What is the value and role of a lead investor?
What is the role of a lead investor? A lead investor brings the needed star power to any investment round, which is the single most critical factor for startups. They draw in the other investors and dramatically increase the probability of successfully securing investment.
As much as a lead investor reduces the amount of time and energy it takes to secure investment, lead investors go out of their way to get other investors to come in. They are typically making a significant investment, often a firm amount of at least 15% to 50% of the round.
Example of a Lead Investor:
- Writes the due diligence report. Leads the negotiation of terms and due diligence with the founders.
- Leads the legal work between the angels and the founders: they manage the angels’ lawyer and the closing process, including managing the money in escrow.
- Writes up a due diligence report and closes on a term sheet after negotiation with the founders. Find other people to syndicate to.
The Value of a Lead Investor
A lead investor guarantees a closed round. A reputation and network will make sure other investors come in. It’s easy to raise once you have a lead. Most VCs, angels, and angel groups require a lead to be investing before they will invest. Therefore, your success rate pitching a pitch deck skyrockets if you have a lead investor putting their name and terms in the deck.
What is the role of a lead investor? A lead investor makes the company’s life much easier by eliminating the need to go through the whole process of raising capital. He or she will invest the most in terms of money most of the time, investing 15% to 50% of a round.
What Is The Role Of A Lead Investor?
Responsibilities of a Lead Investor
What is the role of a lead investor? The lead investor has the following responsibilities and roles:
- Due Diligence: They provide a due diligence report, though the other investors may do their due diligence.
- Negotiations: They negotiate the term sheet with the founders.
- Legal Management: They will engage a law firm for the management of investor paperwork, sometimes financed by the startup and sometimes by the investors.
- Board Participation: They sit on the advisory board or board of directors.
- Introductions and Networking: They make introductions to potential investors, customers, partners, suppliers, employees, and others.
- Investor Management: They assist in managing other investors and structuring future fundraising rounds.
- Future Participation: They invest in future fundraising rounds to support the growth of the startup.
Characteristics of a Lead Investor
What is the role of a lead investor? The following are some common characteristics of a lead investor:
- Passionate Belief: They hold their belief strong in the start-up and founders and are not looking to take control or force out the founders.
- Long-term Compatibility: One can work with him in the long run because parting ways with a lead investor can be more difficult than a divorce.
- Values and Ethics: They have strong values, morals, and ethics.
- Respect in the industry: He is respected in the industry or the startup financing world.
- Experience: He has been a lead investor before and has been successful in his investments.
- Financially Stable: They have enough money available for follow-on investments and are not in financial trouble.
- Diversified Portfolio: The investor has a diversified investment portfolio which will reduce the pressure on the startup because of market problems in a particular sector.
Main Advantages of a Lead Investor
There are several benefits that a lead investor brings to a start-up:
- Large Capital Commitment: They generally commit a huge amount of capital to the business they mentor.
- Credibility: They help in establishing credibility in the market and with other possible investors.
- Experience and Guidance: They set up reporting metrics, provide direction, and review the progress of the startup regularly.
- Mentorship and Network: Your experience, skills, and connections in the sector can be vital for the success of the startup, including opening new doors through the network.
- Chances of Success: Chances of success multiply many times over with a lead investor being involved and guiding.
Drawbacks of a Lead Investor Model
Although the lead investor model has many advantages, there are some drawbacks:
Lack of interest: Some firms may not be able to secure interest from a lead investor, in which case they won’t be able to raise funding through platforms like Angels Den Funding. While that’s not necessarily a bad thing for the business, it could either indicate a lack of interest in a certain sector of lead investors or that the timing is inconvenient.
How to Find a Lead Investor
How to find a lead investor involves a few steps:
Get a List of Prospects: Build a list of prospects to start with. These can come from other founders and their suggestions, advisors who you know can introduce you to other founders, and research on lead investors from other deals.
Also, there are many lists of investors online through websites like the
- Canadian Venture Capital
- Private Equity Association (cvca.ca)
- Hockeystick
- Startup Here Toronto
- Angel Investors of Ontario
- Crunchbase
Build Relationships: Build relationships with investors over time—spend hundreds of hours calling and emailing them and meet with them weekly—often more than 20 hours a week for three to nine months.
Plan and Use CRM: Develop a plan and use a CRM to stay in touch with potential investors and systematically track your progress in finding a lead investor.
Next Steps
What is the role of a lead investor? To find a lead investor, here are the steps you should follow:
- Define Your Needs: Define what you are looking for in a lead investor and the value they can bring to your startup.
- Develop a Plan: Develop a detailed plan of how you will identify and contact the list of potential lead investors. Include how to make contact and carry out strategies to maintain contact and build relationships over time.
- Use a CRM: Implement a CRM system into your investor outreach to allow for monitoring of interactions, ensuring you are consistently following up with possible lead investors.
Conclusion
What is the role of a lead investor? A lead investor can either make or break a startup’s fundraising process. It’s not just about the infusion of capital, but more about greater leverage of their expertise, credibility, and network to boost the chances of success in building a startup. That makes knowledge of the value, roles, responsibilities, characteristics, and ways to be found and approached a big part of any startup looking to secure investment and grow.
Frequently Asked Questions
What is a lead investor?
A lead investor is the main investor in a startup who will usually invest the most money and also help mentor the company.
Why is a lead investor important?
A lead investor helps to round up other investors, lend credibility to your fundraising, and reduce time and work to get fundraising done.
What are the responsibilities of a lead investor?
They screen due diligence, negotiate terms and valuations, handle legal paperwork, mentor the startup, and help raise additional investors.
What are the key benefits of having a lead investor?
They infuse a credible significant amount of capital, provide valuable guidance, and use their network to support the startup.
How do I get in contact with a lead investor?
Develop a target list of possible investors, then go on and build a relationship with them through your CRM, for outreach and follow-ups.
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