A fundraising failure to learn from (Investor Skydiving) pt. II

Jason Yeh
August 2, 2022
#
Fundraising

In my last essay I outlined Investor Skydiving – an analogy that spells out the switch from taking your time building comfort to pushing fast during a tight closing process.  

One great way to learn is with anti-patterns. Seeing things you shouldn’t do.

To facilitate that model of learning, today we’ll walk through the real story of how one founder fumbled it.

(if you missed part 1 essay on Investor Skydiving, read it here first before continuing)

Cold Feet in Investor Skydiving (a true story)

Earlier this year, I was supporting a founder through her fundraising journey.  She’s fantastic - great industry experience, pleasant disposition, and a real focus on her customer. My priority was helping her understand what is necessary to prepare for a great fundraise. 

Along the way an interested investor discovered the company and reached out to learn more. In that process, I advised her to casually engage and let them know that she was not actively fundraising.  This was both true and a standard practice in great fundraising (you’re never fundraising until a real process is live in order to bottle up interest).

That type of interaction, the casual pre-fundraise get-to-know-you, is the evaluation phase where the founder forms a relationship and develops comfort.  Building on last week’s analogy, at that point the investor saw a cool skydiving opportunity and wanted to learn more about the operators. Was it an exciting experience worth considering in the future? Would it be safe to go with them?

During those initial engagements, she did a fantastic job of showing how great the company was. The message was clear. She was an awesome founder and the opportunity to skydive alongside her would be exciting - not to be missed. 

She took her time and didn’t indicate they would need to make a decision anytime soon.  Remember, no decision was necessary because she was clear that she wasn’t fundraising. 

Her hard-to-get approach while communicating progress like invitations to join accelerator programs and interest from other investors WORKED.  Those signals began to influence the VC. 

They could feel the potential for competition coming to steal the opportunity or drive the price up. In other words, they felt they needed to move quickly and in turn asked, “would she take on investment if given a term sheet?” 

Excited by the interest, the founder said she would consider! 

With that green light, the investor asked for deeper diligence calls and meetings with the full partnership. 

The single stream mistake, a cardinal fundraising sin

This is where she fell into a cardinal sin of fundraising. She showed a single investor a tangible investment opportunity without any competitive pressure or worthwhile BATNA (Best Alternative To Negotiated Agreement). 

Since she wasn't ready to run a full process she had essentially created a single stream process that was being evaluated on its own. This is one of the pitfalls that calendar density is designed to avoid. 

As each week went by, the investor dug in, requested more details, asked for customer interviews, and sought deeper levels of information ostensibly to add to the case of whether or not they should invest.

Eventually, the founder looped me into the situation. She was confused and asked me why the deal wasn’t closing. What should she do?

The issue, I told the founder, was at this point no level of additional information would cause the investor to jump. In fact, the more she gave to them, the more likely they would be to step away and call the deal off. They had essentially gotten too scared to jump out of the plane with her.

Too scurred.

What should she have done?

So what happens in those situations, when you're circling high in the sky with an investor who doesn't have the conviction to jump? Well, like I told her, no additional data you give them will have a positive impact on securing a term sheet. The operative phrase here is “data that you give them.”

What instead causes an investor to jump is feeling like others will take the opportunity from them, that the deal will go up in price, or that they'll lose the opportunity to invest.

The only ways to stimulate those feelings are through process signaling and founder courage.

I told the founder she needed to let them know that she was preparing for a full fundraise very soon. Whether or not they were going to do the deal, she wasn't going to spend more time with them.

A show of strength

This move announces that competition is coming. If they don't decide to jump now, others will be joining a fuller process that will either cause them to lose the deal or drive a valuation higher than they want to pay. It's not a foolproof method. But it is the only card left to play in that situation. 

Once you’re in the plane with an investor circling at 10,000 feet… time kills deals.

Even worse -> Spring/Summer 2022 

As of this writing, the past few months have shown the extreme case of time killing deals. The fundraising and investing environment quickly soured over spring and summer 2022.

What went from slight fear driven by a war in Ukraine, rising commodity prices, and global inflation quickly turned to extreme FUD amidst crypto meltdown and public market destruction. 

Deals that were in the middle of being finalized during this quick turn saw the extreme impacts of the phrase “time kills deals.” 

On the less severe side, committed checks were being reduced (“I know I said I was in for $250k, but I can only do $100k). On the most extreme side of things, extremely reputable institutions were pulling signed term sheets.

Just in case it happens again… if you happen to be fundraising in an environment that either has risk coming from macro forces or perceived risk at a micro level with your specific deal, you’d better move quickly because time will MURDER your deal. 

Final thoughts 

In all situations and market conditions, be organized with your fundraise. Even in the best of times, you want to run a tight process that allows you to close deals and limits the chance for feet dragging and extended timelines to kill your beautiful deal.

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