One Reason Why Investors Pass on You 🤔

If you’re new to this newsletter, click here to access the rest of my newsletter articles such as the “Why We Passed on this Startup” series, reflections on investing, and tactics on winning in the market. This article is part of the “Venture Investing Expression” series. Now, onto today’s post!

Today’s topic is “Progress of fundraise.” 

If you’ve been fundraising for any stretch of time, you’ve likely had email responses from investors such as, “Come back when you are fundraising,” or, “Let me know when you have XX% of your round committed.” 

✅ Some passes are due to lack of fit. If it’s a lack of investor/founder fit, investors will hopefully clearly communicate that to you.

But some investor passes are due to the snapshot in time of when the investor and founder interact, i.e. the fundraise has not progressed to the point where the investor feel that they have to make a decision. ✅

No one likes to be first. Especially in venture capital. But, why is that the case? 

A Successful Fundraise is All About the Critical Mass of the Movement Behind the Startup. 

Why is it that if you are a startup raising $1M with $150,000 committed, that fundraising is so hard? Investors seem to want to evade speaking with you. It’s excruciating to move the needle in your fundraise. 

But why is it if you have $400,000 committed toward your $500,000 raise that conversations are much, much different? There is a completely different level of kinetic energy around your fundraise. 

✅ Fundamentally, fundraising is all about the critical mass of the movement behind the startup. The critical mass is measured by progress of the funding round. ✅

Venture capital is a high risk game. Thus, like it or not, investors look to external data points to validate their decision to invest or not to invest. With a fundraise that is in the early stages with 10-15% committed, other investors observing the round do not know if the early believers are enthusiastic for the wrong reasons or if they are onto something. The round has not yet reached a point of critical mass. 

Time is Typically on the Investor’s Side 

Remember, the dynamic of startups being what it is, is that typically, time is on the side of the investor. 

✅ That being said, investors evaluate startups by “time urgency to close.” Those startups whose rounds are closing in weeks get a priority decision over the ones who are 15% committed and likely 3-4 months away from closing. ✅

If the startup’s fundraise is about 15% committed, then an investor thinks to himself or herself, “I have more time to act.” 

Conversely, if the startup’s fundraise is about 85% committed, then an investor thinks to himself or herself, “I need to decide quickly what my move is here.” Otherwise, the risk is that the round closes without giving them an opportunity to invest, if they decide they want to do that. 

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