Raising capital is often a stressful, time-consuming process for entrepreneurs. In this market, it seems as though you have to kiss a bunch of frogs before you find the right investment partner for your business. While going through this process, however, it’s important to be mindful of timing.
When it comes to raising money, speed matters. If you don’t move fast enough, you risk losing momentum as well as committed investors. Worse yet, the longer you let your round linger in the market, the more you inject unwanted complexity into the process. If you want a smooth, relatively painless capital raise, be sure to move quickly.
Momentum matters
I’ve gone through three fundraising rounds at BodeTree, and each time momentum played a key role in our success. If one wanted to take a cynical view, it would be easy to claim that there is a herd mentality in investing. Investors flock towards opportunities that are in high demand and shy away from deals that seem to be lingering.
Speed is key to maintaining momentum in a capital raise. There is a domino effect of sorts that comes into play when investors commit to participating. I don’t know if it’s a fear of missing out or something else, but when one large investor commits it seems as though everyone else falls in line in short order. That was certainly the case in the first two rounds we completed at BodeTree.
Investors have short attention spans
Our latest round, however, was a bit different. In the past we’ve looked to high net worth individuals and highly focused institutional investors. This time, we set our sights on a group of more industry-specific strategic investors. The idea behind this move was to find partners who were uniquely positioned to help us execute in our bank-focused channel and support our growth.
The trouble with these unique organizations, unfortunately, is that their due diligence process tends to be longer and more arduous than normal. We allowed the process to drag on for months as they debated the nuance of legal language and other details. During this process, however, our existing investors who have been highly supportive throughout our history grew listless. Months had passed since they agreed to invest, and as time dragged on other opportunities caught their attention.
While most of our existing investors still honored their commitments, a few dropped off due to illness, external liquidity issues, or other opportunities that popped up. I learned that investors have short attention spans, and it’s important to lock them down quickly after they commit.
The longer it takes, the more complex it becomes
The last, and perhaps most important reason why it’s important for entrepreneurs to move quickly when raising capital is that investment rounds tend to grow in complexity the longer they linger in the market. Potential investors who come in late in the game often want to explore various different protections, preferences, or amendments to the operating agreement. This is expected behavior, of course, but it often causes the complexity of the deal to spiral out of control.
The reason for this exponential growth in complexity is that all of theinvestors in a given round generally have to agree to the same set of terms. Now, investors can have different classes of stock or member interests, but ultimately everyone has to subscribe to the same operating agreement. As potential investors go back and forth and drag out the process, entrepreneurs can find themselves in the unfortunate situation of having to constantly adjust things with earlier investors. This can lead to decision fatigue and ultimately the loss of early commitments.
Ultimately, the key is to move swiftly and with purpose when raising money. The prospect of fresh capital or new strategic support can tempt entrepreneurs into letting rounds linger in the market, but generally the risks outweigh the potential benefits. Always remember that speed matters. Move as quickly as you can to secure commitments and move forward to funding. If you don’t you might find yourself encountering setbacks that are difficult to overcome.
Chris Myers is the Cofounder and CEO of BodeTree, a web application designed to help small businesses manage their finances.
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