How To Close Your First Investor?
No one wants to be left out in betting their capital on the next big thing. But no one wants to be the first one to assume the risk. It's just like Karaoke. Someone sings a song first and others follow the trend. If nobody is confident enough to start, be prepared to witness a quiet night. Indeed, the typical first question out of a VC's mouth when talking to a startup about investing is, "Who's leading this?"
The $19 billion acquisition of WhatsApp by Facebook fascinated me not just for its sheer size but because the primary investor, Sequoia Capital, which backed it mostly alone. This is highly uncommon in the "me, too" world of venture capital, where everyone appears to invest as part of a syndicate. The question points to a paradox about VCs in general. Everyone wants to tout that they're the best at sniffing out the next WhatsApp or the next Flipkart, but when it comes to putting money behind that startup, they want some other firm to have their skin in the game first.
A new startup is like a freshly baked pudding. Although everyone wants a piece of the pudding once it's all baked, but nobody wants to dirty their hands in the batter. On the flip side, everybody loves to work with a half-baked pudding. You get to reap the benefits while not taking the brunt, just in case it flops.Nobody in the VC world likes to go at it alone. In the eyes of entrepreneurs, this makes VCs look like a scared bunch, but there is a rationale to this: It hedges risk. By syndicating an investment--even if the total amount invested is small enough for a firm to manage on its own--there is a bigger pool of funds available for future funding rounds or, alternatively, a reduction in losses should things go south.
The more investors at the table, the more they can share the cost and time of conducting due diligence and hammering out term sheets. This is what venture capital firms do at their core: research and negotiate. And it's incredibly time-consuming. When faced with the choice to either take a deal from start to finish or work on one that is even partially vetted, the latter will save a VC precious amounts of manpower. A prenegotiated deal with a lead investor potentially curbs the need for diligence altogether. Since many deals die at the negotiating table, if late investors don't like the terms being offered on the front end, they can walk away without having to put in the time to get to know what, exactly, they're walking away from.
This is why securing that first investor is critical to your fundraising efforts. The time that a lead investor puts into research your company and its market potential sends a signal to the rest of the VC world that you've got an idea that's good enough for peers to devote precious time and resources toward investigating.
I bring up this herd mentality to make you aware that it's foolish to pitch an all-or-nothing investment opportunity to any firm. Instead, take that first offer (if you're lucky enough to get one), and keep pounding the pavement for more dollars. If I know what I'm saying, you'll find a lot of people who once said "No thanks" suddenly saying "Tell me more."