When entrepreneurs set out to raise a seed round, they typically find that it’s hard to get a lead investor. Lead investors are often professional investors and/or institutional investors that commit a significant amount of time and energy to the company, not just money. At the seed stage, there’s no product/market fit or repeatable customer acquisition process (see The Four Stages of a B2B Startup), making the investment more of a belief in the team and market, not the existing momentum or traction in the business.
Here are a few challenges when there isn’t a lead investor:
- Accountability – The lead investor is the point person for accountability with the entrepreneur, ensuring timely monthly investor updates, annual reviews, etc.
- Board Meetings – The lead investor requires regular board meetings and helps enforce standard fiduciary responsibilities
- Follow On Rounds – If the company isn’t hitting its targets, it’s much more likely that the investors will walk away and not do a bridge round or additional financing as everyone has a more limited ownership stake and participation
Another way to put it is that a seed round without a lead usually results in “just money” whereas a lead investor is a real partner for the entrepreneur.
Entrepreneurs raising a seed round would do well to think through the pros and cons of having, or not having, a lead investor.
What else? What are some more thoughts on the challenges of a seed round without a lead investor?
David Cummings on Startups 