No investors want to be the first… it’s very similar to your 7th grade dance. Remember when the boys would stand on one side of the gym and girls on the other? You wanted to ask Sara to dance but then it would just be you two, out there on an island in the middle of the gymnasium for everyone to stare and point at.
Money is always nervous about moving on its own into a startup. But it’s extremely brave when following others. This is the herd mentality documented at 7th grade dances, and it applies even to venture capitalists and multimillionaire angel investors.
I’ve helped raise money for startups, and invested my own capital into dozens of early-stage or seed round opportunities over my career. And without question, the companies that are most efficient at raising capital for their venture, often over-subscribing their initial funding, are those who have a lead order from a known name before ever stepping into a boardroom.
A lead order is simply the first money willing to invest in your round of funding. And it needs to be substantial, relative to the size of the raise you are conducting. It should be at least 10% of what you are aiming to raise.
There are two characteristics of a lead order that entice other potential investors to take a risk and throw some money into the pot. First, the size of the lead order – the bigger, the better. When investors get the sense that you are moving quickly on your raise and have a serious amount committed from your lead, they tend to act quickly themselves.
Second characteristic: The reputation of the lead order.
If you can convince a well-known venture capitalist, with a strong track record, to invest early on in your venture, other VCs and angels will take notice and be much more susceptible to your opportunity.
The venture cap world is quite incestuous, with many of the same firms routinely funding the same deals. Big name VCs go to the same conferences, cocktail parties and often work on the same block, if not in the same building! They respect one another and don’t want to miss out on any opportunity that the other may be capitalizing on. So, when you have a lead order from one respected VC, chances are you’ll have a great shot at raising most of your capital from other VCs.
It also helps your cause when your lead order consists of a substantial amount from a company insider (i.e. board of director, chairman, president etc.). This shows tremendous internal confidence in what you are working on. It tells the market that your company puts its money where its mouth is.
For those of you who don’t have any experience raising capital at the institutional level, because this is your first startup in need of substantial money, let me share this tidbit with you: before going any further, recruit a professional to join your company who has connections in the venture capital/angel investor world, and who has raised money comparable in size to what you are looking for. You need a lead order before going into foreign boardrooms. If you can’t find it yourself, get someone that can.
In short, you’ll need to give up a piece of the pie (with incentives) to someone who can open funding doors. So, step 1 is to pitch your deal to this type of individual, and bring him/her on as a board member or management. And if you’re hesitant to bring on new blood and lower your ownership in the company, then why are you looking to raise money in the first place?
When raising money for your startup, it is imperative that your lead order carries weight in a boardroom. The bigger and more prominent your lead order, the better your chances of finding the funding you need to get your startup off the ground.