B2B Wins #38: Nobody wants to go first
Funding a startup is fraught with risk. Make it easier to say yes.
Evan H Fisher recently posted on LinkedIn about the need to create momentum in your fund raise. It really doesn’t matter if you’re pre-seed or Series A. Momentum is huge. Every investor wants in on the next biggest thing. Nobody wants to go first.
Every founder fears the “You’re not right for us” or even the “Pass.” But perhaps the most brutal and soul-crushing thing to hear from an investor is, “Let’s circle back when you get a lead.”
The soft “yes” (all lowercase) is demoralizing in ways that the layperson can never understand. I had a round that failed with eleven soft commitments, which essentially oversubscribed the round because no one was willing to price it. Plenty of exogenous factors prevented us from finding a lead, but it doesn’t matter when you’re trying to make payroll.
What is momentum?
In short, it’s the mythical fear of missing out. That divine state when word goes around in the investor community that there’s this thing that everyone wants but only a few can get. But it doesn’t have to be nearly as dramatic.
As you’ll recall from your high school physics class, momentum is a function of mass and velocity. To take the metaphor a bit too far, the mass is the amount you’ve raised. The velocity is the frequency of those inputs. In the strange world of investing, the more you raise, the greater your velocity and, thus, your momentum.
Getting those early checks is the key to building momentum in your raise.
How do you create momentum?
Investors are a wary bunch. Nobody wants to go first. How do you get to the first one?
Be super intentional about targeting investors. No CMO would run a marketing campaign targeted at “People with money.” CMOs spend a long time; some would say too long, thinking about the Ideal Customer Profile so that marketing is done against those people most likely to have the pain that your product solves. Your Investor Campaign should be just as intentional. You should target those investors who meet several critical criteria. First, they should invest in your vertical. If you’re B2B, look for investors investing in B2B. Biotech investors are not for you. Second, they should have money to invest. Most funds raise money with the intent of returns in 10 years. Therefore, they invest most of their money in the fund's first 2-3 years. If a fund has raised money in five years, I wouldn’t bother putting them on your list. Finally, don’t reach out to the “fund”; reach out to the partner in the fund with the greatest likelihood of being interested in your play. Is there a partner who focuses on B2B Knowledge Management? Great, send her your Knowledge Management pitch.
Make the soft less soft. The dreaded soft commitment can be valuable. What you have to do is make it more firm. Nobody likes hearing you have eleven timid investors waiting for a term sheet from someone braver than they are.* To make the best of this situation, spin this lead into gold. Get as much of a commitment as possible. Ask, “When I get a $250K check and good terms, how much would you be willing to invest?” If you can at least get a number, you can tell the next investor that you have soft commitments of $X from X investors. Not great, but better than nothing. A few words of caution: more than half of your soft commitments are a soft “No.” Don’t be disappointed if they don’t take the bait. But this will allow you to separate those who are more serious from those who are less serious.
Don’t be too strict about terms. Cash begets cash. Take any check that doesn’t have absurd terms that harm your raise going forward. Nothing speaks like cash in the bank. Do you want a $7M cap on the SAFE, and the investor wants a $5M cap? Take their terms. Grab the cash. Grab the momentum. There are a few hard truths about the game we play. Money is oxygen. Fundraising takes you away from building. Your job is to get lots of money quickly so you can return to your day job. The quickest way to get cash is to build momentum in your raise. Take the terms.
All this is easier said than done. Do your homework. Increase the likelihood that you get that first check quickly so you can Hoover up the FOMO cash that will come to your door.
Schedule an appointment. I would love to chat.
* This is somewhat tongue-in-cheek. Many early investors don’t know how to price a round, even if that’s something as simple as terms of a SAFE note, so they’ll wait for someone else to validate the terms.