Sponsor: Definition in Business and Finance, With Examples

What Is a Sponsor?

A sponsor can refer to a range of individuals or entities that support the goals and objectives of some other individual or organization. Sponsors, for instance, invest in private companies, create demand for publicly traded securities, underwrite mutual fund shares for public offerings, issue exchange-traded funds (ETFs), or offer platforms for benefits, and so on. Sponsors may also lend their name and reputation to influence the adoption of a movement, platform, or brand for benefits.

Understanding Sponsors

A sponsor can provide a wide range of services and support within the financial industry.

For example, startup companies are commonly sponsored through investors known as angel investors. Startups will then try to build a diverse group of investors who can help advise the company and help it grow in a way that includes individuals, venture capital (VC) firms, private equity (PE) firms, and corporations.

A sponsor may also be considered the lead arranger, or underwriter, in a funding round deal. For example, in September 2023, AI firm Databricks raised over $500 million in a Series I funding round. This means it has had eight previous rounds of financing. The funding round was led by T. Rowe Price Associates, Inc. as the lead sponsor.

Sponsoring IPOs

When a company chooses to go public it also engages the support of a sponsor or sponsors. Sponsors help guide the company through the initial public offering (IPO) process and also provide credibility for new investors considering the IPO investment. Leading IPO sponsors are typically investment banks that take a stake in the company as well. Investors often look for wide sponsorship of a stock before investing, believing that the endorsement of institutional investors adds a measure of safety to their investment decisions.

For example, electric vehicle maker Rivian was one of the biggest IPOs of 2021. The top underwriting sponsors (also referred to as co-managers) on the deal included Morgan Stanley, Goldman Sachs Group Inc. and JP Morgan Chase & Co.

Sponsoring Pooled Investments

Sponsors are also required for mutual fund and exchange-traded fund offerings in order to make them available to the public for investment. An underwriter must sponsor a mutual fund issue and complete the proper regulatory registrations for investors to have access to it. The sponsor of an ETF is essentially the managerial body of the ETF that brings together the needed parties and regulatory framework to establish the ETF.

In the context of exchange-traded funds, the fund manager or other entity who files the needed regulatory materials with the SEC to create the ETF is considered the sponsor.

Qualified Plan and Benefits Sponsors

Benefits plan sponsors are also well known in the investment industry. Plan sponsors are companies or employers who create a benefit plan for their employees. The plan sponsor can work with various entities to provide a comprehensive benefits plan. Plan sponsor benefits can include a wide range of offerings for employees including retirement savings plans, pension plans, financial wellness plans, and more. Examples of a plan that can be sponsored include a pension or 401(k) retirement plan.

As the plan sponsor, employers take responsibility for the benefit plans offered. The plan sponsor does the research, selects the appropriate service providers, deals with legal and administrative elements, and is sometimes a legal fiduciary. Those benefit programs are then offered to employees, who can join as participants.

The Bottom Line

Thanks to their deep pockets, financial resources, and knowledge of different industries, sponsors play a vital role in business and finance. Investment from these corporate entities, which may range from venture capital firms to investment banks can help companies grow and go public.