Why Nobody Wants to Lead Rounds

Hello Startup Community!

Welcome back to Startup Success Weekly with GACS!  Today, we’re digging into a topic that impacts many founders: why it’s so tough to find investors willing to lead a funding round. Let's dive into the unique challenges that make leading rounds so unpopular and what it means for startups seeking capital.

Key Insights

1. High Cost of Due Diligence and Legal Fees Leading a round comes with a big price tag. The due diligence process alone requires extensive work from analysts, partners, and external experts, plus legal fees that add up fast. All told, the cost for a VC to lead can hit between $10k and $100k or more. That’s a big commitment for small VC firms, which generally run lean on resources. And as a rule of thumb: if an investor asks you to cover these due diligence fees, think twice it could be a red flag!

2. Limited Expertise and Deal Coverage Most VC firms specialize in a specific niche, often shaped by the partner’s personal track record. This narrow focus means they can confidently lead rounds only within that spectrum. But even with domain expertise, if a firm isn’t exposed to a large enough percentage of deals in the space, they might lack the full market context needed to make an informed decision. This is why the same few VCs with expertise and ample coverage often end up leading rounds, while others prefer to follow.

3. Reluctance to Risk Social Capital For VCs, every lead investment is a test of their judgment. Leading a round is a public bet on a startup’s success, and when things go well, the rewards are high. But if a startup doesn’t perform, the investor’s reputation and social capital take a hit. To mitigate this risk, many investors prefer to co-invest with a well-known VC, allowing them to share the responsibility and the fallout if things go sideways.

What This Means for Founders

If you’re out fundraising, understanding these dynamics can be helpful. The hesitation to lead rounds isn’t necessarily a reflection on your startup it’s often about the structural challenges and risks that come with leading. Connecting with firms that have both the financial capacity and the domain expertise to lead your round is key. Keep refining your pitch, but know that finding a lead might be one of the more challenging parts of your capital journey.

Have any insights or experiences related to finding a lead investor? Share your thoughts below!

Stay tuned for more startup insights in the next edition of Startup Success Weekly with GACS!

Best, The GACS Team

‍