We received this YouTube comment on our latest episode of Uncapped Notes:

It’s pretty common for investors to hold off on committing to a startup until that startup finds a “lead investor”.

But it stinks.

Elizabeth Yin, one of the GPs at Hustle Fund, experienced this while raising money for her previous startup.

Whenever she heard this, she would respond, 

"Ok! I'll come back when I have a lead!"

But this was a big mistake. 

It turned out that these investors weren’t actually committed. They weren’t lying per se, since they may still be open to investing. But it's not a real commitment.

Why do investors string founders along like this?

Reason #1 — Many VCs are “momentum investors”

Instead of doing their due diligence, many VCs wait for signals (like a reputable lead investor) to influence their decision.

It means they don’t have enough conviction about your business.

That said, it’s common for almost all investors to ask you if you have a lead.

Simply asking that question doesn’t mean that they’re a “momentum investor”.

We’ll explain this in a minute.

Reason #2 — They can reject you AND keep the door open

Telling founders to come back when they have a lead is the easiest way to tell a founder no… without saying “no”.

So if a founder comes back and says: “hey I got a lead!”, everyone will want in.

But if the founder can’t find a lead, the investor has basically rejected the founder while still maintaining a positive image.

When Elizabeth finally figured all this out, she was dejected. 

So what should founders do if investors say they’ll only invest once there’s a lead? Here's her advice.

Ask for clarity

Earlier we said that asking about a lead doesn’t necessarily mean the investor is waiting for signals from another investor.

The investor may want to know there’s a lead for reasons like:

1. Wanting terms to be set by someone else
2. Believing the business won’t work unless at least $X capital is raised
3. Seeing if they have a good or bad relationship with the lead investor
4. Finding out if the founder is raising a priced round or not
5. Seeking clarity on the plan if the founders aren’t raising a round with a lead

Many of these hesitations can be addressed right away. 

For reason #1: setting terms on SAFEs is easy. Even a founder can set the terms, share them with the investor, and let them decide if they want in.

For reason #2: the founders can still pull investors together. They can create a contract where the investor commits to $Z at a $Y valuation, contingent upon at least $X raised.

And so on…

So it’s not necessarily that an investor needs a traditional lead who does 50% of the round on an equity basis. This is why it’s important to ask for clarity. 

At the end of the day, it’s the founder’s job to understand the rationale behind this question.

Make the ask

If applicable, a founder could say something like,

“We may get a lead, but only if it’s the right fit, which is super important to us. But it won't hold up our fundraising and we are raising now on a SAFE/note. We can convert that later if we do get a lead.”

In other words, founders can (and should) still make the ask to have the investor sign a SAFE at a set valuation.

Maybe the investor does it. Maybe not. But founders should keep going with their raise because finding a lead may or may not happen.

Because if you get enough of a round together on the SAFE/note, you'll find that often the "lead" requirement no longer exists.

And of course, if you find a great lead, you can just roll all the SAFEs/notes into the round.

Raise money without a lead investor

Technically speaking, founders don’t need a lead.

Founders have more options to raise money today than ever before:

• SAFE Notes
• Access to thousands of investors
• Crowdfunding
• Going through an accelerator
• Family and friends

So if certain investors won’t budge without a lead, take a different path. 

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