How To Become A Good Lead Investor For A Startup
Lead investors play a crucial social, and obviously, economic role for a startup's launch into a market.
The actual purpose of a lead investor is somewhat debated. A basic understanding of their role is that they are the first corporates to invest a hefty sum in a startup’s vision, plan, product, and/or service. It’s risky business. Although lead investors may not be the largest investors a startup encounters in its lifetime, they play a crucial social, and obviously, economic role for a startup’s launch into a market. Lead investors are social proof that an entrepreneur’s idea is worthy of becoming a reality. In the words of Alexander Cremades, securing a lead investor gives a startup and their funding request, legitimacy, social proof, lower perceived risk for others, and creates confidence in their venture.
Therefore, being good lead investors means giving entrepreneurs both a financial boost to get their plans up and running, as well as nurturing their vision into a structural environment ready to attract future sources of capital. A lead investor’s advice could prove invaluable when one is at the seed stages of running and growing a business. They are, nonetheless, mentors- not mothers. So, how do you actually do your entrepreneur justice by taking that first step as their lead investor, while simultaneously getting those returns?
Here are a few ideas:
1/ Don’t lead them on with no intention of nurturing a fulfilling relationship.
If you have no experience, or no intention of gaining experience, in the startup’s field, don’t just sign a check, and expect your new partner to live up to your return expectations by next January. Lead investors should either find the startup’s vision relatable, or have experience in investing in a startup at their growth stage (e.g. seed stage) when considering investment.
2/ Ask the right questions.
After all, you won’t just be investing money, but also time and expertise. How can we make this a sustainable business in the long-term? Are we the right fit for their business model and vision? How can we advise them to meet our return goals in 12 months’ time?
3/ Be transparent by clearly stating your expectations from the entrepreneur.
The expected returns, and how much time you are willing to invest to their cause, should be signed, sealed, and legalized. 4/ Remember that lead investors are a startup’s first financial partnership. This does not just involve money. Give them structural advice. This could involve hiring lawyers to deal with paperwork, managing future investors, expanding their network, or just negotiating the grounds for your own relationship.
5/ Have the courage to take the first step.
Most people are followers. First steps can be tricky, awkward, and potentially devastating. They are, nevertheless, absolutely crucial to the survival of startups, and, well, a healthy economy. To be frank, there is no cookie cutter format to be a good lead investor. Adapt this guide to your field, economic context, and environment. What’s for sure is that a good lead investor is a startup’s personal cheerleader. They are their #1 fans, believers, and supporters. At the same time, investment is a two-way relationship, and as such, lead investors get first pickings once a startup’s vision becomes an institutionalized business. This can thus become a mutually beneficial partnership- so, put in the work t make it a strong one.