Landing an investor for your startup is an uphill struggle. It’s not as they show in the TV shows. You don’t just put up a website, make a couple of phone calls and then viola – someone gives you loads of money to get your business off the ground. It’s a process that takes time, energy and a whole lot of hustle.
And generally, it’s not just one person or company that invests in a startup during a funding round. More often than not, it’s a group of investors led by what’s called a lead investor.
So, what is a lead investor? How do they work, and what role do they play in an investment round?
Here’s a guide to help you answer these questions and more.
What Is A Lead Investor?
A lead investor is an individual or organisation who willingly takes on the role of spearheading an investment round for a startup.
They do this by putting up a significant portion of the total amount being raised and also leading the negotiations.
In simple words, among all the investors, a lead investor is the one who:
- Leads the funding round: A lead investor either puts up a significant investment amount or is the first to offer to invest in a startup. This signals to other potential investors that the startup is worth investing in.
- Leads the negotiation: They are also responsible for leading and driving the negotiation process with the startup. This includes negotiating the terms of the investment, such as the amount of equity to be given up, the valuation of the company, etc.
- Represents the interests of the investors: The lead investor is also responsible for representing the interests of all the investors in the funding round. This includes making sure that all the investors are happy with the terms of the investment and that their money is being used wisely by the startup.
- Provides guidance and support: As the lead investor is usually an experienced investor, they also offer guidance and support to the startup. This includes helping them with their business plan, providing advice on how to grow the business, and introducing them to other investors and potential customers.
Here’s an example – when you see news of Sequoia leading an investment, like this –
It doesn’t mean they are the only investors, but they are the one who spearheaded the round, and as such, their investment is usually the largest.
However, even though unlikely, there are times when the lead investor isn’t the highest bidder. In these cases, the lead investor is chosen because they’re the best fit for the startup. This means that they have a good track record of investing in and supporting similar companies, they have a good relationship with the startup’s management team, and they offer the most support to the startup.
There are also times when a startup has more than one lead investor (co-leads).
This usually happens during a high-growth phase when the startup needs more money than what a single lead investor can provide. In these cases, all co-leads either divide up the lead investor’s responsibilities or each take on different roles.
The Importance Of A Lead Investor
Technically speaking, if you’re new to the startup ecosystem, you may not even get any traction during your early funding stages without a lead investor. Other investors may agree to invest in your startup, but only if someone else takes on the lead role. Most investors have just one thought while evaluating a startup: “why no one else is funding this deal?”
Honestly, investing in new companies is a huge risk. Most investors follow a more human approach – if others are also funding a deal, it must not be that bad of an idea.
This approach might get you stuck in an investor chicken-and-egg situation.
Besides this, your lead plays a vital role in the success of your startup. They lead the syndicate (group of investors), which means they are responsible for ensuring the deal gets done and that all the other investors are happy.
They are also typically the one who provides the most support to the startup financially and operationally. They are usually the first to call when something goes wrong and offer advice and guidance.
The lead investor is also the largest investor in the round. They may contribute anywhere from 30-80% of the total funding, which gives them a lot of power and influence over the company.
What Does A Lead Investor Do?
The lead investor of a startup plays a crucial role in the company – both during and after the funding phase. Here’s a list of all the responsibilities of a lead investor:
The lead investor is typically the one:
- Spending most time validating the startup’s business model and business plan, acting as an anchor for the rest of the syndicate. Other investors simply put their faith in the lead and follow them into the deal.
- Negotiating and setting the valuation of the startup with the Founders. It’s the lead aching out to and coordinating with other interested investors to form a solid investment syndicate.
- Reviewing and approving (or not) the final version of legal documents, such as the term sheet and shareholders’ agreement.
- Acting as the representative of the investment vehicle in all correspondence with the startup from due diligence onwards.
- Being available and accessible to both the Founders and the rest of the syndicate for any questions or concerns that may arise during the investment process. The lead is also typically responsible for executing and closing the deal.
Even after the fundraising phase, the lead investor:
- Represents the interests of the investors in the company by taking a board seat.
- Remains the key point of contact between the startup and the investors.
- Represents the interests of the syndicate in any future fundraising rounds.
- Acts as a mentor to the Founders, providing advice and guidance on a range of topics such as strategy, recruiting, and managing growth.
- Provides support to the company beyond just financial resources, leveraging their networks and expertise to help the startup succeed.
- Help raise additional funds from other investors if needed.
Attributes Of A Lead Investor
Not any investor can lead a round. A lead investor is usually someone with:
- Prior experience in the venture space: They’ve seen firsthand how companies grow and what challenges they face. This experience is invaluable in helping startups navigate their early days.
- A strong track record: They are usually people who have invested in and helped grow successful companies in the past. This experience gives them the credibility needed to lead a new investment round. This credibility not only attracts other investors to the round but also helps the lead investor negotiate better terms for the startup.
- A large network: Their network can be helpful in many ways. They may be able to introduce the startup to potential customers, help them find key hires, or connect them with experts who can advise on specific challenges they’re facing.
- An ability to add value: They are someone who can provide more than just financial support. They are able to offer advice and mentorship based on their experience growing successful companies.
- Someone the investor network trusts: The lead investor is often the first point of contact for other investors who are considering investing in a startup. If the lead investor is someone with a good reputation, it can help attract additional interest and investment.
- Diligence and commitment: They are diligent in their research and due diligence on a startup before investing. This is because the rest of the syndicate will likely follow the lead investor’s lead.
The lead investor is a key player in any startup’s success. They provide not only the lead investment, but also valuable support, mentorship, and networking opportunities.
For you as a startup founder, it’s important to choose your lead investor wisely. They should be someone you can trust and who has a good reputation in the investing community.
Do your research and due diligence on any investor before taking their money. And make sure they are someone who aligns with your vision for the company.
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A startup consultant, digital marketer, traveller, and philomath. Aashish has worked with over 20 startups and successfully helped them ideate, raise money, and succeed. When not working, he can be found hiking, camping, and stargazing.