Whether you are raising venture capital from institutional sources or individual investors, you must first focus on a lead investors, the one who will put up a material portion of the total raise, and who will act as a draw for other investors. The question, how do you pop the question to know whether you’ve got your lead investor or not.
Undoubtedly, you’ll find smaller investors along the way, and that’s good because, in most cases the lead investors want others in the deal too. If you are raising, say, $1 million, you might just run into the one investor that will write the whole check, but the odds are against it.
As practical, you want to find your lead investor first, because they will act as the draw for other investor, and make your overall raise easier and more efficient. After meeting with your would-be lead investor, you want to close the meeting by getting them to commit to some kind of action step, such as:
Get the investor to call your references
Get the investor to conduct due diligence about your industry, technology, products or service
Get the investor to try your product or service
Get the investor to have his or her accountant look at your historical or projected financials
Get your investor to interview some of your key personnel, vendors or advisors over the telephone
Get the investor to look at competitive product or service offerings.
The reason that you want to get the investor committed to an action step is because it provides the context for the second meeting, which will ultimately lead to the closing meeting. But the close for the first meeting goes something like: “O.K., you’re going to try our product, and talk to some of our customers, and we can discuss your thoughts next month.”
At the next meeting, if it feels like you’re getting traction, steer the conversation toward getting the investor involved in the decision making process.
You: We’ve met twice now, and you’ve had a chance to think about our situation a little bit more and read our business plan. To me, you have a firm grasp on what we are trying accomplish. For all these reasons I’d like to ask your advice about something. How much capital do you think we should be raising?
Investor: Well, your plan says that your are looking for $1 million. But I think the level of accounts receivable on the books as sales increase is going to eat a lot more cash than you think. I think you would do better with $1.5 million.
You: Well that’s one of the reasons I’m trying to bring experienced investors like yourself to the table because I feel in the long run good advice is as important as capital. O.K., of that amount, how much can you commit to?
It’s a very difficult position for an investor to get out of if they are genuinely interested in the deal. And if they won’t commit, well, that’s a small victory too, since it will save you from wasting any more time. But if they are interested, and respond with a material number, such as $250,000 or $500,000, then you have accomplished your objective of securing a lead investor.
