How (and why) to find a lead investor for your fundraising round

TL;DR

• A lead investor handles due diligence, sets the valuation, and drafts the legal documents on behalf of all participating investors. This makes multi-investor fundraising operationally feasible.
• Without a lead, every investor would need to run their own diligence and negotiate their own terms. That kind of redundancy makes closing a multi-investor round nearly impossible.
• The ideal lead investor has experience in your sector, a track record of leading rounds at your stage, the bandwidth to run a thorough process, and relationships with follow-on investors.
• Lead investors typically take a board seat and act as a proxy for all investors in the round. They provide both governance oversight and operational expertise to founders.
• Finding your lead is the first step in fundraising. Most other investors will wait to see who leads before they commit, so prioritize that search before building the rest of the round.

When Mercury raised its Series B round in 2021, we described the fundraise as being “led” by Coatue, with participation from Andreessen Horowitz, CRV, and Sapphire Ventures. This concept of a lead investor is an important one for startups, as the lead VC is a pivotal partnership that impacts a startup’s ability to successfully raise funding and succeed in the long term.

In this article, we’ll explain why you need a lead investor for your startup fundraise, and how you can go about finding the right lead VC for your business.

In venture, a lead investor is an investor in a startup that takes on the responsibility of sorting out the terms and conditions of the investment on behalf of all interested investing parties. This means the lead VC is performing due diligence (i.e., evaluating the business and its prospects), determining an appropriate valuation, and drafting formal legal investment documents.

This lead investor is often (but not always) the largest investor in the fundraising round, which gives them the proper incentive to put in the work to hammer out a deal. Generally, any other interested investors will invest based on the terms agreed upon by the lead VC.

To understand the importance of a lead investor, it helps to understand how startup fundraises come together. Typically, a startup will solicit investment from dozens of investors every fundraising round. Without a lead VC, every individual investor would have to perform their own due diligence, determine their own valuation, and draft their own investment documents.

This would be a massive operational burden for both the VCs and the startup, and make this form of fundraising virtually impossible. By having a VC lead the round, this entire process is streamlined, as most investors will typically fall in line with the terms the lead investor negotiates (with minor adjustments as needed for each investor).

In this sense, a lead VC provides peace of mind to all investors that the company is legitimate and the valuation is reasonable. A lead VC is especially beneficial to small VCs and angel investors who don’t have the time or money to perform due diligence or draft investment documents.

Additionally, one of the core value adds a VC can provide beyond capital is insight and expertise. Having a lead VC in the fold can ensure the founders have another perspective in a more hands-on player — someone they can bounce ideas off of, which may help them avoid mistakes that can hurt the value of the business.

When founders start to build their investor list, they should keep in mind which VCs they think would be a good fit as their lead investor.

The ideal lead investor will vary depending on the stage (seed, Series A, etc.) and sector of the business. Here are some questions to consider when determining a good lead VC:

• Does this VC have prior experience in my sector? (e.g., Have they invested in other companies like mine, or were they an operator at a business in my sector?)
• Does this VC have prior experience leading investments? (i.e., Do they have an understanding of the financial and legal processes related to venture deals?)
• Is this VC trustworthy, professional, and reliable?
• Does this VC have the bandwidth to conduct a thorough due diligence and investment process?
• Is this VC prepared to invest a sizable amount of money to properly incentivize them to lead the funding round?
• Does this VC have good relationships with other potential follow-on investors, and could they represent their interests?
• Is this VC someone I would be excited to work with?

If you can answer “yes” to most, if not all, of these questions, chances are you’ve found a good lead VC to work with.

We mentioned that the lead investor performs due diligence, negotiates a valuation, and drafts the formal investment documents. But that’s just a broad overview of all the responsibilities that come with leading a startup investment. As part of the day-to-day, a lead VC is expected to:

• Negotiate the term sheet terms with the founders (e.g., SAFE vs. equity vs. debt, valuation cap, maturity date, etc.).
• Perform due diligence on the company by analyzing the business’s financials, team, product, market, and long-term viability, and preparing a diligence report to be shared with other interested investors.
• Based on their due diligence, negotiate an appropriate valuation for the business with the founders.
• Negotiate the specific terms of the investment (pro-rata rights, information rights, protective provisions, board structure, etc.).
• Draft the formal, legal investment documents with support from their legal counsel and the startup’s legal counsel.
• Liaison with other, interested “follow-on” investors to ensure their interests are represented during the negotiation process.
• Assume a seat on the company’s board to represent the interests of all investors. For this reason, most lead VCs require power of attorney and act as proxy when needed.
• Provide expertise, insight, and introductions to potential employees, customers, and investors to help the startup scale and reach its next round of financing.

For these reasons, the lead VC is expected to be a master organizer and communicator on all business-related activities. If they’re doing their job well, it should make life easier for all your other investors.

Not every investor is a lead investor, and not every lead investor on one fundraise will necessarily always lead rounds for a startup they invest in. Smaller investors, including angel investors and startup accelerators will typically never lead a round because they don’t have the resources to manage this process. Meanwhile, large VCs like Andreessen Horowitz and Sequoia may not lead early-stage rounds because it’s often not worth their while to invest time and money in leading a round if it’s a relatively small investment.

As we previously mentioned, the ideal lead investor will depend on the sector and stage of your business. For example, if you’re raising a seed round you should look into VC firms that specialize in seed-stage startups, and have experience investing in companies in your sector. These firms will have the specialized knowledge needed to execute a seed-stage fundraise and support your business. Some popular seed-stage venture firms include Accel, 500 Startups, First Round Capital, and Lightspeed Venture Partners.

As you grow to Series A and beyond, you’ll want to find a bigger VC to lead your round — one that can cut a large check and has experience helping startups exit the market (i.e., IPO, acquisition, etc.). A few of these larger VCs include Andreessen Horowitz, Sequoia, Coatue, and Benchmark Capital.

It’s important to note that larger VCs will sometimes invest at early-stage if they think an investment is particularly attractive or promising, but they often won’t lead the round. Similarly, an early-stage VC will sometimes invest in a later-stage startup, especially if they invested in an earlier round and want to maintain or increase their equity stake. Again, this doesn’t mean that the VC is qualified to lead the round.

In other words, the “right” VC to lead your fundraising round will change over time as the business evolves and grows.

Your investor list should identify VCs you think would be suitable to lead your fundraise. Most founders recommend trying to get connected to these VCs via warm introductions, meaning you’re introduced through a mutual third-party you both know that can vouch for you.

Once connected to a potential lead VC, you’ll share your pitch deck with them and make it clear you’re looking for a lead investor. If the VC is interested, they’ll likely schedule a meeting with you to discuss the opportunity in greater detail.

Note that you’ll likely have to talk to dozens of VCs in order to find a good lead investor. Investors who aren’t interested in leading your round (but are interested in investing) will typically want to wait and see who steps in as the lead investor before signing a check.

As such, the lead VC is usually the first domino to fall in a fundraising round. Ideally, with a good lead VC in place, everything else will come together fairly quickly.

Fundraising as a VC is like a dance, and the lead investor is your dance partner. A good dance partner in a venture deal will lead the startup and the other investors, ensuring all parties feel seen, heard, and taken care of. It’s no small feat, which is why founders need to pick their lead carefully. If you’re fortunate enough to find a great lead investor, this not only sets you up for a strong round — but a smooth road ahead.