Chapter 5 - Investor Management
IN THIS LESSON
Lead Investor Basics
Vital to a start-up’s fundraising campaign is a lead investor. Without one, you might not get any momentum going for a long time, if ever. Most investors don’t want to go first, so VCs and angel investors are typically looking to see who your lead investor is. It’s that important, and it’s something too many start-ups underestimate or think it’s only for later rounds of fundraising.
The following are the “basics” about lead investors:
A lead investor serves as a reference for you with other potential investors and helps to increase your credibility in the investor community.
A lead investor is usually the first person to invest in your company or the one who made the highest investment in your company.
Invests at least 15% to 20% in your start-up.
Expectation that the lead investor will put in the most capital in a particular round.
A lead investor works with your start-up to set the valuation, the terms, and negotiations with the new investors in the next round.
A lead investor has performed due diligence on your start-up.
A lead investor sets up reporting metrics for other investors to have a comfort level.
A lead investor eagerly represents your start-up before, during and after a fundraise.
A lead investor usually gets a board seat with your start-up, having direct voting rights in important decisions by the company.
It is best for you to get an engaged lead investor, who believes in you and your company and has a similar level of commitment to the company as you do. You will need to spend quality time with the person you choose to be your lead investor. You want the person to fully understand your company and your market because that person will represent your company to other investors.
Your lead investor will be your heavyweight. Choose a lead investor who can bring other investors on board. It is good for you to look at the network that the investor has. They may even be able to help connect you with a bigger company that would acquire your company in the future.
Once you have your lead investor locked in, it is recommended that you include this person in your pitch deck as a major reference for your company. By you referring to the lead investor who has priced the financing round, you are providing what is called “social proof” and building trust with other prospective investors. The assumption among the other investors will be: “Well, someone has done due diligence and vetted this company to some extent and thought they were worth writing out a check for.” This is positive for you.
Tip: Don’t make your lead investor your dad or your favourite uncle. Investors want to see a lead investor who has more of an objective viewpoint and believes in the company because of the due diligence, not because mom told dad to give you money.