108. The Waiting Game: Why Pre-Seed Investors Delay and How to Speed Up Commitment
Video version of this episode on why pre-seed investors delay and how to speed up commitment.
I hear from many founders who are extremely frustrated with investors. These investors show strong interest in their company but wait until the last possible moment to either commit funds or decide not to invest. It's driving the founders crazy.
I know a VC who explicitly makes this part of his strategy. He mentioned it to me when we discussed my potential role as a limited partner and investing in his venture fund.
He likes to get involved with a company as early as possible, express interest, and then wait until the last moment to decide. This approach is a core part of his investment strategy, and there are good reasons for it.
I'm going to explain why investors do this and share some techniques to get them off the fence and committed earlier.
This episode is part of our series on Fundrasing
Why Investors Wait to Invest
Let’s start by examining what drives this behavior.
They Don’t Want to Invest Alone
Investors never want to invest when no one else is putting money in simultaneously. If I write you a $25,000 check and no other checks are coming in, it will probably just cover your current operational needs. It won't drive growth or help you reach the next milestone, making my investment ineffective. I want my money to contribute to growing your company.
Additionally, there's a risk that your round might never close. In that case, I've essentially written a check to a company that's already failing. I want to know that I'm joining a significant number of other investors, contributing enough money to make a difference and help you reach the next milestone.
Their Risk Goes Down with Time
Another reason investors like to wait is that, as long as you're executing effectively, risk generally decreases over time. You're validating your assumptions, gaining customers, hitting milestones, and building out your product. Each step reduces your company's risk.
However, the entire round is usually priced the same. If your company has a $5 million valuation, that will be true whether I invest at the beginning or the end of the pre-seed round, but the level of risk can be very different. So, I'd rather wait until the very end when the return is highest, and the risk is lowest, to invest my money.
They Want Negotiating Leverage
Some less ethical investors wait to gain better negotiating leverage. If I invest early, you have plenty of runway, and I have little opportunity to push hard on my preferred terms. But if I wait until you're running out of money and nearing the end of your runway, I have all the negotiating leverage because you have no choice but to accept my investment under those circumstances.
It's not a nice way to do business, and it doesn't build a good reputation, but there are certainly many investors who play that kind of hardball.
How to Get Investors to Commit Now
Now that we understand the motivations for delayed investment let's dive into some strategies to get the ball rolling more quickly.
After all, left to their own devices, investors have no incentives to move quickly unless you give them one.
Break the Round into Tranches
One thing you can do is break your round into tranches. Earlier, I mentioned that people want to wait because the risk goes down while the valuation stays the same, but it doesn't have to be that way. I've seen many cases where founders say, "I'm raising $750,000. The first $250,000 can come in at this valuation. The next $250,000 comes at a higher valuation, and the last $250,000 comes at the highest." This way, the valuation reflects the risk inherent in the business. These tranches are a fairly common way of structuring investments.
If you get a savvy lead investor, they might even help you set up that structure because it lowers the dilution they'll experience from later investors.
The nice thing about this approach is that it appeals to their greed. If they invest earlier, they get a better deal. This can drive them to move and invest at the last moment of that tranche, but not the whole round. This way, you can get the money now when you need it.
Set up Intermediate Closings
Even if you don't adjust the valuation throughout your round, you can have intermediate closings. This way, you're not asking everyone to write their checks the minute they say yes, which is often unreasonable, especially for sophisticated investors.
You might close the first time at $300,000 because that's enough to accomplish something significant. The next closing might be at $600,000, and the last one when you hit a million or maybe when you oversubscribe the round. Once you're close to oversubscribing, people know you have enough money in your war chest to execute effectively, and they're more comfortable letting the cash roll in as they make commitments.
Keep Investors Updated as the Round Fills
Another trick is to play into psychology. Keep all your potential investors updated on the progress of the round. Let them know the round is starting to fill up, you don't plan to oversubscribe, and their opportunity to get in on the deal is closing. Tease that you might receive larger checks from VCs or large venture funds, which could shut down their opportunity to invest. If they want in, they need to act now. This fear of missing out can often make investors move faster.
Use Social Proof
As much as angels and venture capitalists like to portray themselves as forward-looking risk-takers, there is a huge herd mentality among them. They often look for social proof that your investment is a good one to make. The best social proof is having many other investors, particularly those they respect, already in the deal.
As you accumulate notable or reputable angels and venture capitalists, make sure to tell everyone. This way, they understand that many smart people believe it's a good deal, making them more comfortable jumping on board without worrying about looking foolish if things don't work out.
Leverage Time Critical Events & Deadlines
Sometimes, you can use time-critical events to get investors off the fence. If there's a partnership opportunity, trade show, or any moment that requires funding to take advantage of, you can leverage it to prompt investment. Investors interested in your company and considering your deal might act quickly if they realize that not putting in money now could cause the entire opportunity to slip by.
By highlighting these critical moments, you can push investors to commit so you can seize the opportunity effectively.
Develop Investor Relationships
Another tactic is to invest in your relationship with investors. People like to invest with those they like and trust, and they are less likely to take advantage of people they have bonded with. So, get to know the investors.
Anyone who has expressed interest should be kept on a regular communication cadence. At the very least, they should receive your monthly update emails. However, if you can talk to them more often about advice, tips, or just to update them on your accomplishments, it can improve your chances of closing that round.
When you finally reach out and say, "Hey, we really need to get that cash now," they're far more likely to respond with, "Okay, here's the check."
Conclusion
By leveraging some or all of these techniques, you will be able to accelerate your fundraising timeline significantly and drive your round to a successful close.
Along the way, you will find a lead investor who will offer you a term sheet. To prepare for that, you should check out this episode on Term Sheet Red Flags to know what to watch for.
