As an entrepreneur who runs a budding startup, you have carefully prepared your elevator pitch, ready to hook in multiple funding rounds from potential investors. The only problem is that you might be turned down by all of them when they ask who your lead investor is, and you don't have one.
While founders are encumbered with the duty of raising funding, the first step should be searching for a lead investor. A lead investor can be an individual or institution that serves as a bridge connecting prospective investors and startups. As the name implies, a lead investor is also someone investing in your business and is typically an expert in the industry. Most venture capital firms, angels, and angel groups will want to know who your lead is. This is because having a reputable entity involved in your nascent business will remove some of the risk concerns shared by the financier.
Who is a lead investor?
A lead investor will be the first one to provide funding to your startup and generally has the biggest stake in the business, asides from the founder. They will perform various work in the early stage and provide valuable assistance to startups. For example, according to a Forbes article, some of their main responsibilities are:
•Discussing and negotiating terms
•hiring a law firm to handle the paperwork
•Promoting your startup
•Being a board member
•Providing introductions and connections
•Advising on the structure of future fundraising rounds
•Mediating and working with other investors
•Attracting other investors, financing, and distribution channels
•And involved in follow-up funding rounds
One thing to keep in mind is that although lead investors will perform some of these tasks free of cost, they typically demand a seat on the board and hold a large equity portion of your company.
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How a lead investor is a startup's most valuable asset
•Providing capital
As mentioned above, a lead investor will own a significant slice of your business equity pie.
This is because not only are they the first to inject capital into your company but are also the one who contributes the most in a fundraising round. A lead generally provides 30% to 80% of the money in each round. As a result, they can earn handsomely from carried interest if your startup ultimately takes off.
Since the lead investor will hold a large portion of your business, you should make sure that they are an expert in the industry and a believer. Sometimes lead investors do not have the capital to invest the most in a financing round, but they have to compensate for that with their expertise and connection. In order to test their capability, you have to spend a lot of time communicating and conducting meetings. Additionally, for someone who plays an important role in the success of startups like a lead investor, they have to genuinely believe in the business idea. Only when they have conviction in the concept that you are trying to sell, will they go above and beyond to see your startup blossom.
•Attracting other investors
Instead of you presenting your idea to venture capital firms to seek financing, a lead investor will take advantage of their sweeping networks of connection in the sector. Therefore, a good lead will have to be able to provide a list of potential funding sources for the company. Their reputation will also ease the concern of other individuals and institutions, convincing them to pour money into your business. However, since they will share the contact of prospective investors, you still have to get your hands dirty and pitch your products or services.
Lead investors will also help you perform the tedious task of outlining terms for deals. Before you can present your ideas to VCs or Angels, you need to have the deal's structure established and decide how much you are looking for. You typically work with your lead on a term sheet, and they will help you with all the essential agreements and conditions on the contract. The lead investor will also determine your pre-money valuation, which outside investors use to decide their equity rewards in return for capital injection.
•Serving as an advisor for the business
Besides providing funding and contact lists, lead investors play a valuable role in advising businesses. They are professionals in the industry, so their extensive knowledge will help your startup navigate various complex hurdles. They will give advice on operational strategies, building financial projections, creating an effective marketing campaign, and good risk management. Additionally, on many occasions, lead investors are former founders of a business, which they successfully sold. So they understand the onerous process of running a startup and the contentious dynamic between founders and investors.
How to find a lead investor?
Now that you see the importance of having a lead investor, how do you look for one? There are several ways that you can find or make connections with a potential lead. For example, they can be introduced by other entrepreneurs and investors. Or they are well-known investors who have a history of leading funding rounds. You can also search for them on online investment platforms, through social media networks, or in a networking event.
Conclusion
A lead investor will be the first to invest in your business. Without them, other investors might turn down your offers, as they want to see a lead investor already validating your ideas. Lead investors also tend to contribute the most in any financing round. Your startup can take advantage of their extensive knowledge as they are experts and professionals who are well-versed in the field. Their far-reaching networks of clients also help you secure additional fundraising rounds in the future.
