Managing the floodgates and (potential) investor relationships (Oversubscribed Weekly #35)August 22, 2019
Mike here. This week we’re going to dive in on two unrelated topics: (1) a successful fundraising strategy we’ve observed with founders be successful with doing multiple closes of their rounds, and (2) some notes on how to authentically build relationships with VCs.
1. Closing the floodgates prematurely
I was talking to some founders recently who were thinking about raising a $1M-1.5M seed round, but had been getting feedback from some investors that they should be raising a bigger (~$5M) round. They struggled with how much they should raise, as they felt they wouldn’t know what to do with $5M, but at the same time if they only raised $1.5M, then they might need to raise another $3M in 6 months to continue their trajectory.
The strategy we talked about was that it can be advantageous to closing the floodgates prematurely to ensure the round closes swiftly while maintaining optionality for raising more in the future, rather than keeping the round open in pursuit of raising $3M more. After all, if they were able to drum up demand, closing the round quickly would put them in a position to do a second close a few months later if they really wanted/needed additional capital. There would inevitably be investors kicking themselves that they weren’t able to get into first close, and they would be enthusiastic to participate in the second close, especially if the company showed progress.
This was inspired by a company I’ve worked with who did just that: they closed a $2.5M seed round with a lot of investor interest, and some investors who wanted to participate were not able to. They didn’t spend their money right away and were able to achieve some valuable milestones in 6 months with almost all of the capital they raised still in the bank. They decided that they needed an additional $2M to grow faster, and they quickly opened up a second round to the existing investors and the investors who they’d talked to for the first round but didn’t invest in time. Within 2 weeks they closed an additional $2M, bringing their total seed funding to $4.5M (with only a 4-person team).
No matter the size of your round, you need to put yourself in a position where you’re able to close your desired amount quickly. It’s 100x better to have more demand for your round than the supply of equity you’re giving away, than to set a stretch fundraising goal that you’re not confident in and scramble to hit that goal.
Put yourself in a position where you can oversubscribe your round, or where you can put up the floodgates when you’re in the most advantageous position to maintain your leverage – you can always let the floodgates back down in a few months and get more money in the bank if you want to. This applies whether you’re raising a $2M round or a $200K round.
2. A tweet thread on building authentic relationships with investors before you ask for money.
Remember, the best way to stack the deck in your favor for a seed round is to have already built authentic relationships with investors before its time to fundraise. This past weekend, there was a very illuminating tweet thread involving numerous VCs and founders about the right way to do this. It’s worth your time to dive into the thread and read the replies.
What’s your pro tip for founders on how to build authentic relationships with investors months/years before they’re fundraising?— Mike Wilner (@mwil20) August 18, 2019
One of my favorite responses comes from Kara Nortman, who notes that if you have a supporter update that includes potential investors, you should drop VCs who don’t read it from the list.
Lots of blog posts on this topic.— Kara Nortman (@karanortman) August 19, 2019
For me, two types:
(1) Current investor – way to make board meetings more productive (send only to major or active investors)
(2) If I am a potential investor
-call to action @ end to confirm read
-drop anyone who doesn't read
Remember, information is leverage, and folks should have to “pay” for information about your company with their attention. If they can’t give you their attention and occasionally a little time, then they’re not entitled to information on your company. Focus on building meaningful relationships with investors when you’re not fundraising. It’s more impactful to have a few investors who are deeply engaged with your company than it is to have countless potential investors on supporter update without any real relationships being built.
See you next week,
Mike (& Max)
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