What makes a good Lead Investor? Leading with high engagement and clear goals

13th Dec 2018
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For a Lead Investor, we look to investors with intuition, leadership qualities, and someone who has the perspective of investing their own money. What else makes a lead investor?

Last year at LetsVenture, we did a study around angel investing, and what makes a good investor. One of the data points we uncovered was that lead investors have domain expertise in startups they are investing in. We found that the ones who conducted review sessions with the founders (at a fixed frequency rather than ad-hoc engagement) increased the chances of success of the startup by as much as 18 percent. In an asset class where 80 percent of startups are expected to fail, increasing chance of survival by 18 percent is something.

Leadership, Lead Investor

While there are many founder stories and narratives around success and failure, we took the approach of talking to Lead Investors to understand what worked well and what could have been done better. As part of #LeadwithLV, we bring to you stories from Lead Investors – stories of what worked for them, the signals they read and those they missed and the outside perspective from someone who had invested his own money.

Lead Investor Profile: Very successful corporate career, spanning from a career in Design, Arts Management and consumer goods. Public market investor and an active angel investor.

As an angel, very supportive of entrepreneurs – has pitched at events when the entrepreneur needed his endorsement. Received huge multiple on exits.

Investing Pattern:

  • Works with founders where domain expertise can be leveraged.
  • Most investments are co-located in his city, so the founder and they share a good relationship (spends a lot of face time with founders)
  • As a lead investor follows meticulous periodic monthly reviews. Spends time with the founder, and then with the senior management teams if required.
  • Typically interacts with founders for a while before committing. Might write a small cheque, followed by a larger cheque.
  • Clearly understands the role of Lead Investor converted to “Investor Director”
  • Made all 3 investments on LetsVenture, syndicated with angels.

Case studies - does it work?

Here are three case studies from the same investor, to bring diversity in approach

Investment 1:

Startup raised $700k in angel round, where he was the Lead Investor. Check marks in all the right places.

  • Pedigree founders, addressing a large market.
  • Investor knew the founders well and had known them earlier, having invested a small cheque in the very first round.
  • Investor accepted to lead the round for the next angel round.
  • Round subscribed and the lead investor transitioned to be an Investor Director in the company, taking a board position.
  • The engagement with the startup was detailed deep dive monthly reviews, with also a close track on what the next round of investors was looking for.
  • Ensured rest of the investors received business updates from the founders
  • The interesting point to note is that the baseline for the next round of investors looked like a moving target.
  • The founders received an offer for Series A (which was re-negotiated with the help of the investor director) from a 40 percent lower value to what had been set as the desirable valuation.
  • Term Sheet also shared with the investor director
  • Exit buyback greater than 5x in less than a year.

Investment 2:

Startup raised XX, where the lead investor was leading the round. All the check marks in the right places.

  • Pedigree founders.
  • Lead investor transitioned to Investor Director.
  • Logistics heavy company, addressing a large market which was very competitive
  • Monthly deep dive reviews, with founders and then with senior management sometimes lasting upto 5 hours.
  • Ensured rest of the investors received business updates from the founders
  • The company also changed strategy, based on guidance from Investor Director (as it aligned with his domain expertise)
  • This change resulted in a substantial change in revenue and growth (both in terms of team and business)
  • The startup raised the next round at a very good multiple. Investor Director actively involved in the negotiation.

Investment 3: 

  • Investor was a small investor when the startup bootstrapped.
  • Agreed to lead the next round when they were looking for angel round. However, the founders decided to bring in a new lead investor, without informing the previous lead investor. The startup raised 500k in angel round.
  • The investor still participated in the round and continued to mentor the founders.
  • The difference he noticed that business updates was sporadic. After 6 months of the investment, WhatsApp messages to the founders went unanswered.
  • The startup has shut down as of mid-2018, with investors being taken for a complete surprise, as the money did not even last for a year.

Final Status

Investment 1: Investor Director took a complete exit. The only reason was that in spite of being closely associated, the investor director was not kept informed about the next round. Not seeing himself being valued, he exited. Today angel investors do not have a representation on the board, for any future right protection.

Investment 2: Investor Director continues on the board, along with the Series A investor. Took partial exit. Angel investors being represented for future rounds.

Investment 3: Amount written off.

Key Learning for Investors

If you choose to transition from a lead investor to an Investor Director (post the funding round closure), it is a fiduciary responsibility to the rest of the investors that we insist that founders send regular business updates. In the absence of this, it is even more important that other investors are kept informed if there is a business concern coming up, or if any RED flag is observed (lack of financial planning, founder conflict, lack of business traction as projected during fund raise)

We believe that as an investor director, you should be willing to invest 4-8 hours a month (might be more if the founders need more guidance and help) If this time is not possible, allow some other investor to be the Investor Director.

Even if you do all the right things, spend time with founders and update other investors, a lot of what can be achieved is dependent on the founder. That is the final bottom line. In a space where the risks are high, there can be unforeseen circumstances which could be addressed if investors are kept informed.


If you’re interested to start your journey to become a Lead Investor, tell us here


In this series, LetsVenture will attempt to break the barriers associated with startup funding by providing a deeper understanding of the ecosystem and helping people #LeadWithLV.


 

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