One of the trickiest parts of any fundraising process is getting the actual commitment from investors.
Often, we hear founders say that the investor is IN, only to find out later that they are NOT REALLY IN.
The complexity is based on two dynamics:
1) Founders have happy ears, and 2) Investors have FOMO, and would like optionality of being in the round.
This dynamic isn’t great for the founders, because as investors fall out of the round, the round may fall apart.
The root of the problem is lack of clear written, reflective communication.
Here is the protocol that can help founders avoid this problem:
Verbal Commit
In the end of every investor meeting, ask the investor if they are interested.
If they are, ask how much they want to put in. If the investor says the amount, this means the interest is potentially real.
If the investor is not there yet, they will tell you. In this case, ask what else they need to make a decision and what the next steps are.
If the investor says he or she is in for, say, 50K, you ask if there are any conditions or if he or she is really in.
Sometimes the condition may be, “I am in pending terms,” or, “I am in if you do a priced round, and get an institutional lead,” (in this case I would really interpret this as they aren’t in) or some other factors.
In this situation, reflect back verbally what you’ve heard.
Literally say – “You are in for 50K pending terms,” or, “You are in for 50K provided we do an institutional round.” Have the investor confirm verbally. Then say that you will send them an email to confirm all of this in writing, and this is critical – say he or she IS NOT IN until the person confirms via email.
Written Commit
In the evening of the same day, email a recap of all the points and details to the investor and ask to reply with YES to confirm. Make the subject line of the email: Your COMPANY NAME, round. In the body, be terse and specific—don’t include anything extra.
If the investor replies, you are all set, and can count the investor as committed.
If the investor replies, says you didn’t get it right, and makes changes, reply back with a clean version that includes the changes.
If the investor doesn’t reply, this means they ARE NOT REALLY IN.
Rolling Close on a Note
If you are raising on the note and doing a rolling close, attach the convertible debt note and the wire instructions to your written commit email.
This way, the investor can review the note, ask questions, and then send you the money.
If you aren’t doing the rolling close, you need to add the investor to your committed investors list and keep them updated regularly.
Follow up
Promptly follow up every two weeks to keep committed investors up-to-date. Good rounds have momentum, and you want the investors to feel good about investing. The update email should include progress on the round and the company.
Keep in mind that if the round is not coming together, this may be a turnoff for the investor, and they may pull out. However, it is still better to be transparent and keep them posted.
Investors are much more likely to stick with you if you communicate with them regularly.
Leverage Committed Investors
While providing updates to committed investors, you should also tap them to get more investors. After original investors commit to your round for a couple days, ask them if they can introduce you to a few other investors. Some of the most powerful connections come from committed investors.
Also ask for permission to tell other potential investors that this particular investor has committed to the round. Again, committed investors will help create leverage.
The more investors commit to the round, the faster your round should be going because you will get a network effect and build up the momentum.
Wrap up
At Techstars NYC, we consistently see an issue when founders aren’t following this protocol. Their rounds don’t come together as quickly.
As a founder you are always better off being clear and knowing exactly where the investor stands rather than living in the land of a maybe.
Image Credit: CC by Howard Lake
