I hate to do this.
In one short essay, I'm going to crush the dreams of many a fundraising founder. How? I'll smush them all just by shedding some light on what many founders have been using to fill their sails. An insidious little thing called a "soft commit." And I'll do it with nary a juvenile sexual reference, no matter how tempting it might be.
A soft commit is when someone expresses interest in investing, but isn't actually legally binding. More importantly, it's a commitment made where the investor KNOWS they likely won't hold their end of the commitment. This is done by vaguely referencing conditions such as the company finding a lead investor, raising a certain amount of capital, or meeting certain performance indicators.
The crappy thing is even when founders do meet those vague conditions, the softly committed investor can still back out easily and without repercussions. Don't believe me? Here are just a few of the many reasons why an investor might back out of a soft commitment:
Even bringing soft commitments up to a potential lead investor isn't that helpful because people know they can be made up without any real way to verify it. For example, a founder could claim have a million dollars in soft commitments, but really only have half a million, and they just rounded up. It's a tricky situation.
When it comes to turning soft commitments into firm commitments, there's really just one main approach with a few variations. The key is getting people to believe that a deal is happening, and that they might miss out if they don't join in. They could either lose the deal itself, or lose out on favorable pricing. There has to be a sense that things are moving forward.
For example, if you have a lead investor in place, you can go back to the soft commit folks and let them know that the deal is coming together. Tell them that there's a limited allocation for others to join, and that they need to hop on board. You've got to make them feel like it's filling up quickly. That gets the ball rolling and encourages people to lean into the deal.
Another tactic, often seen in party rounds, is to gather a bunch of soft commitments and tell them there's enough interest to make the deal happen. You're going to price it, implying that the demand is there. Ask if they want to be a part of it. If you can get the first one to say yes, you can then go to the others and say, "Hey, we already have a couple commits, and we're talking to ten more people, including you. Do you want in?" That gets the ball rolling and encourages people to lean into the deal.
The biggest misconception that founders make around soft commits is thinking they are a lot more firm than they actually are. This can lead to all sorts of problems and mistakes:
Just kidding... these is a hard takeaway. Soft commitments aren't reliable. Don't start counting your chickens before they hatch. Don't stop working hard to raise capital just because you have a soft commitment or even a series of soft commitments.
Soft commitments are a common part of the fundraising process so approach them with caution. If you field them with full awareness of the potential pitfalls, you'll be able to play the game strategically and potentially even turn these soft commitments into firm ones. By maintaining open communication, applying pressure, and employing strategic follow-up techniques, founders can successfully navigate the delicate middle ground between soft and hard.
The simplest advice I can leave you with around soft commits? Assume they don't mean much and be pleasantly surprised later on when they do become money in the bank.