When trying to get an angel round done, the key question is how much you need to have raised to hold a first close. Most rounds I’ve been involved with have lower and upper bounds, e.g., $400k first close, $750k maximum raise. The goal here is to get to $400k and a first close, and using the best tactics to get this done. Because once the first close is achieved, there is a strong gravitational pull toward the final close as the impact of social proof is felt and “fast followers” jump on board.
For starters, there are two kinds of commitments – hard and soft. Hard means that once wire instructions are provided and final documents are sent, the money is in the account. Soft means there is an express interest to invest, but there isn’t 100% certainty for any number of reasons. The goal is to turn soft into hard, and to get hard commitments up to that $400k level. Clearly a frenzy of interest around your company can turn soft enthusiasm into hard desire and funding, but most companies lack this. So is the goal to create frenzy? Not exactly… The goal is to get a deal lead, preferably a value-added angel with reputation and domain knowledge, to help negotiate the terms for the round and to provide an initial hard commitment. Once this is done, ask two things of this angel: (1) can you use their name and hard commitment when speaking to other investors; and (2) might they leverage their networks on your behalf as part of your fund-raising efforts. This can have very powerful effects both with respect to attracting great investors and speed. Assuming they are fine partnering with you on this effort, your job has become markedly easier and your path a straight one. If, however, you lack such leadership, your job has just gotten much, much harder.
In the absence of a true angel round lead, you, the entrepreneur, are putting the whole thing together yourself. Creating initial terms and trying to get a group of unrelated and independent angels to rally round these terms. Chipping away at the $400k first close threshold with a host of $25k commitments. This is a very tough but well-trodden path. To get the deal over the finish line, you will need to create a catalyst for getting people to commit, sign and wire funds. Otherwise, inertia will ensue, the deal will lose momentum and every day that goes by makes it less likely that you’ll get to a closing. To mitigate against this risk, at around $300k, or 75% of the initial goal in hard commitments, plus a separate set of fence-sitters of, say, $200k, I’d recommend scheduling a first closing, sending out documents and wire instructions and creating an urgency to close. This will focus the fence-sitters attention and you’ll quickly smoke out where they’re at. By announcing a close and providing documents, you’ll create a perception of interest, excitement and seriousness. You can even plant the seed and say “I may decide that this is all the money I’m taking in before achieving a set of key milestones and raising more capital at a higher valuation.” There is nothing more seductive to an angel investor than the prospect of getting into a deal with restricted capacity, so by dangling the possibility of round scarcity those on the fence may well tip into the hard commitment category.
But let’s be clear, you’re playing poker here, and overplaying your hand can have grievous consequences. It you play it poorly and can’t get to $400k after drawing a line in the sand, you will have to peel a lot of egg off your face and do a lot of fancy dancing to explain why you didn’t close yet. This may or may not be a deal killer, but you will certainly lose some face. So you need to be confident that you can clear the necessary $100k from your existing group of soft commitments and fence-sitters. If you’re not, then spend more time pitching new investors to build the pool until you gain the comfort you need. While it is possible to tilt the odds in your favour by using the tactics I outlined above, you need to do so in an atmosphere of prudence, confidence and good sense.
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