Dear Founder,
Take a moment to celebrate the rarefied air you are breathing right now. Many CEOs dream of being in this position, and you should feel great about capturing the attention and interest of so many investors. Below are a few pieces of advice that we’ve shared with our founders over the years. In general, these suggestions tie to a common theme: the importance of maintaining a long-term outlook in a high-pressure situation.
Breathe, and remember that this is just the very beginning of the journey.
It’s easy to get caught up in the excitement and fervor of the fundraise. As someone who sits on the investor side of the table, I can only imagine how it must feel to be in your shoes.
Remember that you have the power to drive the process, timeline, and expectations. Investors can sometimes create an environment of pressure and deadlines, monopolizing your time and your imagination. Take stock of the situation, and ensure that you’re talking to the right folks. Is there someone on your list that you’ve heard great things about, but with whom you have not yet made contact? If so, try to reach out and connect before the round is done. You will be working with your investors for a long time, and getting the right people involved will have a lasting impact on your business.
Keep counsel with friends and advisors.
Walk through and explain all of the varied points of different term sheets and different partner experiences with someone you trust. Just the act of putting your thoughts together, and of making a rational argument around why you should to go with one offer or another (even a simple pros/cons list), can be of value. We recommend finding a neutral sounding board—whether that be a fellow founder or an early angel investor/advisor—to go through these exercises with you.
It is difficult to undo a commitment.
Try to resist the urge to continue raising smaller checks while you piece together the lead. Early commitments from friends and angels can add up quickly. Every $50K to $100K check counts, and the larger this pledged pool becomes, the harder it is to set expectations with your potential leads, and potentially to reset expectations with your committed angels if there is not enough space. Rather than confirming all the investment amounts at the beginning, you can communicate your appreciation and desire to work with someone without promising allocation or a specific dollar amount. Preserving flexibility at the start of the raise often pays off later in the process, and can prevent “broken glass” with friends and early supporters of the company.
Examine your biases.
Sometimes we encounter founders who are concerned about board dynamics, or who are worried about any potential challenge to company control. Others are very worried about dilution, to the point where they over-optimize early in the process. It’s much easier to say than to do, but try to think through what set of choices will have the biggest long-term impact on your company. Sometimes finding a strong board member who believes in your team and vision, but who can also challenge you, is critical. Sometimes, a little more dilution early on can result in better outcomes for all. When you decide to move forward with a term sheet, it’s important that you fully understand the reasons (and potential biases) behind your thinking, and to make a good choice for the long term.
Don’t get ahead of your skis when it comes to valuation.
We’ve seen this movie many times. A company is performing well and is “hot,” and the founder is able to raise ahead of their metrics—at a lofty valuation—from a firm eager to win the round and secure allocation. Silicon Valley press has a tendency to celebrate pre-money valuations without fully understanding the double-edged sword they present. These rounds, while they might make you feel like you’re building tremendous value, often present meaningful difficulties down the road. If your company’s growth falters or does not meet expectations, you’ll run the risk of having to answer to an angry and disappointed group of investors. If the macro climate changes or if your company, for whatever reason, momentarily loses its luster, you could face the prospect of a down-round, which can have lasting effects on company and investor morale. This is not to say that you should purposefully sandbag your valuation for fear of not living up to expectations. Rather, it’s to suggest that you choose a number which feels fair, which you believe you and your team can live up to, and which you believe creates a foundation for a win/win outcome.
In the battle for allocation, remember that you can cast the deciding vote.
There is always flexibility on all sides of a negotiation. Many investors have gone through this process hundreds of times, whereas founders go through it a handful of times at most. If you are in a competitive situation, recognize that you have more power than you might think. If it’s important for you to preserve space for pro rata or for strategic new investors, make this clear in the negotiation and set aside some allocation. Great partners rarely push back on this, as they also see the value in having more helpful hands around the table. If it’s important for you that the option pool look a certain way, make this case early in the process with your lead.
Be upfront, decisive, and understanding throughout the process.
Remember that this is a long game, and that many of the people you encounter in this process are folks that you will cross paths with again. Treat them in such a way that the next time you meet, they are as eager to work with you as they are right now. You may not always be in this enviable fundraising position, and it’s important to establish good relationships with the investor community and not to burn any bridges (in particular, false expectations around timing or valuations can cause future friction).
Finally, understand the tactics that investors may employ.
Investors have a number of tools that they may use to win the deal or to exert influence. Some of the most frequent approaches to be aware of include:
- Exploding term sheets: Investors will rush to provide you with a term sheet before others do, and will sometimes include a clause that makes the term sheet expire if you don’t accept it within a few days. A good way to counter-act this maneuver is to say that you want to do more diligence on the firm (this can give you time), and that you are looking for a great partner and thus do not understand why there’s a need to emphasize a short time horizon. If they’re trying to make a case that they’ll be tremendous partners, then this isn’t a great way to start the relationship.
- Guilt: Investors may try to make you feel bad if you don’t choose to work with them. As a founder, it’s important to separate your own personal feelings from what’s best for the business. Simply be polite and let them know that while you are so appreciative of their interest to work with your team, you still need to evaluate your options carefully to choose what is best for the future of your company.
- Fancy outings and exclusive gatherings: You may be invited to unique events and experiences. Understand that there is an investor agenda at play, and use the time with the investor to see how they believe socially and with other founders and peers.
Congratulations again on being in this enviable position. Also remember that this is the just the start of the race, and that the truly difficult parts of building your company lie ahead. It often takes years for companies to reach their destiny, so my advice is to not rush this fundraise. Be as thoughtful about this process as you have been about assembling your team and building your product.
Best,
Jeremy