Playing “Find the Leader” in VC

Micah Rosenbloom, Managing Partner

Raising an early round of venture capital has become a more convoluted process in recent years despite the proliferation of funds, angel investors, scouts and overseas money. There are hundreds of seed funds, but a vanishingly small number willing to lead deals. Fred Wilson discussed this “early stage slump,” and a subsequent post by Danny Crichton at Techcrunch called it the “First Check Problem.” With so much money around, it’s hard to believe that it has gotten even harder to secure a lead investor.

Given the changing dynamics of the game, founders need to adapt their strategies to the new reality. Instead of simply booking meetings with the usual suspects, one must be thoughtful about who and how they approach, and when.

Here are some thoughts on playing the “find the leader” in VC!

Step 1: Be methodical

Think of the fundraising process as a sales process. I suggest creating a Google Sheet to manage your funnel with these category headers:

• Fund name
• Partner or associate
• Intro source & strength of intro
• Related or competitive investments
• Fund size
• Lead or follow money
• Expected check size
• Objections/concerns from pitch meeting
• Probability of closing

Step 2: Set your ask

Some entrepreneurs like to have the market dictate how much they raise. I’ve seen some pitch an “A” plan ($1M), “B” plan ($2–3M), etc. I don’t typically recommend this approach. I counsel entrepreneurs to have a strong point of view on how much they intend to raise. If the market pushes them up or down due to over or undersupply, that’s one thing. However, entrepreneurs should have a model built around a certain set of funding assumptions.

Which of the following describes your stage? How much money do you need to hit the next set of accretive milestones?

• Pre-product, Pre-launch company raising <$1M = Pre-Seed
• Post-launch, early customer validation raising $1–3M = Seed
• Post Seed, highly capital intensive business or repeat founder seeking to raise large $ at high valuation = Series A/B funds

Step 3: Identify true lead check writers

Read Crunchbase and press releases to determine who is leading deals. Look at the board of directors of startups you admire and see who’s listed. Talk to other founders and ask who led their investment rounds and who they’d recommend approaching. Read blog posts from the team and determine whose voice resonates with you. Focus on potential lead check writers initially.

We’ve seen many founders get lots of early small commitments, only to be in a position where they later have to go back to those commitments to cut them back, or worse, turn them down. It’s always easy to fill out a round once you have a lead.

Step 4: Get the right intros

Like any sales process, from whom you get introduced matters. Ideally, intros to VCs are warm. Warm intros include connections from other founders within the portfolio of that VC, other credible entrepreneurs in the community, or committed investors. Less warm intros are your attorney or classic cold inbound emails.

Avoid Pitfall 1: The “party round”

One of the things we often saw in 2017 was companies that were oversubscribed, but without a lead. The dreaded party round is as popular as ever. Being oversubscribed is good, but not having a lead can be fatal. Don’t take my word for it, read what Chris Dixon, Sam Altman, and Mark Suster have to say about “party rounds.” In the end, having one or two investors, you can call that know your business, and are emotionally and financially committed to your success is crucial. Play to investors ego, tell them you need them on your board — a board seat is often the best sign of an investors commitment. Make sure someone in the round feels a sense of ownership.

If no one is clamoring to lead, consider why that it is. Yes, money is necessary to build a company and ultimately, you need to take it where you can get it. But a proper round will pay dividends in the end.

Step 5: Close quickly

“Time has a way of killing deals,” my father used to say. Once you have the lead in place, you want to move as quickly as you can to fill in the rest of the round. At this point, you can share your investor tracker with the committed lead (only after the term sheet is signed and be sure to scrub any critical commentary). A good rule of thumb is to keep a few hundred thousand open for angels or others you think can be particularly helpful or close collaborators of your new investors.

Avoid Pitfall 2: Avoid option buyers

An increasing number of large firms are back in the business of writing $100K into your pre-seed, seed or early A round. I’d avoid this — not because they’re bad investors, many are not — but rather because they are merely buying options for later. These options come at a cost to you, as future signaling problems in the future. Best to avoid in the early days.

Step 6 — Lock down the commits via email or phone

Follower money — especially non-professional money — can flake. Angels can decide to buy a new yacht instead of investing in your round. So, once the term sheet is signed and you think you have your allocations set, go ahead and do a final confirmation of allocations. Think of this interaction as your first “investor update,” highlight the amazing fund you’ve convinced to lead and, spur the followers to move quickly.