A lead investor is the financial term for a person or entity who has the most responsibility, and usually the most capital, in a particular investment. Lead investors can be sometimes difficult to find, as many people are not willing to take the majority of the risk on an investment, but would prefer to follow and have less liability and responsibility if the investment fails. Finding a lead investor can take a considerable amount of time; some experts say that finding one should be a primary goal of any financing deal.
Lead investors are often good for a company as they prevent the old problem of “too many cooks in the kitchen.” As the most responsible and most deeply invested, a lead investor will generally take over the financing agreements and have a large say in who to let in and how responsibilities are divided. Lead investors often become intimately involved with their investments, and will generally hang around and keep working even after financing is completed. They may have a seat on the board of a venture, and may be willing to reinvest more capital if the business is doing well.
Both individuals and companies may become lead investors. Individuals are often venture capitalists: people who make money by investing in companies and products they believe will be successful. They may be companies with an interest in the success of the business; by investing in a new venture, it may help improve the profit or market of the investing company in some way. Generally, lead investors must be well-versed in creating financial deals, and be able to bring additional investments through contacts into the deal.
Many people trying to find create financing for a venture find that the difficulty is not finding investors, but rather in finding a lead. A common response is an agreement to invest only if a lead investor can be found. While these individuals or businesses may be generally interested in helping a project, they are usually not convinced that this particular venture will be profitable, and are thus unwilling to take the risk. Investors who are non-professional may also refuse to be the lead due to a lack of contacts and business acumen.
There are a number of theories on how to find a lead investor. Some suggest calling potential follower investors on the bluff of waiting for a lead by asking them for introductions to potential lead investors. If a company or venture capitalist is truly interested in the project, he or she may be quite happy to set up an introduction. Others suggest that the key to obtaining a lead is to ensure that the business plan is absolutely top notch; consistently receiving negative answers to investment requests is a good sign that the venture may need refining.