Some investors seemingly take forever to make a decision. But if you think about it, if they can stretch out the timeline for their evaluation and initial due diligence, they gain multiple advantages. They get more time to get to know your team and your opportunity. They get to watch your results progress. But a startup’s most valuable resource is time (read that article here). Fundraising founders need to get their round closed as efficiently as possible and with the best investors possible. This article dives into the dynamics of a foot-dragging investor and shares some tools to help get them to a decision.
A Quick “No” is the Second Best Outcome
A fast “yes” is hard to get. Perhaps easier with angel investors than institutional investors. And you might be thinking that a slow “yes” is the second best outcome, but I’ll contend that it’s a quick “no” that you’ll appreciate a little bit more. Wasted time and energy is kryptonite to a startup. If an investor ties you up with multiple homework assignments, information requests, reference requests, and the like, and then decides not to invest, you can never get that time and effort back. It’s gone forever.
Funding rounds using convertible securities (ie – convertible note or SAFE) allow for a rolling close, which means each investor commitment can be accompanied with a check hitting the bank account. But no investor in such a round wants to be the first to commit. That’s because they might end up as the only investor (or one of only a few), and that leaves them holding a very risky investment. This phenomenon isn’t as much the topic of this article, but I definitely dive deeper into it in my article titled “Using Verbal Commits to Secure Your First Investors“.
Early Expectation Setting
During your initial conversations with each prospective investor, ask what sort of things are important to them when making their investment decisions. Their answer will be one, or more, key elements of your business plan (problem, market, solution, business model, traction, team, etc). Focus on those things during your conversation, but also write this information down when you’re done. With this, if you later need to nudge them to a decision, you’ll remember which new accomplishments will carry the most weight.
I also like to ask about their typical process and timeline for evaluating investment opportunities. The answer will be different with lead investors versus those that only follow a signed term sheet. But if you can understand the process steps they typically go through (both evaluation and decision) as well as their typical timeline, you’ll have a benchmark to determine if you’re drifting outside their norm. Some investors can move fast and others can’t.
Dancing the Dance
I’m usually a big proponent of letting the investors control the pace of the “dance”. The main thing you want to know during the “dance” is if the investor is just being polite by taking your repeated follow-on meetings or is this their preferred method of due diligence. So ask them, in effect, to find out. At the end of one of your meetings or via email (in person is better), and after you feel like you’ve truly provided all relevant information, ask them something like “Is there any additional information you need in order to complete your evaluation?”
Side Note: An easy excuse for asking a question like this comes when you have a board meeting coming up. “I happen to have a board meeting on (date) and wanted to see if there is any additional information . . .”
If they give you another homework assignment or information request, you have two choices. You can agree to do the work. And perhaps that’s a reasonable response, if the request is also reasonable. But even then you should ask if, after that, there is any additional information they will need in order to complete their evaluation.
Your other choice is to push back on the request. This typically only happens if the investor seems to be jerking the startup around and not driving towards a decision. But it also sometimes happens if the investor is asking for things that are only typically provided after a term sheet is signed and real due diligence (the second phase) begins. Read my article titled “Demystifying Investor Due Diligence” for more on this second situation. I see too many fundraising founders providing second phase due diligence information before getting a term sheet. A mild push back might help force the investor into a decision.
Side Note: A well-populated and well organized data room usually helps speed the evaluation process. Read my article titled “Demystifying Investor Due Diligence” for that information too.
If they answer “no” to the original question, then you can respond with one of the following questions:
- “Can we count on your commitment for this round?”
- “Are you planning to recommend an investment?”
The first question is more appropriate when dealing directly with a decision maker, like a venture fund general partner. The second question is more appropriate when dealing with an associate or principal that is serving as a gatekeeper for the partners.
Asking the commitment/recommend question should help reveal any remaining issues or inhibitors. Just realize that some investors have a hard time giving a firm “no” or telling you the real reason they don’t want to invest. If you feel like you aren’t really getting a genuine response to their lack of commitment, try these follow-on questions:
- What would make this an exciting investment opportunity for you (your fund)?
- Is there anything specific that concerns you about committing to this investment opportunity?
As you engage in the dance, realize that things will be different if you are dealing with a prospective lead investor versus venture funds that do not lead (they only follow, after a term sheet has been signed). Hopefully you already know which of the VC’s you’re talking to are possible leads versus followers.
The Benefit of Follow-On Investor Commitments
I find many fundraising founders that assume the ideal process involves only pitching lead venture fund prospects first, until signing a term sheet, and then pitching funds that only follow a secured lead investor. I believe that process misses out on a big advantage. Imagine you’re raising $10M and you already have $5M in serious interest (ie – verbal commitments) from follow-on investors that won’t lead. You get to message that to your lead investor prospects. Their initial reaction will be skepticism, but let’s assume it’s real and you can prove that. If so, this will be their reaction:
- Wow, these other investors obviously see things they really like about this opportunity
- Wow, this founder has already de-risked the round for us. If we decide to lead with a $5M commitment, they are very likely to get the full round closed without spending forever doing it.
- Yikes, with that sort of follow-on commitment, other potential lead investors are likely to have heightened interest and move fast. We better move fast too so that we don’t miss an opportunity.
These follow-on investor commitments are most valuable if they’re solid. They won’t be able to give you a 100% commitment since they don’t know what your eventual term sheet will look like. But you should try to get them as committed as possible.
Getting them only to “somewhat interested” or “mostly interested” is better than nothing, but won’t enlist the full response I described above. So don’t say you’ve got $5M in serious interest if what you really have is $1M in verbal commitments, $2M in moderate interest, and $2M in initial interest. Tell it like it truly is in order to gain the most respect and best leverage with your prospective lead investor. And if you are able to improve the mix of follow-on commitments (ie – $2.5M / $1.5M / $1M), make sure to let the prospective lead investor know. You’ll get credit for the building momentum.
Trial Closes and Forcing Functions
Highly-trained, ninja sales reps already know about these techniques. If after doing everything discussed thus far, you’ve still got lead investors on the fence for excessive periods of time and need to close your round, you’ll need to apply some genuine closing techniques. Following are two to try.
A trial close involves asking for something that isn’t a term sheet, but rather something else that hopefully gets a positive response and pushes towards a positive decision. Below are some examples:
- “If you end up leading this round, will you likely want a board seat?”
- “If you end up leading this round, will you reserve for follow-on investments in the future?”
You’ll be in an elite and fortunate subset of fundraising founders if you land on a solid forcing function. Below are two of the best examples:
- Competing Term Sheets – If you have two or more funds verbally hinting that they’re getting close to presenting you with a term sheet, you have the best forcing function there is. You’ll need to be diplomatic with how you message the likelihood of getting another term sheet, because bluffing this one can seriously backfire. The best scenario happens when you are told the partners gave a thumbs up during the fund meeting and a term sheet is coming within ___ hours (probably 24-48).
- Upcoming Valuation-Boosting Accomplishment – If you have something that, once accomplished, provides a meaningful boost to your valuation, the closer you get to it the more you can use it as a forcing function. I’ll take this to an extreme to make the point. Imagine a startup that is in a phase 2 clinical trial for a broad spectrum cancer vaccination. If the results point to high efficacy and low safety risk, that startup’s valuation will skyrocket from one day to the next. Securing a super-valuable and strategic partnership might be a more common example.
Term Sheet Deadlines
You might have read about setting a deadline for term sheet submissions. I know it happens, but I very rarely see it and even more rarely see it executed successfully. Usually, only the most badass startups are able to pull it off. “Badass” usually means something like a team of serial entrepreneurs with very successful prior track records or unbelievable traction. These deals are hot and in high demand from investors.
Having a few serious hints at term sheet interest might be the other situation. Rather than let those lead investors march along their own timeline, you could consider setting a deadline for all of them to march towards. But, again, I rarely see this executed successfully.
If you want to best improve your odds of being able to execute this forcing function, you should do the following:
- Considerable relationship building well in advance of your fundraising campaign for the reasons I mentioned above
- A month or so before your campaign, test drive your key expectations with a few of the best investors you’ve developed a relationship with. Share with them the amount your thinking about raising, the expected outcomes you can accomplish with that raise, and the valuation you’re thinking is fair. It’s a somewhat penalty-free conversation because you’re just doing a test drive. But their feedback could be very telling.
- Reach the sweet spot milestone accomplishments that the investors have told you for months would get them excited about leading an investment
Obsessed with Valuation
Many founders are so focused on getting the valuation they desire that they forget that a good deal involves a combination of price (price = valuation) and terms (see my related article titled “Tell Me Your Price and I’ll Tell You My Terms“). The investor might be forced into excessive due diligence as a result of your high valuation expectations.
Maybe you’ve priced yourself too high. In fact, if most of your discussions with serious lead investors involve debate about your valuation expectations, you’re likely wasting time and need to reset your expectations. For this particular issue, I highly recommend you also read my article titled “Negotiating Valuation with Investors” so that you can understand things from their side of the table.
Rationing Good News
If you’ve had three good things happen since your last conversation with an investor, you might not want to brag about all of them at once. Rather, hold back one piece of good news and use it for inclusion in a subsequent email, phone call or meeting. Don’t get too clever with this. Rather, think about ways to deliver good news each and every week that the investor is considering an investment.
With this strategy, think about what good news you can help create during the coming weeks. Make a list with categories for customers, partners, product, people, other. Under each, list the next positive things that could/should happen. Not all will be of the same significance, and that’s fine. Also make sure to break certain accomplishes into milestones along the way. For example, a verbal agreement for a trial might be followed a signed LOI. Then it moves to a signed and paid trial agreement. Then the trial starts. Etc, etc. Each of these milestones can be used as new good news to message to your investor prospects.
Building and Maintaining Relationships Early
This tool doesn’t directly address pushing a seemingly-interested investor to closure. Rather, it attempts to avoid the long dragged-out process in the first place.
I know the monthly update you send to stakeholders is a bit of a pain in the ass. But, in addition to forcing you to regularly reflect on the progress of the business, it serves a very important benefit for your future investors. They get to track your progress and get to know you over a longer period of time, versus having you first knock on their door after you’ve started a fundraising campaign.
Imagine the benefit of your future investors getting time to really see how you think, how you plan, and how you deal with mistakes and issues. Imagine the benefit of them seeing you accomplish 80% or more of what you project you’re going to accomplish. Imagine them seeing at least one pleasant surprise in each monthly update.
By the time you launch your fundraising campaign, they’ll be super ready to dive into some details without having to come up to speed on the basics of your business. But the biggest benefit is with the overall impression they have of you and your team.
This is why you should always spend a small amount of time identifying and building relationships with prospective investors for your next round of funding. And you should turn up the heat with this activity once you get 3-4 months away from launching your next fundraising campaign.