The Do’s and Don’ts of “Compelling Events”
Originally posted on 8/28/19
Collin Gutman is a Co-Founder and Partner at SaaS Ventures, with over a decade of cumulative experience as both an investor and a startup founder. Prior to founding SaaS Ventures, Collin co-founded Acceleprise, the world’s first pure enterprise tech accelerator. Collin also has been an entrepreneur, having founded WorkAmerica, a social impact workforce development startup. Collin holds a BA cum laude from Yale University, and is an avid DC sports fan.
Speak to any advisor who has successfully raised money and they’ll tell you that investors like to drag out their commitments, watch the company and “hang around the hoop” for as long as possible, and that the only way to combat this is to create “compelling events,” dates by which the investor has to commit, or their money may no longer be accepted.
Generally, the advice is true, investors are slow to move, risk adverse, and generally more of a pain in the butt than we should be. Compelling events, however, are a risky game, and they endanger not just the company’s ability to fundraise, but your own personal credibility if handled improperly. Below are some do’s and do not’s with compelling events.
Set a compelling event that you can stick to. Whether it’s a date, “we’re stopping our fundraise to get back to work on August 31” or a commitment amount “once we close $500k, we’re going to stop fundraising,” set a realistic deadline. Investors then know what the rules are, and if they want in, they need to play by those rules. Assuming you stay true to these parameters (more on that later), your compelling event will be successful — investors will give you a “yes,” “no” or a “we’re not ready yet,” which is another word for “no,” in time. And yes, a no is preferable to a “maybe.” Counting on a maybe to save the company has killed many great startups.
Evaluate your options realistically. If you don’t have a strong lead on $1M, don’t set out to close the round off at $2M. If you don’t have a fund doing deep diligence, don’t set a final commitment date two weeks out. Investors know how long fundraises generally take, and how rounds come together. So if you seem to be setting an unrealistic goal, your investors will completely disregard your compelling event, and claim to be “kept in the loop as things come together” — another word for “you’re farther away from closing than you think, and we’d like to see how things develop between now and then.” In order for a compelling event to actually move an investor, it has to be credible.
Communicate if things change. Sometimes unforeseen things happen. If you tell investors well in advance they have more time than expected, that’s OK. If you hope that having a compelling event will get investors in…
Hope that a compelling event is what closes the round. This is one of the most common mistakes entrepreneurs make. They think that by drawing a line in the sand, they’ll get their investors to close. Often, the entrepreneur knows they likely won’t hit their milestones by a certain date, but rather than changing their milestones/goals, they rely on investors lining up because of that date. What happens is the date comes and goes, and the fundraise isn’t complete. You either need to close with not enough money, or extend your deadline, which leads to…
Remain open to cash after your deadline. This makes you lose all credibility. If you tell investors you need commitments by the 15th, and you’re still accepting commitments on the 16th, you’ve definitionally lied to your investors. In the best of cases here, the investor decides not to follow through with their commitment, and all you’ve lost is their commitment and your credibility with an influencer in the community. In the worst case, they still invest, and you begin a multiyear relationship with an investor from a place of mistrust — it’s hard enough to build a company where your investors are all behind you, it’s nearly impossible to build one when you have investors who don’t feel comfortable vouching for you. Future funds will call your existing investors and ask for the skinny, and if they won’t put their reputation on the line for you, your fundraise is dead in the water. And investors know there will be more deals and that venture is a multi-round game — they value their credibility over “selling” one deal to future investors.