One of my favorite clichés involves chickens and pigs. More specifically, it observes that as interested as chickens may be in breakfast, it’s the pigs that are really committed.
That’s a good way for startup entrepreneurs to think about courting venture capital investors. Collecting a flock of very interested venture investors – chickens – is fine and dandy, but you won’t make much progress towards getting a deal done until you’ve got a pig at the table. So don’t waste a lot of time chasing chickens around until you have a pig corralled. You know you have got a pig in hand when you have a solid term sheet with a “lead” investor inked.
Truth be told, most VCs think of themselves, or at least present themselves, as lead investors. I suppose most probably do lead a deal now and again. That said, though, in any given deal, there is generally only one lead investor. (Co-leads are fairly common, but even in those cases one of the co-leads in fact plays the role of the lead.) That is, one investor who not only wants “in” the deal but wants to “own” the deal.
The first big role of the lead in a deal is to let the relevant chickens know that someone has pig-like interest in the deal. That someone likes the deal enough to put up a big bunch of capital (usually the biggest chunk) and to do most of the heavy-lifting of getting the deal done (which, as we’ll see, is no small thing). That resource commitment, coupled with the signal to the market that a credible (well, hopefully) investor is that serious about the deal, is typically the inflection point when the chickens start getting serious about actually committing some eggs to getting the deal done.
If getting a lead investor lined up is the sine quo non of getting a venture financing done, how do you go about it? Simple. Qualify potential investors as leads before you spend too much time with them. Limit your initial investor solicitations to folks you think are possible leads and folks you think might be sources of referrals to possible leads. When you get a meeting with an investor, if there is any potential interest at the end of the meeting be certain to ask if yours is a deal the investor would consider leading (and if not, can they refer you to any investors who might be).
Step two is to avoid wasting time with investors who are not qualified leads until you have a signature (or handshake) on a term sheet with a lead investor; a term sheet that outlines all of the material terms of the investment. Depending on who the lead is (their reputation in the market), and how big a piece of the deal that the lead is taking (how many other investors with how much more money will it take to fill out the syndicate), agreement on a solid term sheet is the point where most interesting investment opportunities become likely deals.
Next time, we’ll talk about what roles lead investors play after the term sheet is signed.