Venture Hacks

Summary: Here are 3 microhacks for finding a lead investor: (1) If followers have good reasons to not lead, ask them for introductions to potential leads. (2) If you’re early stage, find seed investors who invest in people and high risk startups. (3) If every prospective investor says “we don’t know the market,” find investors who have invested in your market or similar markets.

In Part 1, we wrote,

“Lead investors want at least half the round—and they often want the entire thing. If they don’t want the entire round, they will help you find followers (and some leads will close immediately even if they’re not taking the entire round). They believe your stock is worth more than they’re paying. They don’t need social proof or scarcity to make an investment decision. Like great entrepreneurs, they are mavericks.”

If you’re doing a seed round, you may be able to mass syndicate the financing without a lead. Otherwise, here are three microhacks for finding a lead, in rough order of importance—but you should probably try them all.

1. Ask the followers for introductions. #

If the followers have good reasons to not lead, ask them for introductions to potential leads:

“Can you suggest any firms who would be interested in leading this investment? Why do you think they would be interested in leading? Would you make an introduction?”

This simple test will tell you whether the follower has good reasons to not lead. If a follower won’t make introductions, he doesn’t have a good reason to not lead. If the introduction doesn’t respond aggressively, the follower probably made a half-hearted introduction—he doesn’t have a good reason to not lead. The follower’s level of effort indicates if he really wants to find a lead or he just doesn’t want to say ‘no’. (Caveat: This logic mostly applies to VCs, not angels.)

If a follower doesn’t have a good reason a priori, don’t ask him for introductions at all. Skip this microhack altogether. An introduction by someone who can and should lead, but would rather follow, is a useless and harmful introduction. It’s a strong negative signal. Go get your own introductions.

Finally, if a follower introduces you to the eventual leader, the leader will rarely cut out the follower. (Investors who don’t accommodate the middleman who gives them introductions stop getting introductions.) You’ll end up with two investors and more dilution. But that’s better than the alternative: zero investors and no dilution.

2. Find seed stage investors.

Every professional investor’s fantasy investment is a sure thing: zero risk and infinite reward. If you’re early stage, you can circumvent this fun fact by doing a seed round:

1. Focus on investors who go out of their way to invest in seed stage companies with lots of risk, not investors who say they invest in seed stage companies:

“What seed stage companies have you backed in the last 2 years? What exactly did the company (team, product, traction) look like when you invested?”

Does your company look similar?

2. Find non-professional angels whose primary motivation is working with great entrepreneurs, not profit. In particular, talk to folks who already know you well and are willing to to bet on you.

Seed investors increase the probability of raising money from VCs. High-quality seed investors raise your valuation, provide social proof, and obviate the need for extensive due diligence in the VC round. Many companies close a small seed round and do a larger VC round in a few months.

If you want to skip the seed round, mere commitments from high-quality seed investors have a similar effect. And these commitments provide a strong alternative as you negotiate with VCs. Obviously, if you do the VC round, don’t cut out any seed investors you have committed to.

3. Find investors who know your market.

If every prospective investor says “we don’t know your market,” find investors who have backed companies in your market or similar markets.

Educate investors about your market. It’s your job to convince them the market is great. Find successful companies in your market and figure out how they got there, how long it took them to get there, how much money they raised, how much money they’re making, how much money they would be making if they were as smart as you are, et cetera.

Talk to the management at these companies and see if they will personally invest in your business or advise you. Ask if their company wants to be a strategic investor.

Yet more ways to find a lead.

In Part 3, we’ll suggest two more ways to find a lead investor.

Image Source: Funny Treat.