By Adrian Enache, CEO of Angels Den, an online investment platform that makes it simple for investors to own shares in early-stage companies with great potential.
If you’re an entrepreneur looking for an injection of funds, seeking investment for your company can be a stressful – and even risky – business. Whether it is at the start of your journey or you’re already on your way to becoming more established, the range of investment approaches alone are enough to give anyone pause for thought.
The same can also be said when viewed from an investor’s perspective. With so many companies jostling for attention and numerous ways in which to provide financial support, making an informed decision about where to invest your money is getting harder than ever.
However, a new model of investing has been on the rise which provides a win-win scenario for both investors and entrepreneurs alike: the lead investor model.
A model apart
A lead investor is an individual or an organisation who will lead a funding round and may also act on behalf of the other investors. Typically, the lead is the first to offer their financial support for the company looking for funding, and someone who will add value as they inject smart capital to drive the business forward. As the initial investor, the lead also has the opportunity to do some extra screening and due diligence – which they essentially undertake on behalf of all subsequent investors.
The lead’s due diligence can range from a company visit and a few questions, to a full and rigorous appraisal, perhaps with outside help such as from an accountant. With this all complete, once the funding round has commenced, another key aspect of their role is to invest their time and expertise to ensure that the round is closed successfully.
Credibility is key
By their very nature, lead investors tend to be well-established individuals with sufficient levels of capital to invest in exciting new opportunities. As such, they usually commit a large amount of capital to the business they choose, and helps the startup to establish credibility in the market and – crucially – among other potential investors.
During the funding process and beyond, the lead investor can use their skills and experience to accurately review the company’s progress and update the other investors. In doing so, it further lightens the load for any entrepreneur whose main focus (as it should be) is running and growing their business.
More than just money
In addition to the financial backing they provide, a lead investor also typically provides some level of mentorship to the company they decide to lead. Being a lead investor allows them to use their sector expertise, skills, and connections to help the business succeed. While to some this may seem like more responsibility and work to take on. Yet by doing so, they ultimately stand the chance to significantly increase the return on their financial investment while the entrepreneur and startup benefit from valuable insights and a sustainable management strategy.
With all this said, the lead investor role isn’t suited to everyone and many will prefer to take a back seat. However, for those willing to invest their time and expertise as well as their money it can provide an opportunity to better protect any capital they put forward, as by establishing a mentor relationship their chosen business is better prepared to avoid the pitfalls a lot of early-stage companies encounter.
It is, after all, a sad truth that a great deal of startup enterprises fail despite having great ideas and dedicated founders, often due to the fact the team is not ready to manage the specific challenges that arise during the growth process. With a lead investor on hand, however, they are far better equipped to navigate any unforeseen challenges along the road, and deliver on their early promise for a win-win situation for both business and investor alike.