Long sales cycle? Marketing got too expensive? Spent too much time fixing the product?
There are so many reasons why things can take much longer than planned. In fact, our experience at Tau is that the vast majority of startups, including the very successful ones, do face a significant challenge at some point which made their fundraising tough. Below are five practical tips to still pull off a successful round.
1) Types Of Investors
Investors come in many sizes and flavors. If you are being unable to get a top institutional VC to lead then go for co-leads. Maybe that co-lead is a strategic. Or focus on other types of capital such as family offices, grants or loans. As a CEO keeping the company afloat is the number one responsibility, so keeping close tabs with investors is a must. At Tau we encourage our entrepreneurs to do passive updates through quarterly newsletters and active ones through meetings. Also that entrepreneurs raise at least 6 months before running out of cash and expect a regular process to take 3 months (this is for priced rounds, SAFEs are typically quicker).
2) Deal Terms
Valuation is hardly the only lever to negotiate. As an entrepreneur you can also offer several other terms to sweeten the deal:
- prorata rights — invest enough in the next round to maintain your ownership
- super prorata rights — invest enough in the next round to increase your ownership
- warrants — right to buy equity in the future round
- board seat / observer — to keep the investor closer to the company
- renegotiate the option pool — 10% is the benchmark in the early stages to attract talent
- commercial exclusivity — this is something strategics often seek and our advice is to tie it with milestones and / or bound by a time period
- legal costs — the startup will pay for the lead investor’s diligence, usually there is a cap that varies much based on local norms, in Silicon Valley in 2021 we often see $25K
Obviously you have to balance giving away these rights with setting the company for future success. For instance, if every investor has super prorata then it will make it harder to attract future investors and even if you do, it will dilute you significantly. But the point is that there are a number of other ways of negotiating a mutually acceptable deal.
3) Multiple Closes
At Tau we recommend against multiple closes in most situations. But there are always exceptions. One is if a particular investor wants to come in but doesn’t have the cash right then, presumably because they need to do a capital call or SPV. Another is a deal is very hot and the startup wants to close the larger investors and then share the remaining allocation with smaller investors. Or if there is a tranched financing based on milestones, which doesn’t happen much in tech these days but does happen in other areas such as life sciences. Overall, adding steps to the financing can help get investors more comfortable and push them towards closing the round.
4) Put Your Own Money
Now and then we see companies where entrepreneurs put in their own cash into the raise as a way of jumpstarting or rounding it. For most entrepreneurs it’s a bold move since they already have both salary and equity tied to their company, but it does give even more assurance to investors about commitment. A related idea is for entrepreneurs to limit selling their shares in secondary. Cofounders selling up to 10% post series B usually balances interests — the cofounders get some liquidity for their hard work, the market gets assurance they are still committed to the company.
Larger startups can divest parts of the company. Some do an acquisition and actually raise a round specifically for it. These rounds are often insider-led i.e., the market could interpret the move as existing investors continuing to be bullish. Another way we have seen startups approach M&A is through revshare, which definitely has its pros and cons in terms of limiting or accelerating growth. Even small startups can find ways of making themselves more attractive by restructuring. Case in point, Twitter was a spinout of a podcasting company — the renewed focus and clean cap table made it much easier for them to raise funding.
Originally published on “Data Driven Investor,” 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.