The Who, Why and How: Lead Investors

You’ve created an amazing founding team, you’ve built a brilliant product that has been gaining a lot of traction, and now you’re looking to expand your company. How do you continue to build your business? By searching for a lead investor in your next funding round.

The lead investor is the first step in the process that makes the rest of the process take flight. The primary responsibilities of a lead investor is to invest, advise and attract other sources of capital for your business. There are so many financial opportunities with a lead investor on board, so searching for one will definitely provide a lot of value to your company.

Below is a list of ways to identify a lead investor, build a relationship, close the deal, and everything in between for your next funding round.

What Is A Lead Investor?

A lead investor is a company’s principal capital provider. Lead investors play a much more critical role than that of any other investor. Regardless of what round, whether that be the angel round, venture round or hedge fund, finding a lead investor can be invaluable to a company.

There are certainly many paths towards acquiring funding, but having a lead investor can prove to be beneficial. For instance, when a lead investor takes the lead in representing a funding round, they can influence follower investors to get on board and thus increase the value of the funding round. Beyond finance, lead investors can also offer invaluable advice towards the company’s growth.

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How To Identify A Lead Investor

The key to identifying prospects to become the lead investor in your round, is to do your homework. Most founders think that just any investor has the potential to help lead their funding round. This couldn’t be further from the truth. The key is to find an investor that has some type of experience in your industry, so they will quickly understand the problem that you are solving, and your solution. Investors that fit the descriptions below will more likely be willing to meet with you to discuss your company:

  • Has either previously invested in, founded, or been an early employee at a company in your industry
  • Invests in companies at your stage, whether it is seed stage, series A or beyond

If you make the mistake of pursuing investors that have no experience in your industry, you will create a much harder road for yourself, because they will not have the natural sense of empathy for your company and industry. In the post titled “How to Find a Lead Investor,” by Nitin Pachisia, who is a founding partner of Unshackled, gives a great example of this advice in action saying:

“If you pitch an investor who has no experience in the retail industry, and try to explain a point of sale solution to them, they are just not going to relate to it as much as an investor who has experience in retail or one who has 5 or 6 portfolio companies in the industry.”

3 Qualities Lead Investors Must Have

According to Adeo Ressi, below are the three qualities that you should look for in a potential lead investor:

Interest in Your Segment

“I shy away from investments that are designed in order to get a return via an exit or an acquisition. Look for investors that want you to become a great, long-lasting, sustainable business. Ensure they truly believe in your mission.” — Neal Sales-Griffin (Starter League) from “Choosing An Investor: 5 tips from 5 Entrepreneurs

Financial Resources

A lot of entrepreneurs will ask questions around how big the angel’s fund is, how we make decisions, and if we’ve invested in this space before. Also, are you investing right now? I like those kinds of questions because it shows the entrepreneur is sizing me up and is interested in finding the right fit, not just someone to write a check. — David Cohen (TechStars) from How to Find the Right Investor for Your Business

Time and Risk Readiness

You have to do an intense background check on your investors before you ink a commitment — I can’t stress this enough. You also have to exactly understand their time investment. A lot of young startups make the mistake of thinking their investors will be more involved than they are, so you have to really understand what you’re walking into.” — Rob Fulton (Exponential Black) from “9 Things You Should Avoid in a Potential Investor

These qualities limit the number of people, but guarantee you a great lead investor for your company. And remember, before finding a lead investor you are going to speak to at least 50 potential investors, 20 of which may be interested in your company, and 10 of which may actually invest. You may get lucky if you secure a lead investor before speaking to 50 prospective benefactors, but those are rare cases.

Do Not Get Blacklisted From Lead Investors

If you are looking for funding but do not have your pitch or company in good shape, you will be blacklisted. When you get a “no” from an investor, that “no” is forever. The average investor sees dozens, if not hundreds of deals a month. There are some cases in which investors may look at your company again, but don’t count on it. Also, if you make a bad impression with one investor, there’s a good chance that they will pass the word along to fellow investors, which will hurt your chances for potential meetings with others.

Glen Hellman, a serial entrepreneur and angel investor, provided a list of the offenses that will put you on the investor blacklist in his post, “Have You Been Blacklisted By Investors?”:

  • Following up with an email telling the investor they don’t get it or they’re idiots.
  • Pulling the rug out from under the investor because they aren’t moving fast enough or some other bogus reason.
  • Associating with and depending on sleazy, untrustworthy advisors.
  • Not being coachable. Never admitting you don’t know, that you made a mistake or arguing too stridently with a closed mind.
  • Coming into the process with the naïve inflexible belief that the money raiser sets the deal price and terms.

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