Breaking down the definition of a Lead Investor, their role in a funding round and how to become one.
At LetsVenture, we have more than 3,500 angel investors from 23 countries. These angels come from various sectors and are experts in their domains. However, every time a startup looks to actively close their round on the platform, the role of a "Lead Investor" becomes critical.
Over the past few months, we have been engaging with these experts trying to figure out what encourages (or discourages) them from becoming a Lead Investor. Let us explore who they are and what their role is.
Who is a Lead Investor?
After receiving multiple definitions from those who have been in this position, this is what we stick to - A Lead Investor is an investor who willingly steps in and represents the investors of a startup before, during and after a fundraise. They should ideally have engaged with the startup for some time to understand the business and see how they can support the entrepreneur.
A lead understands the nuances of angel investing, can bring in strategic value to the business – and most importantly - is willing to commit the time to work with the startup. It wouldn't be much of an exaggeration to say that Lead Investors love the founders they work with and believe in what they are trying to build. They lead and lead with passion!
On LetsVenture, this is how we define one:
A Lead Investor could be an individual or a group of two to three investors (who could co-lead the round).
They are someone who will
- Invest at least 10-15 percent of the round
- Work with the startup to set the valuation and terms of investment
- Represent the investor syndicate during fundraising (pitch on behalf of the startup, review term sheet, answer investor queries)
- Based on the board seat allocated, sit on the board of the startup or as an observer.
- Work with the startup on the next rounds of funding
What does a Lead Investor do?
A Lead Investor plays an active role in two phases.
Phase 1: The Fundraise Phase:
- They are willing to spend time validating the business plan of the startup. When a round is anchored by a Lead Investor, the other participating investors put their faith in the lead's due diligence.
- Set the valuation and terms of the investment for the current round.
- Be available and accessible to other investors in the round. Participating investors often wish to talk to the lead investor to understand the invest-ability of the business, as well as look at the lead as a reference. A lead's endorsement helps drive investor confidence to a great extent.
*On LetsVenture, we have standardised term sheets and special provisions in the legal documentation (term sheets and shareholding agreements) that enables lead investors to represent the syndicate more effectively especially for the next round of fundraising.
Phase 2: After Fundraise, in the growth years of the company
- A Lead Investor typically represents the syndicate by taking a board position in the company.
- Plays an active role in the ongoing governance and reporting of the company
- Provides support with the future financing rounds as well as strategic decisions
A Lead Investor is not necessarily the person who puts in the maximum capital. The Lead Investor is only a role definition – this could be a team of people (typically investors lead in pairs so there could be a lead and a co-lead investor) Phase 1 and Phase 2 could be managed separately by two different people.
How to become a Lead Investor on LetsVenture?
At LetsVenture, we are putting together a framework to help Lead Investors.
- Construct a Syndicate Easily (online and offline tools to help bring the syndicate together with minimum effort)
- Seamless and high-quality legal paperwork via Commitment-to-Closure (Financial and Legal Due Diligence, Standardised Term Sheet and Shareholding Agreements)
- Programme Management of closing a deal in the syndicate
- Office Hours Management (helps you meet startups based on your availability)
- Lead Investor Incentives – This is specific to LetsVenture.
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.