A lot of people have asked me about my experience fundraising for HeartThis over the last few months. We successfully raised funding from a fantastic group of investors (including Freestyle Capital, Google Ventures, 500 Startups and more), but if I had it to do all over again there are many things I would do differently.
One thing I learned is that no investment is a sure thing until the money is in the bank. You’ve probably heard this before, but it’s 100% true and important to keep in mind when pitching. I’ll cover three examples of how this can play out. Two come from personal experience, and one is a gut-wrenching example from a friend.
Insufficient funds
An individual angel investor expressed interest in backing HeartThis. We went over the details of the business, the team, and all the risks involved, and they remained solidly on board. However, when the round was closing and the time came to provide final details in order to receive financing documents I opened my E-mail to discover a message saying they had to pass for financial reasons. This is something you have to be aware of when dealing with individual angels. Often times they don’t have tens (or hundreds) of millions of dollars set aside specifically for investing, so their ability to invest is much more tenuous.
Failure to close
The HeartThis team has personal connections to a number of professional investors. We began speaking with one such individual early on. Between our personal ties and their warm reception, we were confident that they would participate in our seed round. Despite being positive towards our team and business, they ultimately declined to participate in our seed round. Losing their investment was primarily my fault. Our personal connection to this investor wasn’t through me, so I was less aggressive about following up and building momentum with them than with other investors. Instead, I let our team member with the closer connection manage the relationship. This was a mistake. Investors want to see the CEO take charge so they can have confidence in their ability to lead a new venture in the face of overwhelming odds. By playing a passive role in courting their investment I failed to instill that confidence, and I believe that ultimately led to them passing on our round.
Losing your lead
This story comes from a friend and fellow founder. Their startup was in the midst of wrapping up their Series A funding with a prominent VC leading the round. At the last minute, the firm decided that not only were they not going to lead the round, but they were not even going to participate. This put the company into a full-on crisis. The CEO went from feeling confident about raising a major round of funding to facing the prospect of not being able to make payroll the following month. They were forced to literally beg other participants in the round to not drop out and to instead consider increasing their investment. Anyone who has gone through fundraising before will recognize how terrifying a situation this would be. Most investors are followers, and they want to get in on hot deals that alongside name-brand firms. If you have a top firm back out of leading your round, the majority of other investors won’t even consider putting in money. The emotional toll on the CEO was immense, and the company came very close to disaster.
When it comes to fundraising, do not relax until the money’s in the bank. A positive feeling doesn’t matter. A verbal commit doesn’t matter. Even receiving term sheets doesn’t matter. None of them are legally binding, and there are countless examples of investors choosing not to invest (for both good and bad reasons) at the eleventh hour. Close investors as quickly as possible before they have time to cool off (consider closing in tranches!), and don’t stop actively pitching just because you think the round is filled. Good luck!