You love the founder and the company is crushing it. Time to write a check, right? Think again.
There's one other little matter that needs to be ironed out before I invest in a startup: finding a lead investor.
A lead investor sets the price and terms of the round. The lead also does the deepest diligence on the company and will usually join the board if the company has one.
Why is this lead investor so important to me as an angel? Let me explain…
Getting to the Next Level
My $5,000 check is not going to get a company to the next level all on its own. Neither will a $25,000, $50,000, or even $100,000 check.
For a company to really break through, it's going to take seven figures. And if you want that kind of cash, you need a lead investor.
Lead investors generally put $1 to $2 million into a seed round. That's the kind of cash that allows you to hire more engineers and sales guys and really upshift growth.
Doing That Pesky Diligence
Sometimes people ask me, "Francis, how do you diligence a company you're thinking of investing in?"
The answer is that as an individual investor, you really can't. You're relying on the lead to do the diligence.
Of course, I can meet with the founder, use the product, read the deck and deal memo, research competitors, etc. And I do all that.
But a good lead investor does a much deeper form of due diligence. They talk to customers, review contracts and bank statements, check on IP assignments, and a lot more.
Imagine if every single person in the round did that. Customers might be getting 30 calls in the space of a couple weeks!
That's unmanageable for them. So angels and smaller VC funds rely on the lead to do that diligence.
Better Performance
At one point, I decided to run an experiment. What if I invested in whatever startup I liked, lead or no lead?
I put a couple of checks into companies that weren't even raising but were performing well. Fast forward a year or two…
None of those companies is doing well. Meanwhile, many of the startups that had lead investors are doing great.
If a startup can't pull in a big round with a lead VC, there's probably a reason — even if I couldn't find it.
What's more, the startup that didn't raise a big round is at a huge disadvantage. Its competitors could be sitting on millions.
Getting The Round Done
If I really like a company, I don't just sit back and hope they get a lead investor. I make intros to VC's in the hopes of finding them that lead.
This lets me prove my value to a founder. If I made some great intros, he'll save me a spot once that round comes together.
Plus, I just enjoy helping founders I like!
The One Exception
There is one exception to the lead investor rule: a party round.
Party rounds can work, provided enough cash goes into the company. What's more, the largest single check sometimes does the same diligence a lead VC would anyway.
I look for 12+ months runway signed and wired. Not "committed." Not "soft circled." In the bank.
You'd be amazed how those commitments can evaporate when it's time to actually write a check.
Party rounds can still make great investments. In fact, my most successful investment to date was a party round.
Wrap-Up
As an angel, it's easy to get excited when you meet a great founder. I get excited too!
But these days, I never jump the gun.
I want a lead investor before I write a check. This way, I know the company checks out on diligence.I also know they'll have enough cash to hit the big time.
Do you look for a lead investor?
More on tech:
The Simple Way to Angel Invest
Why You Shouldn't Raise VC in the Summer
Remote vs. In Person: What's Better for Startups?
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