What is a lead investor?
On TechCrunch, I often see articles saying
Company FooBar raised $10M in a Series A round, lead by Ventures Inc.In this context, who are "Ventures Inc"? What does it mean that they lead the funding round? (i.e. what do they actually do?)
Do these companies charge fees for this type of service?
Funding Definitions Investment
2 Answers
This means that a venture capital fund, Ventures Inc., along with a number of other smaller, less-relevant venture capital funds, who are not named here, have collectively purchased $10m in stock in the company FooBar.
Usually when companies raise funds from investors, there is more than just a single investor involved. Typically, one investor has decided to invest on the merits of the company and done a lot of due diligence to ascertain that they really want to take this risk, and they have reached agreement with the company management on how much to pay for how many shares. Once the deal is reached with this lead investor, there are often several other investors who are willing to invest alongside (participate in the deal) without doing their own due diligence, and under exactly the same terms as the lead investor. This is usually because they generally like the company and they trust the lead investor.
They do not charge a fee for this service. They give money to the company in exchange for shares of stock.
"How does it all work" is too broad a question; there are entire books about how Venture Capital funding works, so that is outside of the scope of what can be answered in a single question here.
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Ah ... ok, I see. I've always read "lead by" as "Ventures Inc., is the company who facilitated the investment round", rather than "was the largest / lead investor". Thanks for the clarification - makes perfect sense. – Marty Pitt 12 years ago
A simple way to look at it is that announcing a "lead" investor is actually Promotion.
Announcing the largest investor can:
- show the credibility of the startup, by association to a renowned investor
- galvanize other investors to join in with the 'lead'
- imply that the startup has the strength of counsel from that lead (kind of like #1)
- Improve SEO because of the market analysts that follow the actions of that 'lead'
- get free exposure to new deals vis-a-vie #4
- get gratis services and other perks by association with a big name lead (if you're in NYC and you're backed by First Round, you get more comps.)
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(2) is not strictly correct - the other investors will have already joined in by the time the raise is announced. (4) is not really correct either; it is unlikely Google cares who invested in you and I don't see what it has to do with market analysts. – Joel Spolsky 12 years ago
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You're prevaricating a bit about the thoroughness of educating people in all dimensions, possibilities, etc. Of course other investors cannot get in on the round that just funded - that's just basic. Of course Google 'does not care', but they do index the words and pundits, misc. bloggers, various analysts can then find out about this news. "Market analysts" may be a term that you use more specifically than my simple summary. – New Alexandria 12 years ago
