To Lead or Not to Lead: How to secure a Lead Investor for your Round

As the principal driving force behind an investment round, we take a look at what makes an effective lead investor and the different ways to get them onboard

Raising capital is one of the most critical and challenging tasks for any startup. A successful funding round can hinge on one key element: securing a strong lead investor. But what exactly does a lead investor do, how do you find one and what will it take to get them onboard? In this article, we explore the role of lead investors, why they matter so much in early-stage funding and practical strategies to help attract the right partner for a startup's growth journey.

What is a lead investor?

Investors come in all shapes and sizes: individuals, firms, family offices, just to name a few, but what exactly is a lead investor? 

Also known as a lead partner or lead backer, a lead investor is the firm or individual that steps into the primary role during a funding round in early stage or venture capital investments. Lead investors make the first commitment to a startup raising funds, usually providing the largest sum of capital and encouraging other investors to follow suit. While a lead investor takes the funding initiative, follow investors offer smaller amounts of capital and typically have less involvement in strategic decisions. 

What is the role of a lead investor?

Taking up the position of a lead investor is not to be taken lightly. From negotiating deal terms to greatly influencing the startup’s journey, lead investors take on many important and influential roles. Some of these key roles include:

• Terms Sheet - Lead investors usually negotiate the term sheet, which sets the valuation, equity stakes and important deal terms that founders and subsequent investors will adhere to.
• Expertise - Providing critical insights and a deep knowledge of a particular industry makes certain investors ideal to lead the fundraising round. Not least because they can open many doors and expand a startup’s network!
• Capital Responsibility - While multiple investors may be involved in a single funding round, the lead investor usually commits to the largest amount of capital. This signals confidence in the project, builds momentum and attracts additional investors who see this as a sign of potential growth.
• Due Diligence - A fundamental part of any lead investor is to head up the due diligence process, evaluating the startup’s business model, financial risks and long term projections. Ultimately, this heavy lifting saves time for other investors, making the project even more appealing to potential follow investors. 
• Credibility - Gaining a lead investor ensures a startup seems legitimate and credible. Their involvement validates a startup’s vision and encourages other investors and stakeholders to join the syndicate, also known as “herding”.
• Influence - Finally, once the round has closed, lead investors can take on a more active and supportive role as a board member, offering guidance and mentoring to the team behind the vision. Additionally, their presence acts as a bridge between the startup and other investors, making future funding rounds more likely and accessible.

Ultimately, the lead investor is the dominant force of an investment round. Whether it's an individual or a firm, lead investors set the tone, promote and support the startup, showcasing its credibility and ultimately helping to close the round.

How much of a round does a lead investor take?

When it comes to dividing the financial load, factors such as company stage, size of investment and business model will influence who takes what. And while there’s no hard and fast rule about how much a lead investor takes, a general ballpark figure can be anywhere between 30 and 70% of the total round. In fact, a more common way to break down funding portions is to look at what stage a startup is currently in. Let's take a look at a few examples together:

Pre Seed: At this early stage, lead investors may take on a larger share, anything upto 80-100%. 

Seed Round: For a total round of $1 million, a lead investor might take on 30-50% ~ $300-500K.

Series A: For a total round of $5 million, a lead investor could provide between 50 and 70% ~ $3-4 million.

Series B: For an investment round of $20 million, a lead investor could take around 40% ~ $8 million.

Aside from the stage, crucial aspects, such as deal size and valuation, an investor’s appetite for risk, competition and market traction will strongly influence the size of stake an investor will make in a funding round. The bottom line: lead investors will take a large enough stake that justifies their influential position in decision making and direction - likely to be between one- to two-thirds of the total funding raised.

How to secure a lead investor

While having a lead investor will provide the necessary foundation to attract additional investors and legitimize the vision, securing one isn’t always plain sailing. In fact, high costs incurred during the due diligence and legal expenses (sometimes soring to over $100K) can deter investors from taking the leap. Additionally, lead investors must have a high level of expertise and knowledge to accurately assess and invest in a startup, rendering them highly prized, yet low in availability.

But by following certain tactics and tips, a startup can increase their chances of securing that all important partnership. These include:

• Building Solid Relationships

Meeting a potential investor and expecting them to just hand over a dollop of cash is beyond wishful thinking. Lead investors want to know the people behind the vision and be sure that you share the same ethics and ethos. That’s why it's so important to research and seek out relevant investors with investment criteria that aligns with the startup’s vision. Ultimately, founders must build meaningful relationships with potential leads that cultivate trust and faith. 

• Showing Traction & Metrics

An effective and persuasive way of showing a potential investor that a startup is headed in the right direction is by providing strong metrics and analytics that clearly demonstrate growth. This instills confidence and increases a startup’s chance of closing that all important deal.

• Leveraging Networks

You know that saying, “it's not what you know, it's who you know”? Well, that couldn’t apply more in this scenario. Raising capital has a lot to do with your network. Existing connections lead to potential investors, so building up a strong and interconnected network of VCs, founders and investors radically improves a startup’s chances of meeting and securing a lead investor.

Alternatively, if your network is limited, using online platforms that connect startups and investors can radically grow your connections. Building a network of potential investors couldn’t be more simple with Angels Partners. With a growing database of over 120K investors and automated outreach, Angels Partners has streamlined the fundraising process, saving you time and energy. You can choose from a range of plans to suit your stage and needs, allowing you to effectively experience the power of accelerated fundraising. 

Additionally, attending industry events and applying for accelerators or incubators can ramp up network connections, improving chances of securing that all important lead investor.

• Being Transparent 

Inflating numbers or hiding important information does no good to anyone, even if it seems tempting to exaggerate analytics to secure that deal breaker round of investment. And besides, investors, generally speaking, know when something is too good to be true. Be honest, be real and it won’t come back around to bite you.

Closing Thoughts

Securing a lead investor is not just about raising capital, it's about gaining a partner who believes in your vision, validates your business and brings expertise and credibility to the table. While the process can be complex and competitive, understanding what lead investors are looking for, building strong relationships, showcasing real traction and leveraging the right networks can significantly increase your chances of success. With the right lead on board, you're not just closing a round, you're opening the door to long-term growth and support.