Your deck is perfect. Your pitch is tighter than a camel squeezing through the eye of a needle. You’ve done some stretching, you’ve had three cups of coffee, and you have even tried your vocal cords at a primal scream in the forest. In short, you’re ready to start pitching your startup to investors. How do you find them? That is where a lead list comes in.
A lead list, you’ll be unsurprised to learn, is a list of leads for potential investors. To be more specific, it should be a spreadsheet of some sort. Excel works. Google Sheets is better for collaboration. Airtable is excellent if you want to be able to do advanced filtering. You can also decide to use a customer relationship management (CRM) tool. You would typically use a CRM tool for sales processes—which is perfect. When you think about it, your fundraising journey is very much a sales process.
Structuring the list
The name of the firm
A link to the firm’s website
The name of the partner at the firm you want to target (if you know)
An email address for the partner (if you have it)
Connection vector (i.e., who do you know who can get you an introduction? We will get back to this in the next chapter.)
Whether the firm leads investment rounds or not
The size of the fund
The fund’s typical check size
Relevant investments the firm has made
Notes and info
What tier firm it is (I’ll talk more about that in just a moment)
When did the firm start investing out of its current fund
Some of the columns of your spreadsheet are going to be clear. Let’s talk about the ones that aren’t.
Partners
Different partners at different funds will have varying interests and focus areas. One partner may have an in-depth focus on hardware. Another may be excited about marketplaces. A third might have a soft spot in their heart for healthcare startups. Even if you’ve seen the firm invest in a bunch of hardware companies, it reflects poorly on you if you end up pitching your healthcare company to the hardware partner. If you know the hardware partner personally, it’s possible to send them an email and ask for an intro to the healthcare partner, of course. If you don’t have a warm intro, ultimately, the firm will want the deal flow, so if you send your healthcare startup to Henrietta Hardware, she will forward it to Harry Healthcare. Approaching the right person does show that you’ve done your research, though, so try to get it right; it helps you, it helps them. It’s worth noting that not all firms have clear delineations between partners—perhaps the whole firm is focused, or all partners are generalists. In that case, you pitch to the partner you can get the warmest introduction to—we will talk more about warm introductions in the next chapter.
Firms who lead
You should find out whether the firm is willing to “lead” a round or not. Leading an investment means negotiating with you for the terms of the round, doing in-depth due diligence, and writing you the first check for your round. Firms that don’t lead will “follow”—they tend to do lighter due diligence, and they accept the same terms as the lead investor. Note that a “follow” investor doesn’t necessarily write smaller checks—I’ve seen examples of a “follow” investor writing checks the same size or larger than the lead investor. You’ll also sometimes find that some firms want to co-lead—that is, both dictate terms. I’m less of a fan of that—if I find myself in that situation, I’d try to play it so that I get two term sheets from them. They’ll probably be pretty similar, but at least you have two conversations going in parallel. At the beginning of your fundraising process, ignore any firms that don’t lead rounds—they are a distraction until you have a term sheet.
Relevant investments
In your research, look for “relevant” investments that the firm has made. Relevant, in this case, doesn’t mean direct competitors. It’s extremely rare (but not unheard of!) that a firm would invest in two startups that are going head to head. You will be looking for investments in the same space. For example, if your startup is tackling a specific type of cancer, look for firms that have invested in solutions focusing on other types. If you are solving one supply-chain problem with a SaaS solution, look for investors who’ve placed a bet on SaaS solutions in other parts of the supply chain. When you talk to the investors, mentioning their related investments as part of your pitch is powerful—and if you know the founding teams of the other investments, all the better.
Fund dynamics
The fund dynamics for each firm are essential. You need to know the size of the current fund they are investing out of, the typical check size they write, and when they started investing out of their current fund. The most important of these is the check size. If you are raising $15m, and the fund you have your eyes on only writes $20m checks, that’s not a good thing; you aren’t a “good deal” for them. In any individual round, a lead investor will typically invest half the money raised. If you are raising $15m, it means that you’re looking for a fund that can write a $7.5m check to lead the round. A fund that typically leads rounds and invests $20m per investment is investing in $40m rounds, meaning that you’re barking up the wrong tree. Doing your research here is essential. Knowing the size of the fund and when they started investing is helpful, but exactly why is a little outside the scope of this book; make sure you have a good advisor who can talk you through those dynamics and why those two numbers are important to you. Incidentally, asking a potential fundraising advisor to explain what you should be looking for in terms of fund size and fund age is an efficient filter to see whether your advisor is a good fit. If they don’t know, or if they can’t explain it, run for the hills.
Tier
You should also make a note of what “tier” you think the firm is. A tier is a subjective judgment of how prestigious you believe the firm is. If you get a lead investment from a top-tier firm, it becomes much easier to get other investors interested. If your lead is a low-tier fund, it becomes much harder. More respected firms also make it easier to raise follow-on funding; lower-tier investors tend to want the halo reputation of investing alongside top-tier firms. Note that the “tiers” are often dependent on the industry. In niche industries, a relatively obscure firm (i.e., one that isn’t well-known in the broader investor community) can be in high regard among investors investing in that niche. Do your research thoroughly.
Notes
In the notes field, capture rumors and other data points you pick up. If someone tells you that Elena, at a particular firm, has shifted her attention to something relevant to your company, make a note! The VC industry can change quickly, and even though Elena may not have made any investments in your space yet, you could be the first. The only way to find that out is to pay attention and do a lot of networking. Accept coffee invites from anyone who will take a meeting even if they don’t plan to invest. If they are willing to share inside gossip about the investment landscape in your industry, that is perfect!
Doing the research
Doing in-depth research to find out who you should reach out to is not trivial. There are more than 700 venture firms in Silicon Valley alone. It’s possible that 50 or more would be a good fit for your startup—so how do you find them?
For your first sift of potential investors, I recommend taking a pretty broad approach. The goal is to have a comprehensive long list of all of your potential investors and then prioritize them in the order that makes the most sense for your company.
A technique I’ve found that will work well is to make a list of 30–40 companies that are slightly more advanced in their journey than you are. If you are raising a seed round, look at companies that are at their series A. This ensures that there’s as much data available as possible about their previous fundraising, but also that the data you are gathering is less than 2 years old. For this list of companies, get creative—think of companies that are similar to yours, but not the same. If you are creating a new type of toothbrush, think about tooth-whitening startups. If your product helps learn a new language, list companies that are for other educational sectors. Does your company create a tool that helps reduce the risk of credit cards? List companies that offer other auxiliary services for the credit card industry—rewards programs, marketing tools for credit cards, or credit monitoring applications.
The next step of the research is to use whatever data you can find to learn more about the fundraising journey for these companies. Find out who invested, when, and how much. Databases like PitchBook and Crunchbase are fantastically helpful here—when I work with customers, I tend to use both to help comb the landscape for potential investors. Also, use Google News; do a search for “[company name] funding round” and read whatever press releases or news stories you can find. Make a note of all named investors—and in particular who led the rounds.
The goal of this research is to get a picture of which firms are emerging. Whenever I run this type of research for my own companies or my clients, I am always amazed to see how many times the same firms come up again and again. To me, that’s a sign that the technique is working. If I came up with a list of 40 companies that are “relevant” to the startup I’m researching for, and the same 2–3 investors come up again and again, those will pop to the top of my list; clearly, they have a particular interest in this industry or market.
At the end of this research, you should ideally have a list of 50–80 venture firms. Start filtering them down—this is where Airtable comes in handy. Move everyone who doesn’t lead rounds to the bottom of the list. Sort everyone else by tier and by how well connected you are to the firms. In a perfect world, three to four firms bubble to the top; they lead investments at the stage where you are raising money. They are prestigious firms. And you have a way of getting a warm connection.
Now that you have your lead list ready to go, it’s time to start outreach—more about that in the next chapter!