Your round isn’t anywhere near closed unless you have enough investors who are very serious about investing. However, it can often be difficult to figure out if an investor is actually serious about investing or just being positive about your business. So how can you tell who is actually serious and who isn’t?
Signals to look for:
- For VCs, you’ve had at least a couple of meetings with the firm, including the decision maker / makers
- For everyone, you’ve discussed details of the round — e.g. how much you’re raising, what the money will be used for, and even potential valuation / terms of the round; If you are talking to angels about your company, they may not even realize you are trying to raise money from them unless you explicitly mention your round!
You will need enough serious investors to even start to close your round. How many are enough? The pipeline value of this serious investor group overall should be at least 2x the dollar amount you’re looking to raise. In other words, say you’re looking to close $500k, you will need enough serious investors such that should they all invest, they would invest approximately $1m in aggregate.
Next, you need to create strong urgency with this group of people. Founders will often create urgency the wrong way by saying nebulous things like, “We have all this interest.” Or “We’re closing our round really soon.” But these types of statements are not only not credible, but they also signal you have no idea what you’re doing…
There are several ways to create strong urgency – here are a few:
1) Have a firm deadline you can and will commit to
This is often easiest if there is a particular event coming up — such as a Demo Day or a pitch event / press event. “We are closing a tranche of funding on X date, which is our Demo Day. After that, the price will go up. So if you are serious about investing now, then let’s talk in the next 48 hours.” Then, tell all investors you’ve been talking with about this deadline — both the serious and non-serious — and see who talks w/ you in the next 48 hours and ultimately comes into your round.
2) Tell all potential investors how much money is in your investor pipeline
If all of your serious investors were to invest, how much would this pipeline be worth? (As mentioned above, it should be at least 2x…but ideally more). Then tell all investors you’ve been talking with — both the serious and non-serious — that you are closing off your round soon, because at this point you have about $X in your investor pipeline but are only raising $Y. And so if people are serious about coming into your round now, you’ll need to talk in the next 48 hours.
3) Tell all potential VCs about where your conversations stand with other VCs
If you are going into second round / later stage meetings with VCs, make sure all the VCs you’re talking to know this. “I have 4 second round meetings this week with other VCs on Sand Hill. Things are moving a bit faster than I’d originally thought, so if you think it makes sense, let’s get a meeting scheduled this week.” Keep putting pressure to shuttle your VC fundraising process along with all the firms you are talking with. Once you get terms — either verbal or bulleted in email — then tell all VCs that you are now talking specific terms with another VC and that you’re trying to figure out who is potentially in this round and who is out. Once you get a term sheet, tell everyone that you have a term sheet and that you are trying to figure out which firm(s) make(s) the most sense to move forward with. Every step of progress you make with a VC should be something you tell all the other VCs about so you keep moving all processes forward.
DO NOT TELL PEOPLE WHICH VCs you are talking with! You don’t want VCs talking to each other behind your back and then either colluding on price or talking themselves out of your deal altogether. You want them to think independently.
Also, if you get a term sheet with a valuation that is much lower than you’d hoped / anticipated, this is not the end of the world. Just getting any term sheet at all is a GREAT starting point. Valuations are the result of supply and demand — not based on your progress / revenue. Once you get a term sheet, you should focus on getting other term sheets so that the terms can get bid up and so you can have other VC options. On the flip side, a lot of entrepreneurs overly focus on valuation — you don’t don’t want to set your valuation too high (because it can bite you in the next round), and ultimately, you want to work with investors who are right for you, so make sure the relationship(s) is/are right with the VC(s) you ultimately go with.
Now, for all of these tactics, a big risk is that no one commits to your round at all and it completely falls apart! But you have to take that risk. This is why it’s so important to have enough serious investors in pipeline in order to keep moving your fundraising process forward — investors WILL drop out either because they weren’t serious in the first place or they can’t move fast enough or they don’t like the details of the round. And you need to be ok with that. If you don’t have enough serious investors in your pipeline, you either need to have more first meetings with new prospective investors or re-evaluate whether you should be raising money right now. Often it’s a better use of time to stop fundraising and then go back out and raise money later when you have a better story to tell.