What is a lead investor?
A lead is the investor signing up to do the hard work associated with investing in a startup (it’s not all sipping Blue Bottle Coffee while listening to podcasts). Beyond capital, a lead will invest the most time, energy, and effort throughout a startup’s fundraise. The lead’s process should translate into an endorsement that will serve as the vetting mechanism for follow-on investors to join-in and close out a fundraise. A good lead should do the following:
· Roll-up their sleeves and do the necessary due diligence to validate a startup’s business
· Set the valuation and terms of the investment
· Build conviction in the investment opportunity
· Hire (or help find) an appropriate law firm to paper the deal
· Provide accessibility and availability to syndicate the round with other investors
· Write the biggest check (and reserve for future fundraises)
· Take a board seat and help implement a governance structure for the startup
· Give strategic guidance on personnel, operations, growth, capital and exits
· Play an active role in the ongoing investor reporting of the startup
When should you find a lead investor?
The time spent working to identify and secure a lead early in (or before) a fundraise will provide a meaningful ROI to a startup. A commitment from a lead will separate a startup from others on the fundraise trail that have not secured one. After a lead makes a commitment to fund a startup, then they will quickly switch to act as an advocate for the startup during the remainder of the fundraise – the lead is staking its reputation (and its investor’s money) on the quality of the investment opportunity. Building the necessary conviction to lead an investment in a startup does not happen over-night.
Given the role a lead investor plays with a startup post-investment, they are signing up to partner with its team for years to come. A startup’s team will spend many hours along-side its lead through both the good and the challenging times. So, there needs to be adequate time to build a relationship before an investment. Meaningful relationships between entrepreneurs and investors can take years to develop. However, savvy entrepreneurs should begin their search for a lead no less than one to two quarters in advance of going out to fundraise.
How do you find a lead investor?
The best source to identify a lead is a friendly introduction from a shared contact (e.g. other investors, entrepreneurs, lawyers, or other trusted connections). This introduction provides the initial stamp of approval to quickly get a lead’s attention. But, if such an introduction is not available, then an entrepreneur must do the proactive research to identify a lead.
An entrepreneur needs to know that an investor is a fit for its round – this will require identifying investors that invest in similar startups (but not exactly the same) by searching out and reviewing the investor’s criteria and track record, including:
· Type of Investor (Lead or Follow-on)
· Stage (pre-seed, seed, series A, etc.)
· Investment Size
· Industry (Software & Hardware, Energy & Advanced Materials, Health Innovations)
· Verticals (IoT, Enterprise Software, Medical Device, Cleantech)
· Customer Type (B2B, B2C, etc.)
· Revenue (pre-revenue, specific ARR/MRR benchmarks, etc.)
· Geography (Colorado, Southeast, North America, etc.)