Hint: It doesn’t mean we’re ready to invest as soon you find that lead

You pitch to an investor — an individual, an angel group, or a VC fund — and you’re likely to get the response: “Sounds interesting. Let us know when you have a lead investor.”

Nice, you think. They’re interested. They’re going to invest once we sign up a lead.

If you pitch to Chemical Angels and don’t have a lead, I’ll actually be the one giving you that message. Then I’ll move your application from “pre-screening” to “hold for lead” in our database.

So apologies for the misunderstanding. Your application hasn’t been immediately rejected, so you’ve passed the first hurdle. But we’re still a few more major hurdles from being “interested” much less “likely to invest.”

So here’s what investors mean by “waiting for lead investor” and how you should use that information.

What is a Lead Investor?

Let’s start with the basics: what is a lead investor?

Every round needs one investor to take the lead. (And yes, despite rumors to the contrary, this includes the pre-seed round.) The lead negotiates the deal terms with you and conducts thorough diligence. In most cases, they become the largest investor in the round and join the company’s board.

Other investors rely on the lead for a variety of reasons. Usually that comes down to not having the resources to conduct a thorough diligence process ourselves or not having the required level of expertise in your industry. We may also not have the financial wherewithal to be one of the largest investors in the round.

Chemical Angels is not a lead investor. Our investments are small. We have technical expertise, but not the marketing, finance, and legal resources required for thorough diligence. We’re not prepared to negotiate deal terms and draft/review the investment documents. (Tech Coast Angels, the other angel group where I’m an active member, is much larger and is able to lead deals.)

So we’ll only consider a startup once you have a lead investor with set deal terms. We strongly prefer a lead investor to be another angel group or small VC fund. We don’t consider an individual to be a lead, nor a strategic investor, an accelerator, or an economic development agency. We need an objective third party who’s examined the company in painful depth, negotiated fair terms for all investors, and made the decision to invest.

What Happens Before You Have a Lead?

If you apply to our group, we ask right on the application if you have a lead investor.

If you don’t have a lead already secured, we could just tell you to wait until you do. But we’re interested in hearing from as many startups in our sector as possible. We might even be able to introduce you to potential lead investors. Plus, the fundraising process is convoluted and takes a long time, so we want to get started in parallel.

A 5-minute introductory pitch isn’t a significant time commitment for you or us. So you get a short time slot along with 20–25 other startups the first Thursday and Friday of each month.

The following week we get together to pick 4 startups to invite back for a full 30-minute pitch. In most cases, those startups already have a lead.

The rest we other applications into 2 groups. The first are ones that we’re not interested in, usually because they’re at too early a stage for us to consider, but also because they don’t fit our sector, don’t have a competitive moat, or just haven’t garnered interest among the group. Sorry. If that’s you, I’ll send you a polite decline.

The remaining applicants are ones that might be a fit, but don’t have a lead investor. The proposed deal terms might be absurd, but we assume those will get adjusted to something reasonable in negotiations with the lead. Those startups will get a polite message from me saying they’re on hold for a lead.

And there your application will sit in our database on hold until we hear back from you.

What Happens After You Have a Lead?

Congratulations, you landed a lead! It’s a huge milestone in your raise, and unlocks the rest of the process.

Now you can go back to all those investors like us who told you to reach out when you have a lead.

Does that mean we’re ready to invest? Uh…no. It means we’re ready to begin the process of considering whether to invest or not. Here’s what happens next.

If you had your 5-minute presentation a month or two ago, you’ll be considered along with the current crop to invite for a full pitch. If it’s been longer than a couple of months, we’ll ask you to give a 5-minute update, which really is no different than a fresh 5-minute intro pitch.

If you’re one of the four companies selected, great. Now you give a full pitch to the group. If not, sorry.

If there’s interest after the full pitch, we’ll set up a small committee of 5 or so members for a 1.5 hour call to dive into the gory details. If that goes well, we begin a diligence process.

Our diligence process includes talking to your lead investor and reviewing their diligence report or investment memo. We’ll also want to speak with customers, review patents, meet industry experts, and perhaps plan a site visit. We’ll review all of our concerns and see if we’re comfortable.

If everything checks out, the diligence committee votes on whether to recommend investment. Then we prepare our own deal memo and bring it to the full group for a vote to invest from our member fund. Individuals are always welcome to invest, no matter what the group decides, but most follow the decision of the diligence committee.

So What Does Hold for Lead Really Mean?

If we’ve told you that your application is on hold for a lead investor, we’ve decided there’s a good enough fit that we’re keeping the process open. But that’s still very early in the process of deciding whether to invest.

You’ve gone from about a 1 in 50 chance of investment from our group to about a 1 in 10 chance. Your odds have improved by 5x. While that’s still far from even a 50/50 call, it’s great progress. You’ve identified the right group of potential investors.

You’ve also convinced a key investor that they should invest in you. Now keep going and convince the rest of us that we should, too.