The investor quarterback: running lead on a syndicate
Choosing to be lead investor on a syndicate is a lot like signing up to run the Comrades Marathon. For the crazy ones it sounds like a great idea at the beginning, it’s a lot of work for the most part and the reward when its all over is addictive – you’ll want to do it again.
Like the Comrades, leading an investment round is not for everyone though. Not only are you steering a team of big hitting investors but you’re also doing all the heavy lifting for those that tag along (known as backers). There are a number of considerations that you should be aware of before assuming the role of lead investor. We cover these considerations in this blog and will be following it up with part two where we discuss the work that’s expected of you and the upside of being a lead investor. These blogs form part of our series on syndication, for more information on the benefits of syndication please visit our previous post.
The first consideration and possibly the most important is experience. There’s no substitute for getting your hands dirty. There’s a lot of literature around leading a round, including this blog, but lessons from the school of hard knocks always speak louder. It’s for this reason that we at Jozi Angels require angels to participate as a backer on deals before taking on lead responsibilities.
Getting involved in new technologies and new markets is always exciting but to validate the startup’s potential you need to have some idea of the business landscape. Being lead comes with certain responsibilities (discussed in part two of this blog), one of which is to issue a written due diligence report. Backers participating in a deal will do their own due diligence on you and your report. Its then that your domain expertise will bring credibility and ensure you produce a thorough assessment of the startup.
In addition to knowledge of the business sector, it’s important that the lead understands the startup’s tech and operating model. Deep learning, blockchain and quantum computing are all sexy buzz words in the tech industry and its easy for a founder to bamboozle angels with BS. It’s important the lead not only understands these terms but also how they are being applied. A high-level understanding is sufficient, we are not suggesting you need to be a developer.
Conflicts of interest
The interests of the lead investor and that of the startup need to align through the investment process. There are potential roadblocks and potholes throughout the journey, smaller issues can become bigger ones over time. Identifying these potential conflicts of interest will save you and the startup time and money.
Should you choose to proceed given a conflict it’s important for this to be disclosed to the startup. At Jozi Angels we ask that all angels agree to our Terms of Service and these include conducting yourself in an ethical manner. Remember the aim of any professional angel is to build a portfolio of 20 or more companies and that improper conduct will only work against you in the long run.
Bridge to follow on funding
Raising capital is an inevitability in the startup space. Capital is required when things aren’t going to plan and the startup needs life support. It’s also required to grow the business when things are going well. In your typical startup angels fulfill an early stage need for funding, venture capitalists, corporates and other investors will generally follow on with further investment at a later stage. It’s important for the lead to have relationships (or to develop them) to facilitate follow on funding rounds. At Jozi Angels we host regular events that encourage relationship building with other angels and follow on funders.
In the next part of this blog we cover the benefits of being a lead investor, this includes a discount on equity and preferential investor rights. These benefits are linked to the size of the investment made by the lead investor. Given this link, it may only make economic sense to run lead if you’re investing a decent portion of the investment round. While some may consider this the least important of all considerations listed here, it should be factored in before committing to the role.
Look out for the next part of this blog in which we’ll be discussing a syndicate’s expectations of a lead investor and your benefits. For more information on the deals we are currently syndicating please visit our Opportunities Board.