Why It Matters Who Your “Lead” Investor Is

Q : What does a lead investor do?

If you are fortunate enough to be able to raise venture capital, it can seem like a good idea to raise it from a lot of investors. If I can get 1 great investor on the cap table, why not take 2? Or 4? Or 10?

And there are advantages to having more investors, at least, if they will actually help.

But make sure you know if you have a lead investor. And who it is. Because in the end, when times get tough, the rest won't be on the hook to help. Not really.

A lead investor:

• Is expected to lead any bridge round. This is super important. If the company does OK but Not Great, the investors will often be willing to do a bridge round (i.e., a smaller, second, all-inside round). But the lead investor has to … lead it. If they don’t do their pro rata or more, a bridge is really tough. Everyone loses confidence. N.b.: it's almost impossible to do a bridge round without the strong support of the lead investor.
• Is expected to make the most intros for the next round. Often they don’t. But it’s a reasonable expectation. Next round investors will first look to the largest / lead investor to get a pulse on the company.
• Interviews most of and ideally recruits some of the executive candidates. The lead is expected to do the bulk of the interviewing of VPS and C-level execs.
• Does most of the board of directors-level work. Other investors may not come, or may not own any board-level responsibilities.
• Is expected to be the #1 champion of the company. If they aren’t, everyone will wonder.
• Has to recruit a replacement CEO, if ever necessary. If for any reason the company needs a new leader, the lead really has to be the one to get it done.
• Deals with a wind-down. Not fun, but if the start-up fails, someone in the investor syndicate has to deal with a lot of the issues. There are a lot of potential liabilities here, processes, etc. The lead has to take the lead here for the investor syndicate.

The non-”lead” investors generally won’t do much of this. The lead(s) sometimes won’t either, but you hope.

If you aren’t sure if you have a lead investor, ask. If you aren’t sure if they’ll do the above, ask. And if you don’t have a lead investor, don’t necessarily expect too much of the above.

A little more on the first point here: How Bridge Rounds Work in Venture Capital: Messy, Full of Drama, and Not Without High Risk | SaaStr