How Do You Get Investors to Actually Commit? TFP 12/11

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📰 Today's Edition: How Do You Get Investors to Actually Commit?

You're raising $1 million for your startup. You've pitched dozens of investors. Everyone seems interested. But nobody's signing.

Week after week, you hear: "This is great. Let's stay in touch." Meanwhile, your fundraise is going nowhere.

Most investors won't commit now. Why would they? It's better for them to wait.

Since you're very far from raising the full $1 million, they know they have time. They can watch and see if other investors commit. They can see if your metrics improve. There's no rush. Afterall, if investors can get into the deal at the same terms 6 months from now, it’s always better to wait.

This is terrible for you as a founder. 

You're stuck in a chicken-and-egg situation. Investors won't commit until other investors commit. But you can't get other investors to commit until someone commits first.

And while they wait, your fundraise dies slowly.

There's a better way to structure your raise. 

Let me walk you through it.

Are traditional funding rounds dead?

Kinda, at least for pre-seed and seed stage companies.

Most early-stage rounds now close on SAFEs.

A SAFE (Simple Agreement for Future Equity) is an agreement where an investor gives you money now in exchange for equity later. 

Instead of getting shares immediately, they get a contract that says their investment will convert into actual company shares when you raise your next priced funding round. 

This shift is huge for founders because it means you don't need a lead investor anymore. You can agree on a valuation cap, a discount, and investment amount with any investor, sign the standard SAFE template, and wire money. No lawyers required.

You can also close whenever you want. Get some investors in now, others later. Take one check today, raise more in three months. Or raise continuously. 

The flexibility compared to equity rounds is massive. In a traditional equity round, you are required to raise a minimum threshold of investment before any investor wires you the money.

Check out this article where we dive deeper into SAFEs.

How can you speed up investor commitments?

But what if you break your $1 million raise into smaller pieces? This is what we call tranching.

Let's say you split it into $300,000 and $700,000.

You still tell everyone you're raising $1 million total. But for investors who can move fast, you're doing the first $300,000 at special terms.

Here's what you say: "We're raising $1 million. The first $300,000 is available at a $4 million post money cap for early investors. This offer is only available until March 15th OR until we hit $300,000 in signed SAFEs, whichever comes first. After that, the cap will go up."

Now you've created real urgency.

Investors who commit early get rewarded with a lower cap. Investors who wait lose the better terms. More importantly, you can actually test whether your valuation is interesting to investors.

How do you know if your valuation cap is right?

This is where the tranche strategy becomes really valuable.

If you have a TON of demand on that first tranche, your cap is too low. You're giving away too much future equity.

If you have no demand at those special terms, then either your cap is too high OR investors just aren't interested. If nobody wants in even with the special terms, you have a bigger problem and should probably pause fundraising.

The beauty of testing with a small tranche is that even if you price too low, you're not giving up much. And the momentum you create is incredibly valuable.

Plus, if things go sideways, you can always blame the purple hippocorn who wrote your fundraising strategy. (Just kidding. Don't do that. I’m imaginary.)

What happens once you've raised some money?

Once you've got money in the door, you need the next dollars even less. Your position is stronger.

This means you can afford to ask for a higher cap on the later money. The second tranche is less critical than the first.

As you're getting close to filling the first tranche, start updating all the investors you're talking to. Send them messages like: "Hey, just wanted to let you know we now have $100,000 left of our first tranche. After that, the cap is going up."

This creates even more urgency as the window closes.

What about big lead investors?

The tranching strategy works with both small and large investors.

If you're approaching large lead investors, you still tell them: "Hey, I'm raising a $1 million round. I'm starting to bring in smaller checks on a party-round SAFE, but we're raising a larger round that fits your sweet spot."

If a big investor wants to lead, they'll offer you an equity deal. At that point, you can roll all your SAFEs into the priced round.

Here's something I've seen repeatedly: lead investors often get more conviction when a party round is going well. Momentum attracts momentum.

And if no lead investor wants to come in? You can party-round your way to success with this tranche strategy.

What actually closes fundraises?

Momentum.

That's it. Momentum is what gets fundraises done.

Through this tranche strategy, you're manufacturing urgency. You're giving investors a reason to prioritize a decision on YOUR company over all the other companies they're looking at.

Without urgency, your raise sits in their pipeline behind 50 other deals. With urgency, you move to the front.

Here's what the process looks like in practice:

Week 1: "We're raising $1M total. First $300K is at a $4M cap, available until March 15th or until we hit $300K."

Week 2: Start getting commitments. Keep reaching out to more investors.

Week 3: "$200K committed, $100K left at this cap."

Week 4: Close the first tranche. "First tranche is full. Now raising the remaining $700K at $5M cap."

Weeks 5-8: Continue raising with proof that investors already believe in you.

Each stage builds on the last. Each commitment makes the next one easier.

What should you do right now?

If you're raising money, stop thinking about it as one big round.

Break it into tranches. Create real deadlines. Reward early investors with better terms so they move quickly.

The concept of a traditional "round" is basically dead at the early stages anyway. SAFEs give you the flexibility to structure your raise however you want.

Use that flexibility strategically. Create urgency where it doesn't naturally exist. Give investors a clear reason to say yes today instead of maybe next month.

Test your pricing with a small tranche first. Build momentum. Then use that momentum to close the rest.

Your investors are different people with different value adds. They should get different terms. They should feel like they got a deal by moving fast.

That's how you turn "let's stay in touch" into signed SAFEs and money in the bank.

Tranche your raise. Build momentum. Close your round.

Until next time, 

Dunky, the “flying high” hippocorn

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