Quarter full rounds that never finish
Investors typically don’t like to take on risk — that’s an absolute truism. There are the risks to the business that you likely already know, but there’s one more worth mentioning here — reputational risk. Above all else, investors don’t want to look stupid. And if your round isn’t filling up, then investors are going to wonder why nobody else is doing the deal, and if they’re going to end up with egg on their face.
One of the most common manifestations of this phenomenon plays out as follows. An entrepreneur is raising $1M. They get $250k committed from those who know them, then start approaching other investors. With no true lead, they’re just closing money and hoping to get to the million. But the round stalls there. What happened?
Well, with only ¼ of the round spoken for, there’s no FOMO. Investors aren’t afraid of missing the round. So they decide to wait and see what happens even though they like the deal. Then as the weeks and months drag by, the round still is roughly ¼ full. Since it’s not filling, the investor starts to wonder why no other investors are jumping at the deal, and concludes they must be wrong, and no longer want to do the deal because nobody else wants to do the deal, and they don’t want to be the contrarian.
So how can you avoid this? Come up with a scrappier plan. Find a way to get by on $500k and target that. One of two things will happen. 1) You’ll get your $500k, since investors will start feeling FOMO on a $500k round that’s half full, or 2) you’ll get your $500k, and since every investor wants to be the “last check,” you’ll be able to “oversubscribe” or take more money than you “planned,” and take on up to $1M, accomplishing your initial goal.
While this all may seem silly — that planning to raise $500k as a way to raise $1M makes no sense, optics are often everything in venture — and as long as you’re legitimately prepared to make the business work on $500k (rather than holding out for $1M once you hit $500k), you can shift the odds back in your favor.