If you are setting up a new business, one of the first things you need to start thinking about is finding financing. When it comes to start-up funding, investors are often the best way to channel initial funding for your business.
This guide will look at one of the most crucial aspects of financing: finding the lead investor. You can learn about 1) what a lead investor means, 2) why finding one matters for your business and 3) the things you should look for before you begin searching. You’ll also be able to understand the four crucial steps to finding a lead investor.
WHAT IS A LEAD INVESTOR?
Anyone looking for funding a business must be aware of the difference between a lead investor and an investor. In short, lead investors tend to be much more involved in the business, both in terms of the amount of money they provide for the business and the information they might receive on a monthly basis in terms of operations, compared to general investors.
The Business Dictionary defines a lead investor as a:
“Partner or investor with the largest share of capital in a syndicated financing arrangement. A lead investor is usually the initiating venture capitalist who takes charge of the deal, and who may also act on behalf of the investors”
A lead investor can be a single individual or an investor group. The key difference to other investors is the commitment of lead investors. Lead investors are able to work closely with the business and provide their expertise and time for the business. In many instances, the business information is shared closely with the lead investor.
Although lead investors are often the investors who put the most capital into the business, it doesn’t necessarily have to be that way. The most important factor is the level of involvement, as lead investors are typically closely associated with decision-making and expertise in the new business. Nonetheless, in most instances, the initial investment of a lead investor will be significantly higher to what other investors might be considering.
Since lead investors are such a vital player in a business’ development process, they can be quite hard to find. A lead investor is expected to provide not just capital, but also the expertise and therefore, many investors prefer to let other investors take the leading role.
The responsibilities of a lead investor
Perhaps the easiest way to understand what lead investors are all about is by looking at their responsibilities. A lead investor is not just a funding machine for the business; a good lead investor could provide the expertise to guarantee the business grows and reaches its full potential.
First, a lead investor will naturally provide the business financial support. It is often quite a substantial amount of money, at least around 20% of the funding round the business is looking for, for example. The lead investor can provide the money to get the business up and running.
Second responsibility is to provide structured advice on the direction the business should be heading. A lead investor should provide the business advice and tips that not only can generate more funding, but also boost the business in terms of sales and growth.
Finally, a lead investor has the responsibility of commitment. Whilst other investor can often take the money and run after you’ve completed your financial obligations to them, a lead investor will follow the business much longer. Although a lead investor is not directly involved with the business, in terms of running it, the commitment is to help the business for as long as required.
WHY DOES FINDING A LEAD INVESTOR MATTER?
Considering the fact lead investors have much more responsibilities to other investors and they are harder to find, does a business require a lead investor? Any new business knows how hard it can be to find good investors, but finding a lead investor can significantly reduce the difficulty.
The reason is clear when you look at the name: a lead investor. Since the commitment level is different for a lead investor, your company can send a clear message of trust and interest to other investors by having a lead investor. If you get that one investor attached to your business, you make it much easier to find other’s willing to invest.
A lead investor sends out two strong signals for the other investors. First, a lead can ease the burden on other investors. Since you already have someone who’s helping you sort out the finances, other investors might feel happier to invest. You are only after their capital not other commitment, which might take their time away from their other projects.
Second, the lead has started the funding, which means your other investors can get on board with a smaller capital investment. This can be important, as many investors might not be happy to invest huge amounts of money to new projects due to their risk status.
On the other hand, a lead investor would also make it easier for your business, as they reduce the need for additional funding. Not only can you attract more investors, but also you already have a large investment to get your business moving. Even if you struggle finding further investment, a lead investor would have already provided enough to get the business growing.
Not to mention the importance of the expertise your business can gain from a lead investor. A great lead investor can provide a wealth of information on topics like funding, marketing and the day-to-day business operations. Therefore, it is essential your business put enough time and effort in finding a lead investor.
KNOW WHAT TO LOOK FOR
Before we move onto look at the concrete steps you can take to finding a lead investor, it’s important to understand what you should be looking for. Just as there are bad investors and good investors, there are also bad lead investors and good lead investors.
What makes a good lead investor?
First, you need to remember the responsibilities of a good lead investor. Since you aren’t just after the capital investment, you can’t pick your lead investor based on who can invest the most money. Whilst you do want a significant and tangible investment from the lead investor, the most important thing is to find someone who is committed and interested.
You want your lead investor to be almost as passionate about your business as you are. The business should spark enthusiasm in the lead investor, not just be something they half-heartedly invest in. In fact, your lead investor should be so excited about the prospects for your business that they want to be all in because they know you are going to get big.
This means you need to stay away from the “potentials”. These investors keep telling you they might be interested if your business is able to do X and Y. They are not prepared to fully commit, even though they might see the potential. But a good lead investor should be a maverick; someone who is prepared to get on board even if you don’t have a line outside your business of others wanting to invest.
What are lead investors looking for from your business?
You should also be looking for lead investors who clearly know what they want from your business. For this, you need to know what your business can offer to the investor to guarantee you find the right lead investor.
You must clearly think about the possibilities of your business. Don’t think this only in terms of the financial return you think you can offer, although it’s also important, but also how being involved with your business can enhance the investor’s personal expertise and career.
Furthermore, it’s important to match the interest and the expertise of the investor with the business and the industry it operates in. For example, if your business were part of the medical technology sector, you’d want to find a lead investor with expertise in this area. Naturally, they don’t need to be the master of the particular business idea or anything like that. But it is important they aren’t a newcomer to the industry or sector.
As mentioned in the previous sections, a lead investor should be able to provide you with their input and assistance and this is much harder, if they’ve never worked within the industry or with a similar type of business.
Remember to conduct due diligence
Finally, investors often scrutinize the businesses they invest in a meticulous manner. This is to ensure they limit the risks and know what they are getting into. But just as your investor needs to conduct due diligence on your business, you should do the same on the investor.
This might not seem as obvious and easy as it sounds. If you are a start-up struggling to get investment, any investor coming your way might sound like a good deal. But you shouldn’t just accept the money.
As the lead investor will be heavily involved with your business, you need to make sure the relationship works. There are business partners and then there are the business partners that know just how to challenge you and push you forward. This is what you should be looking for. Someone that can help you to succeed and fulfill your dreams, while also keeping you grounded. You aren’t looking for an investor that gives you money and agrees with everything you do. You need to receive advice on how the business can be even better.
When you are looking for a lead investor, the following questions are important to answer:
- Has the investor/entity previously invested in similar type of companies/industries?
- Does the investor/entity have experience in start-ups? If so, what is their track record of helping start-ups succeed?
- If their investments have failed, why did this happen? This is important, as failure might not always be a lack of proper funding or help from the investor’s side, but sometimes could be.
- What’s their commitment ability for the business? When are they able to provide assistance? How involved are they going to be?
Furthermore, as mentioned earlier, a lead investor can be either an individual or an investor group. If you are dealing with an investor entity, such as an investment company, you need to be especially diligent. Before you commit to the group find out whom exactly are you dealing with. Will you have a single person helping and contacting you or a group of individuals that will look after your business?
THE 4 STEPS TO FINDING A LEAD INVESTOR
Finding a lead investor won’t be an easy task. As mentioned earlier, many investors don’t want to be as intimately involved with the businesses they invest in and there is quite a bit of competition over potential lead investors. The process of finding a great lead investor won’t be easy, but it can be quite straightforward if you follow these steps.
Step 1: Have a solid business plan
In order to attract any sort of investor for your business, you need to have a solid business plan. A lead investor will be especially focused on scrutinizing your business plan, as they will be so heavily involved with your business. So, start by ensuring you have a good business plan in place.
For example, check out further tips from the video below:
The key things to think about are the goals your business has. Think carefully what kind of vision you are going after and what steps are required in order to get there. This is the important part of attracting a lead investors also because it helps you start narrowing down the potential investors.
Remember that your business plan doesn’t necessarily need to be perfect or fully developed, as you talk with your investors. Having a business plan doesn’t, in this context, mean you must have the legal framework properly up and running, it is the idea and route map that matters the most. You need to be able to show your potential lead investors what the business is all about, where it hopes to be in the next year, five years and ten years. Furthermore, you need to be able to showcase an understanding of the potential hurdles and obstacles and show a way to solve them.
You should definitely keep your business plan grounded in reality. You need to aim high, but you can’t forget about the resources you have at your disposal. Don’t try to make your business sound more interesting or lucrative than it is. A good lead investor will spot the business plans that are what they say they are.
Step 2: Look for an investor that matches your business plan
Once you have the business plan ready, you already have an idea on the type of lead investor you want to find. At this point, it is a good idea to take advantage of your local small business incubators. These incubators can be a great source for making connections and finding more about the investor scene at your local area or in your specific industry.
You can also contact other business organizations. When it comes to finding a lead investor, your personal connections play a crucial role. Since you want to find someone you get along with well and who can act as your mentor, it is a good idea to see if there are people around you suitable for the role.
Do remember not to opt for your mother! While the lead investor can encourage other investors with their initial investment, the responsibilities are greater than just the personal rapport. So, use your inner circle to see if there are suitable candidates, but don’t opt for a family member.
At this point, you can also discuss lead investor candidates with other potential investors. If you have already attracted these ‘potentials’, you can definitely ask their advice for a lead investor. It might be, that while they aren’t ready to commit to your business as heavily as a lead investor would, they know a candidate for the role.
If you are a start-up, you want to find seed level investors. These investors are specifically looking for risky investment opportunities and companies that are starting from scratch. On the other hand, look for growth investors if you are an established business ready to take it to the next level.
Step 3: Start building a relationship with potential lead investors
When you’ve been able to find a few potential investors, you need to start building a relationship with the person or group. Finding the right lead investor is much more than just asking for money and signing a contract. In fact, you don’t want to be suggesting the investment opportunity immediately.
Since the lead investor needs to be passionate about your business, it is a good idea to build a relationship first. Talk about your ideas for the business and build an understanding of what the investor thinks about the business ideas. Don’t bring up investment – you almost want your lead investor to suggest the investment.
In the investment world, a ‘no’ can unfortunately be a definite answer. Therefore, you don’t want to rush your investment proposal at any stage. After all, you are looking for someone who is sold on your idea, not someone who needs months of convincing.
Most seed investors are excited about new investment and leading opportunities. Use this to your advantage and get them excited about the business. Invite them to visit your business and look at how things are shaping up.
Once you see the person is excited, pop the question. Make sure you clearly outline what you are looking for – a lead investor who can provide you the support you need – and let them know what your business can offer – in terms of monetary gain, but also personal fulfillment.
Step 4: Negotiate a term sheet
If you have found a lead investor who is happy to invest in your business, you need to startnegotiating the term-sheet. Remember you are still going to want to make a good deal for your business – don’t just accept an offer they give you without thinking it through.
It is important to hire a professional lawyer to help you with this process. Even if you’ve found someone you trust, you still want a third party to go through every single detail to ensure there won’t be any problems later on.
You want to be clear about the terms of the investment in terms of the capital stake, the control of your business and how you’ll pay back the investment.
Finding a lead investor will require plenty of research and planning. But if you outline the essentials you are looking for in an investor and prepare your business plan to mitigate risks, you can achieve this goal.