps keep momentum in the founder's hands.

Bryan continues by mentioning, “having successfully raised more than half a dozen VC rounds at various stages, I’d recommend focusing ruthlessly on two types of investors when fundraising, until you have both.”

1. Active lead investors in your market.

Try to get to every single investor in at least the US who has led at this stage in the last 5 yrs, that looks like your startup at all, all your X for Ys.

eg at FundBoard, it would be the Angellist vector, the Carta vector, etc.

2. Strategic individuals or firms that’ll influence leads.

Bryan dropping in with another anecdote, “Wunder is a fintech, solar company, and nearly zero investors know both markets. So, we got Fintech Collective and Fenway Summer — great fintech firms — in, contingent on a great lead, and that got it done.”

Founders should ask this question up front with investors, and if neither of the above, be sure to set expectations that you’ll be focusing on finding a lead, and putting together a really strong syndicate afterwards, because if the first doesn’t happen, it’s moot.

If a non-lead persist, "I am always happy to provide a fair discount for jumping in ahead of a lead with a right-now investment into a simple convertible or SAFE. This is the proverbial calling of bluff, or not" says Bryan.

It also helps to separate herd vs conviction investors, both are important but good to know where investors are coming from.

Want to learn more about finding a lead investor? Here are some of our favorite resources:

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