What Is A Lead Investor Anyway? And is the Role Changing?

Image credit: Iain Christie/SpaceQ.

If you have ever tried to raise money for a business, you will be familiar with the term “Lead Investor.” If you have not had that pleasure, you might not be.

Traditionally a Lead investor is the investor who is investing the most money in a particular round of fund raising. In other words, a company finds an investor who is interested in taking an equity stake in the business in return for capital. Often, at least in the last few years, the company would like to raise more money than a single investor would like to provide. So, other investors “join the round” meaning they add their capital. They do so according to the same terms that have been offered and accepted by the Lead.

So, the classic picture of a “funding round” was that it was a deal that was negotiated by the lead investor who was open to having more capital added to increase the leverage they would get from their investment.

But things have been shifting of late. Almost every one of the companies that I have spoken to that have tried – and succeeded – at raising money have had the same issue.  They find that they have many investors that are interested.  Even some who are prepared to provide a significant amount of investment, but who do not want to lead the round.

Some version of the line, “we like it. We would be quite happy to put X$ in. Let is know when you have a lead investor,” has been commonly reported. In the end some of these companies were able to complete a round of funding with a lead investor who was not the largest contributor financially.

So, what has happened?  What does lead investor imply now?

I think, at least in the space sector, it is another side effect of the situation that I discussed in my last few columns. The space sector attracted a lot of attention a few years ago. Many investors who were not all that familiar with the sector decided to start a space portfolio. Many of these investors applied their usual model to that portfolio. They did deals that made sense to them based on their experience in other “deep tech” fields.

Many of those investors have been disappointed by the performance of their investments. Even when they have backed companies that are successful by many standards – those companies have not performed the way that investors expect. They have not performed in the way that was anticipated when the terms of the deal were negotiated.

That’s my reading of the situation. As a result, I think that some investors have just decided that space is not for them and have turned their attention elsewhere. Other investors, I think are more committed to the sector for the longer term, but they have recognized that they lack a detailed understanding of how the space sector works. They feel that they should not be setting the terms of deals, and they should not be responsible for the due diligence involved.

As much as anything, I think they are hesitant to take the position of setting expectations for other investors – only to have the deal be disappointing for everyone. In other words, there is reputational risk involved in being a lead investor. It’s a risk that many investors interested in space are increasingly unwilling to take.

So, what does all that mean for space companies looking to raise money.

It means, honestly, that there seems to be an interesting opportunity developing. For investors who are “space savvy” it seems like it should now be possible to capitalize on the current “market sentiment.”

An investor with both money and experience in the space business now has a chance to both make their money go further and to get preferential terms for themselves. They can do this by offering to lead rounds by negotiating and setting the term sheet and by taking a leading role in the due diligence process. But, because they do not have to be the biggest contributor to any given round, they can also participate in more deals.

And, as any investor will tell you, while it is expected that the lead investor will invest on terms that are common for the whole round, it is also not uncommon for the lead investor to ask both the founder and the other investors for some concessions or incentives – which often involve the right to exercise certain options or the right to receive preferential terms in future rounds.

To me, this means that investors who have the experience and confidence to act as subject matter experts on the space sector have a real opportunity to carve out a valuable niche for themselves.

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About Iain Christie

Founder and CEO at SideKickSixtyFive Consulting and host of the Terranauts podcast. Iain is a seasoned business executive with deep understanding of the space business and government procurement policy. Iain worked for 22 years at Neptec including as CEO. He was a VP at the Aerospace Industries Association of Canada, is a mentor at the Creative Destruction Lab and a visiting professor at the University of Ottawa's Telfer School of Management.

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