Ask an Investor: what happens when my lead investor won’t lead?

Welcome to a new BetaKit weekly series designed to help startups and entrepreneurs. Each week, investors Roger Chabra and Katherine Hague tackle the tough questions facing founders today. Have a question you would like answered? Tweet them with the #askaninvestor hashtag, or email them here.

It’s fundraising season and you’re out hustling for a lead investor on top of all the hard work you are doing building your business day-to-day. You take the time to put a list of potential lead investors together and systematically schedule meetings with them. You meet a lead and the meeting goes well. There is hope.

They follow-up with some time-sucking data requests that you dutifully fulfill. Another call with them and things seem to be moving along. Some more time is invested on both sides. They ask you to come back in with your lead sales guy. So, you do. Their email follow-up seems positive but has been a few weeks, so you check back in and ask for a follow-up call to keep the momentum going.

Then, one day, you have the call and once the niceties are out of the way, they say, “we like you, we like your business, but we’d like you to get another VC to lead and then we will look seriously into participating.”

So, what’s a hard-working founder to do?

The Office

Lose their phone number.

I’m exaggerating (a bit) here to make a point, but seriously, this kind of offer from a VC who typically leads is basically useless to you as the founder of an early stage company. I talk to many founders who have heard this over their careers and find this type of feedback extremely annoying and disruptive. To me, this is just bad behaviour on the part of VCs.

Lose their phone number. This kind of offer from a VC is basically useless to you as the founder of an early stage company.

We’ve talked about this a lot in Ask an Investor columns: when you are raising a new round of financing, all of your efforts should be focused on identifying and locking down a lead investor you want to work with. Someone who can set the terms for your round and who can help you attract additional money, if necessary, to get you to your target amount.

So when a VC who everyone knows is a lead investor tells you to go away and come back with another lead – what are they really saying? Well, honestly, they are saying they don’t really believe in you but they might change their mind if you find a great investor… ummm, thanks, but no thanks!

You want a VC with unwavering conviction, someone who believes in your vision and will be with you through thick and thin over the years. That conviction has to start early and start strong. Good VCs want founders to have conviction; well guess what? Good founders want their VCs to have conviction as well.

Get a proper lead with some chutzpah and you won’t need this other investor. Your new lead plus your existing investors should be able to get your round filled. Even if there is room left in the round, if you find a credible lead you will have little difficulty bringing in other angels or groups (folks who typically don’t lead but syndicate into rounds).

So, if they don’t really believe in your company, why don’t they just say so? Well, again, it’s bad behaviour, but basically, the VC wants to leave the door open for them to invest if you end up getting a “better” name brand investor to the table. The non-lead wants to see if the deal will get hot and they want a free ride with another firm that could enhance the chances of success for the company.

Also, they are protecting their reputation. Boy, won’t they look silly to other entrepreneurs and their own LPs if a top name-brand firm does a deal in their own backyard or target sector and they are not involved? Bad for them, yes, but it should all just be noise to you. You have more important things to worry about, like, again, finding a lead with conviction.

What you really should say to this non-lead VC is that you’d be interested in working with them, but that right now you are focused only on finding a committed lead investor who can take the entire round themselves or with other co-investors that they will bring in. Furthermore, you can say that you will be building your round only with VCs who have given expressions of being a lead in the form of a term sheet. All of this will impart that you are serious about finding a lead now, and only a lead. A non-lead commitment is not helpful right now.

The Office

In truth, fundraising is a bit like dating; they share a lot of the same ups and downs. An investor asking you to come back to them once you’ve found a lead could be translated to “he’s just not that into you” in dating terms.

All that being said, there are a couple of legitimate reasons why a VC may not want to lead. The first is that the business is too far away geographically for them. They may be experts in your space and excited about your specific idea, but they feel uncomfortable putting in a significant amount of money without being able to be hands-on. This is a good reason for them to point you towards finding another lead closer to home. In fact, to be most helpful and increase the probability that they will be in the round, this follower should offer up some intros of firms in your space that are more local and could lead the round. Ultimately, after you have a lead, it’s up to you and your new lead to decide whether you should let the other firm into your deal.

Another legitimate reason is that the investor you are courting typically writes smaller cheques and couldn’t make an investment totaling, say, at least half your round. Again, find your lead and then decide whether the firm with the smaller cheque can add value. Finally, you will often see strategic investors (the in-house VC arms of large corporates) prefer not to lead or “price” rounds. The thinking here goes that strategic investors are not as sophisticated in pricing rounds as institutional investors are, and they are typically more hands-off than regular VCs. Think carefully about including strategic investors in your round and, again, do this thinking in conjunction with your real lead investor.

Katherine’s take:

Katherine Hague

I couldn’t agree more with Roger on this one. An investor telling you they’ll invest once you have a lead generally isn’t any more helpful than a no. The investor is just hedging their bets. I’ve personally been given this response on the fundraising trail a number of times. The first couple of times you hear it, you think it’s genuine interest, but then you learn over time that it’s a soft no to keep the door open.

In truth, fundraising is a bit like dating. From blind dates and awkward first meetings to relationship building, rejection, and proposals, dating and fundraising share a lot of the same ups and downs. An investor asking you to come back to them once you’ve found a lead, in dating terms, could be translated to “he’s just not that into you.” Move on and find someone that is all in. Find someone that isn’t interested just because other people are interested; someone with conviction.

The hardest part of fundraising is finding an investor willing to lead. Once you’ve secured your lead, filling the round will seem like a walk in the park. Trust me when I say that you’ll remember the people who believed in the vision before it was a ‘hot deal’ and those are the people you’ll want to bring in to fill your round.

Got a question for the investors? Email them here.


Roger Chabra

Roger Chabra is the CIO at TribalScale, a global provider of digital products & companies for mobile & emerging technology platforms with offices in Toronto, Los Angeles, Dubai, San Francisco and New York City. You can follow Roger on Twitter at @rchabra

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