By the end of this year we will have gone through at least 5 closes. (that means we will have directly raised capital into 5 different entities).
By the end of the year I will have been involved in well over a dozen total capital raises inclusive of those raised by our portfolio companies. It’s become almost expected that managing investors throughout the process and especially at the end is difficult and commonly leads to people getting squeezed or pissed off.
The reason is that when you are trying to raise a set amount — you will likely talk to everyone/anyone possible to ensure the capital gets raised. It often means that you make capital allocation offers to multiple investors who then all come back and say “yes” at once. At this point, you are about to piss someone off.
You can’t take in more money than was initially being offered (Although some startups do, especially in raising equity capital. This dilutes them further than expected or they need to raise their valuation). So you have to explain to an investor that while at the time of making the offer there was room, in the few days since, someone else committed. What’s best is to set the expectation of that being a possibility from the beginning, but remembering to do that is hard and at the time it seems like a “good problem to have.”
Your other option is to screw the person who confirmed their commitment “first” in favor for the next person who might be a more attractive, value-add investor. It’s a really difficult position to be in. I’ve traditionally favored “first come, first serve.” But we’ve advised our portfolio companies both ways…
Two strategies we’ve undertaken in the last few raises are:
(1) Finding an investor who early on has expressed flexibility in a final commitment number, so that you can accept last minute stragglers who had been offered an allocation early on, but took a few days or weeks to commit.
(2) Investing capital out of the management team’s pocket (not always possible). One of our partners offered to invest a large amount of capital into our last fund knowing he’d probably be crammed down as more capital was raised. In the end, half of his allocation was crammed down, but his flexibility helped preserve the relationship with out other financiers.
It’s a tricky situation, I wish there were more discussions around how to handle it gracefully.