By Maria Jones | Partnership Manager @ investors angel Crowdfund Beat Guest Editor,
Equity crowdfunding – is a difficult, multi-stage process, during each part of which the entrepreneur encounters new tasks and challenges, on which depend the success of his businesses funding round. However, today we will discuss what can truly make or break the future of your business – that is the topic of lead investors and specifically, how to find them.
Why you need an investor-led model
Allow us to form a thought which will form the backbone of this entire article: finding a lead investor is very difficult. Precisely because of this it would be prudent to mention that you do have alternatives. The issue is that, equity crowdfunding includes under it’s umbrella two distinct models: aside from the investor-led, there also includes the company-led model, and these models are polar opposites of each other.
Due to the difficulties in finding a lead investor, many companies end up disheartened and decide to opt for a more independent and self-reliant path, presenting themselves as their own lead investor. This is the crux of the company-led model. The entrepreneurs themselves make the terms and requirements, conduct valuation, and set the goal sum for the round. All of their requirements they present to potential investors, in a sense saying – “Either except these terms, or go on your way”.
The problem lies in that this method does not commonly work. It is self-evident, that the startup making it’s own list of terms and not advising with any outside party, is going to be thinking solely of his own interests. Terms, formed in such an atmosphere are unlikely to be very friendly to investors. As such, the method of “Either except, or Move on” is likely to end up as simply “Move on” for investors.
It’s a completely different situation – when the suggested terms of the round, company valuation, and legal nuances are the result of negotiations between an entrepreneur and an experienced, well-versed lead investor. The set of terms and requirements will be balanced such that they represent the investors and the startups interests equally, which will substantially increase the percent of positive reactions and decisions during investment. However, these are not the only benefits of the investor-led method.
Many of these people have already been thru all of the steps that your startup is going thru, precisely because of that they can increase your overall chance of success. For example, they can give a professional suggestion, or network you with their connections in the business world. Besides that, the lead investor via his personal strengths gives your business the necessary advice and directs it down the optimal strategy.
What is a Lead Investor?
Out of all that has been said above, it can be summarized that the lead investor is a person (or organization), which not only presents itself directly as an investor, but also as a curator, as someone that the startup works closely with in regards to the organization of the fundraising round, in making strategic decision, and business-expertise. From a normal investor he differs not only in a far larger percent of investment, but also in a far larger engagement in the businesses internal process, and as such access to the startups confidential business-information.
Successful conclusion of the fundraising round via an investor-led method will bear results only if the lead investor truly does take on himself the responsibilities that are placed upon him.
First off, it is self-explanatory, that the lead investor has to financially support the startup – that is, he has to present himself as an investor. Yes, it is considered that this is not necessary and this is not what defines the value of a lead investor – nonetheless, this is typical for them.
The secondary responsibility of the lead investor lies in that he has to give structured, concrete advice regarding the direction that the startup should move in. It would be correct if this advice touches not only on how to attract more investment, but also for example, how to improve sales and promote the businesses growth.
Finally, the third responsibility of the lead investor is that even after the conclusion of the round, when it would seem his first two responsibilities are fulfilled, he should still stay on with the startup. Even though he will not work as closely with the startup as before, his assistance should be open for request for so long as it is needed.
What qualities are important for a Lead Investor?
Basing ourselves of off the responsibilities of the Lead Investor, it is not particularly difficult to establish a list of qualities that it is worth paying attention to when searching for a Lead Investor.
First, you have to be sure that he has prior experience investing in startups, preferably similar to yours or at least in a relevant industry. In any case, this touches on the actual key aspect and quality of a potential lead investor. He has to understand your business, not only that but it has to be a dual-layered understanding. First – he has to understand the entire industry in which your business is working in. Second – he has to understand the specific sphere in which your company is active. Only in this situation can the lead investor truly fulfill his obligations.
If you find out, that tin the past a potential lead investor did not necessarily have successful experiences – for example, his investment ended unsuccessfully – it is good to find out the reasons for why events proceeded in such a manner. It would be fair to note, that it is not always the investors fault that the investment was unsuccessful. A startup’s survivability depends on a lot of factors can’t always be judged so easily. However, often it is precisely due to a lack of necessary financing or other assistance from investors. In a sense, it is wise not to judge based on past failures but it is wise, to find out the causes behind them.
The second important quality of a lead investor can be characterized as a sense of responsibility before the startup. The Investor has to understand, that he is responsible for those that he has taken under his wing, and that means, that he will be ready to spend time and effort in helping the startup, as during the fundraising round, so too afterwards. So it is important to ask yourself a couple of questions during your search: “How much is this person prepared to work with my startup?”, “Does he have the capabilities to fully fulfill his responsibilities?”, “How involved will he be in the process?”.
Third, an investor is an investor precisely because he has the possibility to invest in “his” startup a sizeable amount of funds. Usually the amount that a lead investor injects into the round is anywhere from 25 to 50% of the rounds total goal. It is worth noting that others do not consider this a necessary aspect of the lead investor. According to the site of equity crowdfunding platform Syndicate Room, a lead investor – is not necessarily someone who has invested the largest sum into the startup, but it is someone who has spent the most time and effort in advancing the startup to success. From this we can deduce that usually it does end up such that the lead investor has put forth the largest sum in the round, but this factor does not remain a criteria.
We have already mentioned numerous times, that the lead investor has to really “push” the startup forward from his end so that it is successful. One of the critical aspects in this constitutes the presence of strong ties to other businesses. In other words, a potential lead investor has to have a network around him formed up of other investors, preferably those with as strong of an understanding in your industry and sphere as he does, who he could introduce you to. These kinds of connections form the bedrock of success that a lead investor can bring to your startup.
Finally, but not final in importance – is the presence of “chemistry” between the lead investor and the entrepreneur. In any situation where multiple people have to cooperate and work with each other, the presence of a good atmosphere is always important. When the lead investor joins the process, you and him become in essence a team. Both of you do everything you can to make sure your business has a successful launch. In this kind of high-pressure, make-or-break situation it is important to be on the same wavelength and really look at the situation as a team.
What can you do to search for a Lead Investor?
So we have to understand both what a lead investor is and what we can expect from him. The remaining open question is really, “what can I do to make sure the search for a lead investor is successful”.
It is good to start from the simplest and yet the most difficult – the development of a business plan. Everything here is quite logical – if you want to convince someone to not only invest in your business a sizeable amount of money, but to also have him “take you under his wing”, it is necessary to show that you are worth it. We don’t doubt for a second that you understand the importance of the business plan for the entirety of the funding round, however it won’t hurt to discuss a few key points which will help make your business plan as understandable and interesting as possible for a potential lead investor.
First, form concrete goals for your business. Carefully think about where you see your company moving, what steps and stages you will have to go thru, and how best to tackle them. It is good to ask these questions not just to form a clear way to present them to a potential lead investor, but for yourself as well – this will truly help you narrow down the list of potential investors.
Second, remember that your plan in this situation doesn’t have to be completely perfect, but it does have to present correct information as to what your startup is and what it hopes to be within 5-10 years. The connection between the lead investor and startup can potentially last for years, as such potential candidates should know what they can expect from the future.
Third, be a realist. Don’t put in your business plan unrealistic goals, don’t try to be a hero and do the impossible. You shouldn’t try to make your startup out to be anything, except what it truly is. Don’t try to make it more interesting than it actually is. Of course, high expectations are something to be commended, but they need to be based on what you can actually accomplish. Don’t create a false impression for the lead investor – he has to understand what your business is actually capable of.
A properly formulated business plan will be a very powerful tool in your search for a lead investor. But where do we start our search? During this stage it’s worth taking look at business incubators and their programs. They can serve as a priceless gateway to new connections and networks. Besides this, collaboration with incubators can serve as a way to find out more about what is happening in the industry – such as for example, how likely are people to invest in startups within it.
Don’t forget about your own personal connections though! During this stage in your business they can serve a very important role. It’s quite possible that in your search for someone to serve as a ‘pillar’ for your business, you realize that you already know someone who fits the bill. However, besides mutual understanding it is important to remember that you should share a similar vision and professional “chemistry” with this person, and of course the other important qualities of a lead investor that we discussed earlier. Base your decision on them.
So it has come to pass that you have found that one and only person who you are prepared to trust with your startup. Now begins the most important and difficult step, building a relationship with your potential lead investor.
To be frank, no one is waiting for you. More so, likely nearly no one even knows of your existence. Because of this it is a critical mistake to connect with someone and instantly offer him the role of lead investor. The likely outcome in such a situation is simply going to be – “No”, and in the world of investment and startups reconsiderations take place very rarely.
The Investor-Led method in many ways expects a trusting relationship between the startup and the lead investor, and dumps a lot of responsibilities unto the shoulders of the second party. As such an investor has to truly become enraptured with your business – and this is possible only with a methodical approach to constructing your relationship. Adeo Ressi, founder and CEO of the Founder Institute, formulated a mechanical plan for how you should build your relationship with investors via a chain of mutual actions:
2. Inviting for Coffee
3. Sending a News Update
4. Meeting for an event
5. Inviting for Lunch
6. Asking to become an Investor
7. News Update
To form a solid relationship with a potential lead investor this set of instructions is just as apt. It is important to remember two things. First, asking someone to become a lead investor should come no sooner than the 6th step. Second, you shouldn’t adhere completely to a rigid plan, if you feel it is too soon to receive a positive answer you should wait. You might have to spend more time to increase your odds.
In conclusion, it is presumably that in many cases a face-to-face meeting with a potential lead investor may be very difficult (or even impossible) to organize. In this case, it is worth looking at these instructions not quite so literal but rather recognize the pattern and direction that your actions should be pursuing. In the end, in the era of the internet it is possible to form long-term connections even at a distance.
And so I am sure you have already realized, that what awaits you is a difficult and time-consuming task. However, nothing about it is impossible. Quality preparation and the right mindset will make it such that you will not miss an opportunity when it comes calling. Success is just around the corner!
Maria Jones | Partnership Manager
INVESTORS ANGEL CORP.
Titoff Place, 24.5 Old Northern Highway,
Boston Village, Belize District, Belize, C.A.