Once founders have exhausted personal savings in their startup, they need additional funding to prove out the concept, develop the technology or product, and hire the team who will market and sell the product or service.
A founder will likely have to “raise a round of funding” to cover the expenses associated with the next phase of growth. A round is a cycle of fundraising that clearly defines the amount of money being raised and how it will be used within a defined time. A lead investor can provide a multitude of advantages to help a founder raise a round of funding.
A lead investor is a person or group of investors (like an angel fund) that works directly with the founder to set the terms for the investment round. This person or group typically invests 15% or more of the total round. In the book, “The Art of Startup Fundraising,” author Alejandro Cremades says a lead investor will often: make introductions and connections, bring other investors and financing, connect the company to distribution channels, and help structure and participate in future fundraising rounds.
The lead investor adds credibility to the founder, the startup and the round of funding. If raising a pre-seed round (the very first round of funding) from friends and family, a lead investor isn’t necessary. However, a lead investor can really help. Lead investors can influence other potential investors and prevent them from diverting the founder’s time or money away from the core mission of the company.
As the company grows and more investment is required to scale, venture capital funds will often require a lead investor. At all stages, a lead investor can help the founder close the round faster.
Lead investors can be challenging to find, particularly if you are a woman business owner. In 2021, of the $330 billion raised by startups in the United States, female founders secured only 2% of these dollars. It was the smallest share of venture funding women received since 2016. America has not been cultivating an investment culture that invests in women or encourages women to be lead investors.
Brad Feldman notes in his book “Venture Deals” that only a small number of people invest, let alone understand the concept of a lead investor. And the investment culture has more followers than leaders. The few who do lead investment rounds are usually men.
Why don’t more women serve as lead investors? Some women have shared with me that they lack the experience and therefore the confidence to serve as a lead investor. They don’t want to “mess things up” for other investors. Sadly, some women can’t visualize themselves in that role or don’t want the responsibility.
However, more women need to become lead investors–especially those women who have risen to the ranks of the C-suite. Not only do they have the financial capacity, but they have developed a sophisticated set of skills and experiences that can help support startups.
It’s time for women to start seeing themselves as lead investors and learning about the process. Financial stability is a key component of qualifying to be a lead investor. An accredited investor has: an income exceeding $200,000; joint income of $300,000 for the last two years; or a net worth of $1 million, excluding the primary residence. Many women meet this criteria but might not be connected to or engaged with women founders or funders.
Joining an organization of women founders and funders can help you understand the investing processes, provide access to deal flow, and expand your network. The Startup Ladies hosts a monthly educational series for entrepreneurs and investors and helps match investor-ready founders to funders. The ultimate goal of this program, called Startup Investing 101, is to grow the number of women investing in startups and increase the number of investments and amount of money invested in female founders.
If you have ever chaired a board, led a team, or raised money for a not-for-profit or political candidate, you have developed the skill set needed to serve as a lead investor.
Women founders will not be afforded equal opportunity in the startup space until women funders serve as lead investors and invest with the same frequency and amounts of money as their male counterparts.
Originally published by the Indianapolis Business Journal on April 1, 2022.