The Beauty of the Lead Investor Approach
Investing with success is difficult. Having enough firepower to invest in private markets at all is difficult. Raising money and being successful with a startup is difficult. Sounds like a fun-free zone. So what do you do?
“9 out of 10 startups fail!” — Even if you are not working in an entrepreneurial environment, you will have heard this quote at least once in your life. Although the statistics are fuzzy, the underlying message — most startups fail — is true.
However, it is not only the entrepreneurs who don’t have it easy. Investors also have to endure tough times and are likely to lose. Investing in early-stage companies is hard and risky all the more when you don’t have time to take a closer look at an investment opportunity. When investing in private markets is challenging, why not better join someone, who is picky and has the time for a closer look at a company instead?
If you have ever founded a startup, you know how hard it is to get a lead investor on board, because they are very picky for a good reason. Investors who join such a lead investor can rely on the know-how of an experienced investor with an affinity for the sector.
What Exactly Does a Lead Investor?
A lead investor plays an important role in the execution of deals. This starts with showing commitment to the deal and communicating with peer investors to measure interest and guide them through the deal. Lead investors work closely with the due diligence team to ensure that all risks have been mitigated for investors. For this purpose, they undertake a comprehensive and detailed evaluation of the business model, financial plan and product. The lead investor assists in negotiating the deal by preparing the term sheet and ensuring that the terms are acceptable to all investors in the transaction. That sounds like a lot of work, but what do lead investors gain from giving you the opportunity to join them?
The Best of Both Worlds
With investors behind them, lead investors can increase the amount of money they can raise for a given deal. This gives them the opportunity to invest in companies which have high deal sizes they cannot raise on their own. By investing more capital, lead investors can leverage their influence on the company they invested in. Additionally, they can charge management fees on co-invested capital as compensation for sourcing lucrative investment opportunities and conducting due diligence.
So why not connect all stakeholders instantly and without paperwork with each other. In such an environment, investors get access to hand-picked deals, lead investors get more firepower and startups get more capital with fewer meetings. This is exactly what we achieve with Leva.
Originally published at leva.pe on February 5, 2019.
