Examples of previous articles:
- Raising A Bridge Round — 3 Core Principles
- Insider Rounds — the Good, the Bad and the Ugly
- How Best to Pitch to a VC
- The Art And Science of Raising Venture Capital
- 10 Best Ways to Work with a Corporate VC
Many of these have talked about how to fundraise effectively with a focus on overcoming challenges. But the opposite also happens — what if your company is doing phenomenal? The hottest startups command disproportionally attention in the market and chances are you can essentially prescribe the terms and timing of the fundraise. That said, there are ways to maximize that momentum, and this article will focus on five practical ones.
1) Passively Engage Inbound Interest
Startups doing well will often keep potential investors at bay, rightfully arguing they are focused on building the business. Some will also use limited accessibility as a signal of strength i.e., only the best investors will get the CEO’s time and only with some work. All that said, there are many smart ways of collecting the inbound interest without over-stretching yourself:
- add them to your newsletter
- add them on your LinkedIn
- invite them to a Demo Day
- consider holding an Open House
- have a FAQ addressing common questions, formats could vary widely from text on the website to a video
You won’t be able to bring on more than a handful of VCs on your cap table regardless, but that’s not the only way to have a win-win. By engaging at least passively with these investors you could still uncover potential customers and partners, perhaps from their portfolio. And they are also likely to speak well of you in the ecosystem, which further helps your company’s reputation.
2) Set The Terms Of A Pre-emptive Round
What if an investor actually extends a term sheet or signals strong interest in doing so? If it’s an investor you could consider working with, then signal to them clearly the terms which you would accept. Most fundraises are akin to negotiations but if your startup is doing exceptionally then convert it into an auction, including specifying what winning bids would look like. For instance, if you were planning to fundraise six months from now then you can signal the valuation you are expecting then as the starting bid. The danger of playing this game is obviously that it can backfire if no bidder steps to the plate. This dynamic also plays similar if the conversations are around acquisition rather than investment. Here is a deeper discussion around preemptive rounds.
3) Take Away The Oxygen
If you can command a fantastic fundraise then consider the impact on current and / or future competitors. In consumer companies it’s often a land grab i.e., go big and be loud about it. But there is also wisdom in raising a war chest silently to surprise your competitors. The right choice obviously depends on context but in general, taking away the oxygen from the market is a good strategy when it’s winner takes most. In enterprise or digital health, with long sales cycles and large markets, it’s better to raise extra cash to do acquisitions rather than scare off the competitors.
4) Set The Extra Cash Aside
Raising too much money / at too high valuation / too early is as dangerous as the opposite. Arguably it’s even more dangerous since the ecosystem incentivizes such behaviors in the short-term and the potentially negative consequences are usually not apparent right away. Having too much in the bank can fundamentally alter the culture of a company, reduce productivity, and even set up for failure if you end up marching towards a smaller upround, flat round or even down round in the future. What do the best entrepreneurs often do? Usually Ignore until a rainy day (need the cash) or a shiny opportunity (embark on a new product). At Tau Ventures we advise our CEOs to stick to their fundraising plan and if they get oversubscribed by more than 10%, put that extra away.
5) Set Up Controls To Not Lose Yourself In The Hype
Companies that are doing well end up raising more funds that gives them the ability to do even more, basically turning into self-fulfilling prophecies. But the opposite also happens and there are plenty of case studies of companies that came crashing down — WeWork has yielded a fantastic book and here is a list of 200+ compiled by CB Insights. Indeed, raising funding is not a goal in and of itself, it’s a means to an end. Many entrepreneurs don’t disclose their round by itself, instead announcing it in tandem to a major accomplishment from the business. It’s exceedingly hard to maintain perspective when so many things around you are going well, which is why surrounding yourself with a strong board that will keep you accountable is very much in your interest too. As is having a management that is open to fighting for the best decisions even if that means disagreeing with you. And overall having a culture that prizes constructive debate.
Originally published on “DataDrivenInvestor,” am happy to syndicate on other platforms. I am the Managing Partner and Cofounder of Tau Ventures with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). Many of my writings are at https://www.linkedin.com/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.