Lead Investor Venture Capital - Explained
What is a Deal Lead?
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Table of ContentsWhat is a Lead Investor in a Venture Capital Round?What does the Deal Lead Do?Attributes of a Lead InvestorMajor Responsibilities of the Deal LeadSyndicate Academic Research on Lead Investor
What is a Lead Investor in a Venture Capital Round?
A lead investor is an individual who serves as a link between a group of investors and fund-raising company. Primarily, the lead investor must also be an investor. She or he is saddled with the responsibility of representing the interests of other investors while relating with a company as regards provision of funds. The lead investor is thereby both an investor and an intermediary between the company that needs funds and other investors.
What does the Deal Lead Do?
A lead investor is the one who initiates the venture capital in a financial arrangement. Usually, the lead investor has the highest share of the capital that will be given as a support to a fund-raising company. However, in some cases, the lead investor might not be the highest shareholder but just an investor agreed upon by the group of investors to lead and represent their interest in the financial arrangement. The role of the lead investor is germane to both the fundraising company and the group of investors. Hence, for an investor to lead, he must have an in depth knowledge about venture capital in financial arrangements. With the expertise of the lead investor and his knowledge about funds and infrastructure, a good and professional relationship can be maintained between the fundraising company and group of investors. Furthermore, the lead investor gives legal advices and establish a stable and reliable financial support between other investors and the company. This might warrant the lead investor to introduce more investors to the company by giving them the assurance that their investments will not go to waste. T
he lead investor has to maintain a cordial relationship between a group of investors and the fundraising company. Not every investor can act as the lead investor, this is because there are certain attributes that are peculiar to the position of a lead investor, without these qualities, the lead investor might experience difficulty in convincing other investors and realizing funds for the company. Although, all the agreements in the financial venture are binded by legal documents, the lead investor must also be at the top of his games to ensure that the terms of agreements are fulfilled.
Attributes of a Lead Investor
Below is a highlight of the skills, qualities and attributes that qualifies an investor to be the lead investor;
- Prior experience in venture capital market and legal financial arrangements or agreements is necessary.
- The lead investor must be able to differentiate between private equity and venture capital.
- He must be a professional that is ready to invest his time in the venture capital market.
- The lead investor should have experience with syndicate and business arrangements.
- Passion to ensure the growth of business and relationship with the fundraising company is needed.
- Knowledge of accounting tools and marketing tools is an advantage.
- Must be diligent with work and accountable.
Any investor with the above qualities can take up the role of the lead investor. Hence, the investor with the highest venture capital does not necessarily have to be the lead investor. Any other investor that portrays these virtues can be anonymously agreed upon and appointed by other investors. The lead investor will draw up realisable plans that will be consented to by other investors and also ensure a steady communication with the fundraising company. The ability to communicate effectively and efficiently with existing investors or prospective investors. The lead investor does not just initiate business with a fundraising company, concrete plans must be in place. For instance, there are some cases where the lead investor will be the only investor on ground and he needs to bring in other investors. Before the lead investor can successfully have a group of investors, there is need for campaigns and marketing. Marketing or campaigning for the fundraising company through social media platforms, face-to-face approach and other marketing channels will attract other investors to the company. However, the job of the lead investor does not end at the campaign, he needs to maintain the available investors and increase the investors, doing this entails that the lead investor must be well versed with good administrative skills. Both the group of investors and the fundraising company have a lot of expectations from the lead investor, this is why he is crucial in the venture capital market.
Major Responsibilities of the Deal Lead
There is a number of roles that the lead investor needs to deliver, here are his major responsibilities;
- Administrative roles during and after funding campaigns.
- Make prompt decisions on behalf of other investors.
- Organizing meetings with investors and shareholders of the fundraising company.
- Must act as a liaison officer between the company and the group of investors.
- Ensure legal formalities as regards investment agreements.
- Give an adequate representation of the interest of investors.
- Must have the power of attorney and act as proxy in necessary cases.
- Provision of investment plan and nominee structure.
- Must account for the fund released or received.
- Give timely reports or evidence of payment.
These responsibilities are ongoing and can increase depending on the plan of the investors and growth of the fundraising company. These roles are also not limited to campaign periods, even after successful campaigns, the lead investor must discharge his duties. The question of whether a lead investor can sell their shares or not is largely dependent on the agreed lock up or lock in period of investment between the group of investors and the fundraising company. Usually, in every venture capital market, there is always a lock in period which is agreed on by the company and investors. This lock up period is put in a written statement and signed by the investors after certifying all legal formalities. However, this lock up period differ from one fundraising company to another, it might be 2 years or more than two years as agreed upon. During the lock up period, the lead investor cannot sell their shares. Also, the investors or fund-raising company cannot withdraw their money from the investment. Because the lead investor has the responsibility of assuring other investors of the security and reliability of the fundraising company, a lead investor cannot sell their shares until the lock up period is over.
In a venture capital market or arrangement, a syndicate administrator is simply an authorized person who promotes the shared interest of a fundraising company or a group of investors. This means both the fundraising company and the group of investors can appoint a syndicate to represent them in an investment. However, for a syndicate administrator to have an authorization, all the parties involved in an investment must be carried along. If a fundraising company wants to appoint a syndicate, there must be an agreement by the funder beam of the company. Also, if a lead investor wants to appoint a syndicate, other investors must give permission. A syndicate administrator takes on administrative tasks and represents the interest of the company. Aside from serving as an agent that performs that operations of the company, a syndicate administrator has an active role during campaign for the fundraising company since he is a representation of the company.
Academic Research on Lead Investor
- The CEO, venture capitalists, and the board, Rosenstein, J., Bruno, A. V., Bygrave, W. D., & Taylor, N. T. (1993). Journal of business venturing, 8(2), 99-113. This is a research that studies the degree to which venture capitalists add value to the businesses and companies they fund aside from monetary value. Venture capitalists are investors who provide funds for startups or emerging companies in order to help them grow into full stature. Although, many venture capitalists have their eyes on funding business with high potentials of become successful, however, funding a company is not as invaluable as adding immense values to the company. Quite a number of investors have reasons for funding startups, while some venture capitalists are passionate about the expansion of the businesses they fund, some are only providing funds so as to feed on these young companies later on. Studying the roles of lead investors has provided clarification on the issue of adding value to these startups or companies. This research studied the board size of 162 tech firms that are backed up by venture capitalists located in California, Massachusetts, and Texas. Aside from the board size, the board composition and board control of these companies or firms were all researched. The research found out that venture capitalists made up over 40% of members of 55% of the boards of these firms. Also, when a top-20 venture capital firm was the lead investor, then 55% of the board members were venture capitalists. On the other hand, when the lead investor was not a top-20 firm, only 23% of board were venture capitalists. Aside from venture capitalists, the board comprises of inside members, venture capital principals, outsiders and other board members. Originally, when it comes to handling value-adding advice, owners of firms or companies do not give any preference to the advice of venture capitalists at the expense of other board members, but this has changed over the time. One can however say there is a divide in the treatment of value of advice of top-20 boards and non-top-20 boards. The status of the lead investor however plays a major role in whether a company will value their advice or not. To simplify this, CEOs tend to rate the value of advice of venture capitalists of top20 venture capital firm higher that the value of advice of venture capitalists that are not from top20 venture firm. So, CEOs that have no top20 capitalists as lead investors in their board treat the value of advice of capitalists and other board members equally. However, research has shown that money alone will not suffice to distinguish a venture capital firm and put it above competitions as companies are now well-informed about the importance of value-added. Hence, for a venture capital firm to stay aloof of competitions, it must restrain from total reliance of venture capital (fund) because firms (customers) are now yearning for value worth more than fund, the distinctive factor will now be value-added. Business owners and companies now expect more than fund from investors, since non-venture capitalists bring value-added,venture capitalists should also bring value-added. However, it has been found out that a company or a business owner tend to get more value-added when the lead investor is a top-20 firm, though, there is a setback to this. If the lead investor is from a top20 firm, there is a high tendency that venture capitalists will have control of the board and this may affect the board composition and board control. Nevertheless, researchers maintain a position that since value-added is important in a venture capital market, there should be a way to measure value-added.
- What do venture capitalists do?, Gorman, M., & Sahlman, W. A. (1989). What do venture capitalists do?. Journal of business venturing, 4(4), 231-248. Quite a number of venture capitalists devote time in maintaining cordial relationships between the venture capital firms and their portfolio companies. Hence, a strategic analysis and survey was put in place to find underlying factors in how this relationship is maintained. This paper shows the results of a survey conducted to clarify the relationship that exists between startup companies and venture capitalists. The survey was conducted in 1984 using 100 venture capitalists and subjects. Only 49 of the 100 venture capitalists that were mailed gave responses and their responses show that they spend much time monitoring their investment in the startups or companies. The survey through a statistics conducted show that venture capitalists devote about 80 hours of on-site time and 30 hours of phone time in maintaining a direct contact with each company they are fundraising. The time they devoted has helped in identifying how well business owners are managing their business establishments because weak management can cause venture failure.
- The informal venture capital market in Norway? Investor characteristics, behaviour and investment preferences, Reitan, B., & Sorheim, R. (2000). Venture Capital: An international journal of entrepreneurial finance, 2(2), 129-141. This journal studies the characteristics and behaviours that investors exhibits in relation to investment preferences using the Norway venture capital market as a case of study. In the Norway venture capital market, Small and Medium-Sized Enterprises (SMEs) have developed a dependence on debt financing and this poses a great risk to venture capital market. Debt financing refers to an act of borrowing money in order to acquire an asset. Unlike equity financing, debt financing has a drawback on the venture capital market because every debt has to be repaid and in most cases repaid with interest. This study highlights the necessity of reducing debt financing and increasing equity financing. Equity finance is derived majorly from the informal venture capital market but sadly, the Norway market lacks knowledge on informal venture market. This lack of knowledge resulted in the embrace of debt financing which has the risk of increasing a companys insolvency during financial hardships. This paper also took a further look into informal investors in the Norwegian market and described these investors in terms of their investment behaviour, activities and preferences as well as their demography. Through a survey conducted, it was found out that informal investors are relatively low in norway compared to the survey done in UK and Sweden. In Norway, a survey was done with 6618 respondents but only 425 can be classified as informal investors based on the data realized.
- The venture capitalist: A relationship investor, Fried, V. H., & Hisrich, R. D. (1995). California Management Review, 37(2), 101-113. This paper reviews how venture capitalists build relationships with their portfolio business by acting as relationship investors. It is a management review that focuses on how investors strategically take on management responsibilities in order to integrate finance, communication, marketing and compliance to agreements between their portfolio businesses.
- Toward a model of venture capital investment decision making, Fried, V. H., & Hisrich, R. D. (1994). Financial management, 28-37. This paper adopts the use of a case study methodology to achieve the development of a model of venture capital investment decision-making. Through this case study methodology, this paper proposes a six-stage model for venture capital investment decision-making process, these are; origination, generic screen, venture capital firm-specific screen, first-phase evaluation, second-phase evaluation, and closing. This paper further pinpoints that different criteria inform how venture capitalists make decisions and this is why a venture capitalist makes effort to make provisions in favor of both the demand and supply sides of a venture capital market.
- Does investor identity matter? An empirical examination of investments by venture capital funds and hedge funds in PIPEs, Dai, N. (2007). Journal of Corporate Finance, 13(4), 538-563.
- Structure and management of syndicated venture capital investments, Wright, M., & Lockett, A. (2002). The Journal of Private Equity, 72-83. This article talks about the roles of syndicate partners or administrators and the relationship that exist between them and the portfolio businesses. The structure and mode of management embraced in the British venture capital investments, how monitoring decisions are made, reviewed and enforced, the different roles of lead investors and non-lead investors are all considered and discussed in this article.
- After the cash arrives: A comparative study of venture capital and private investor involvement in entrepreneurial firms, Ehrlich, S. B., De Noble, A. F., Moore, T., & Weaver, R. R. (1994). Journal of Business Venturing, 9(1), 67-82. This journal identifies two major sources of capital and the important roles they play in expanding startups and existing businesses. These two sources and venture capital and private investment sources and they are avenues through which a business or a company grow in equity. This journal however presents a comparative study of venture capital and private investment sources and the role they play in expanding entrepreneurs. Both venture capital firms and private investors add value to a business firm, although, the values they add may have some likeness, they also differ in some aspects. But because a business firm needs the funds of both investors, they sometimes don't take a look at their uniqueness. This study however establishes how business firms initiate and maintain relationships between their primary investors whether they are venture capitalists or private investors. This study shows a contrast between firms that have private investors as their initial investors and those that have venture capitalists and their primary investors. Major differences were spotted in these two categories of business firms. The criteria for examining the differences include the depth of involvement of the investors in the firms, how much control investors have on the firms and the type of funding or skill the firms need from the investors.
- Characteristics, contracts, and actions: Evidence from venture capitalist analyses, Kaplan, S. N., & Strmberg, P. E. (2004). The Journal of Finance, 59(5), 2177-2210. This journal carries out an investment analyses with the aim of looking at the contract actions and contract characteristics, strengths and risks entailed in the analysed investments focusing on venture capital market. 67 firms which were funded by 11 venture capital firms were selected as case study and the strengths and weaknesses of the investments or contract were analysed. The risks of investments were segmented into three parts which are cash flow rights, control rights and liquidation rights between the investors and the firms. Cash flow rights are ownership rights to share earnings of a firm based on the controller, so this is a major area for both investors and the firms. The analyses of the above categories of risks show that the risks can result due to deficiencies in contract designs and monitoring. When there is an increase in the managerial control and intervention from the venture capitalists, the investors tend to have greater rights control. Also, if the investors provide laudable value-added support for the business or entreprenuerial firm, the investors have higher equity benefits.
- Moderating effects of investor experience on the signaling value of private equity placements, Janney, J. J., & Folta, T. B. (2006). Journal of Business Venturing, 21(1), 27-44. The choices of venture capitalists and financing modes that startups employ when in need of external funds is vital in separating them from other business firms. Typically, startups need private equity as a good financial mechanism. The values and effects that private placement of equity have on emerging businesses are unrivalled Private equity are funds not enlisted on public exchange list. These are typically investment funds organized as limited partnerships to serve as a support for firms at inchoate stages. Although, private equity are short-termed, they can be disclosed to third parties, outsiders. This disclosure helps the investors enjoy a prestige and also portrays the firm's high chances of success in business. Private placements of equity as a financing mechanism for startups enable them to have a more effective evaluation that will also help in signalling a firm's prospects. The use of private equity adds magnificent values to startups given that these investors are experienced and have the skills required for the growth of the company.
- A profile of angel investors, Morrissette, S. G. (2007). The Journal of Private Equity, 52-66. This study advances knowledge in the field of new venture funding, specifically on angel investing by examining the angel investors who found new banks. Angel investors are an important source of start-up capital; capital provided by angels worldwide is estimated to be many times the amount provided by venture capitalists. As a foundation, the study provides a composite profile of general angel investors drawing upon Benjamin, Freear, Gaston, Margulis, Robinson, Sohl, Van Osnabrugge, and Wetzel. It also draws upon Sullivan & Millers work on investment motivations and investor type clusters. In addition to advancing the disciplines knowledge on angel investors, the study is also relevant to banking industry structure research. While there have been studies of economic factors leading to new bank formation, there has been no study of what motivates the angel investors that fund new banks. An affluent person that provides fund for a startup An angel investor (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity.