The Lead Investor Challenge – Investor Blog by Joey Davis

Entrepreneurs on the fundraising trail will hear a polite “No” from investors more often than not, but the next most frequent response they’ll hear is: “I’m interested, but come back to me when you have a lead investor.” Efficiently finding a credible lead investor (“lead”) will be as important as anything an entrepreneur can do for a fundraise. Most investors are considered follow-on investors, which means that they will wait for a lead to commit to fund a startup before they will commit.

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.)

This blog was written by Innosphere Fund Principle Joey Davis

The Innosphere Fund has led seed-stage investment in Innosphere Incubator Client Companies since 2017 – the Fund looks for motivated founders that can build a great company with smaller amounts of capital while achieving superior growth milestones and positioning the company for a near-term exit. https://innosphere.fund/

With 20+ years of experience, the Innosphere Incubator’s tested model has supported hundreds of companies in reaching their key milestones and solving challenges like identifying appropriate lead investors. For information on becoming an Innosphere Incubator Client Company, please visit https://innosphere.org/ or reach out to Scott Sampl, Innosphere’s Chief Operating Officer, at scott@innosphere.org

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