QUESTION:
I have all these VCs interested in my startup, but none of them will write us a check. They’re all sitting on the fence waiting for someone else to take the lead. It’s so frustrating! What’s the best strategy for closing VC funding?
ANSWER:
Nathan Beckord
by Nathan Beckord at VentureArchetypes
There’s no magic bullet here, other than to continue to build momentum in your business and to continue to build momentum on the deal. The former means demonstrating traction, growth, customers, etc. The latter means socializing the funding with enough VCs until you find one who will take the hook. If you do these two things well, the deal will happen; if the deal doesn’t happen, it’s time to take a look and see what’s causing them to pause, and if necessary, remove the “hair on the deal.”
Beyond these fundamentals, however, there are a few techniques I’ve seen employed, with varying degrees of success. One is to set an artificial deadline for closing, often driven by some external event (like you are traveling abroad for a month). The other is to set a tiered valuation schedule, e.g. “all investors who commit by Dec. 10th will buy in at a $2M pre-money valuation; the next closing will be February 10th at a $3M pre-money;” and so forth (essentially making the investment more expensive the longer they wait). If you’re using convertible debt instead, you can offer a higher discount to the Series A to those investors who pull the trigger first. If your investors are truly just on the edge of the fence, these techniques could get them to tip.
Finally, one additional technique is to find the investor who is closest to a “yes”, and offering him/her special, very favorable terms to be designated as “the lead” (even if he/she is technically not taking the majority of the round). Once you have a firm commitment on “the lead”, you can socialize this to the rest of the interested parties; when doing this, it’s imperative to convey a sense of momentum…that the deal is heating up…and ask for their firm answer. Be the closer.
Having said all this, at the time of this writing there is more seed money than there are good deals on the market, so if you’re getting recurring responses of hesitation, it may be worth it to get an outside “deep dive” review and analysis of your business plan and deal structure to see what’s holding it up. Best of luck, Nathan
I think the advice above is good. Often founders don't know how to close a deal when the investors are on the fence. Creating a sense of urgency is critical to closing.
It’s basic sales techniques, but it’s also about generating real (or perceived) momentum to get a deal to tip. VCs will often wait and watch unless there is momentum or a catalyst to get them to act—i.e., fear of missing a deal that other investors are interested in. That is where it differs from sales.
Nothing new here. It's basic sales negotiating tactics.