One the 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.
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 they are 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 they ARE NOT IN until they confirm via email.
In the evening of the same day, email re-cap of all the points and details to the investor and ask to reply with the 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 and 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, then this means they ARE NOT REALLY IN.
Rolling close on a note
If you are raising on the note, and doing a rolling close, then in your written commit email attach the convertible debt note, and the wire instructions.
This way, the investor can review the note, ask questions, and then send you the money.
If you aren’t doing the rolling close, then you need to add the investor to your committed investors list, and keep them updated regularly.
Promptly follow up every 2 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 company and on the round.
Keep in mind that if the round is not coming together, this maybe a turn-off for the investor, and they may pull out. However, it is still better to keep them posted and be transparent.
Investors are much more likely to stick with you if you communicate with them regularly.
Leverage Committed Investors
In addition to keeping committed investors posted on the round, you should tap them to get more investors. After a couple of days of them committing to your round, reach out and ask if there are 2-3 (small number) other investors they may be able to introduce you to. The intros that come from committed investors are always very powerful.
Also ask for permission to tell other potential investors that this particular investor has committed to the round. Again, committed investors help create leverage.
The more investors commit to the round, the faster your round should be going because you get a network effect and build up the momentum.
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 than live in the land of a maybe.
Engineer, Immigrant. Vegan. 3x Founder, Managing Partner @2048vc. Previously ran @techstars in NYC. I write #startuphacks: http://alexiskold.net .