Adapted from an article originally published by the author in Inc. Magazine.
Finding investors and raising enough money to fill a round is something many entrepreneurs and their deal leads have to endure. After exhausting friends and family money, most startups are financed using a process that we investors refer to as “syndication.” For entrepreneurs the syndication process can be long, arduous frustrating and tedious. And for deal leads it is not only a lot of work, there is some reputation at risk as well. However bad it is, there is something even worse: going through the process and failing.
Putting in the time and effort to raise money needed to grow a business - without achieving success, is both personally and professionally devastating for the CEO and the team, and is to be avoided at all costs. Although syndication is a fairly straight-forward concept (covered in the previous articles in this series), oftentimes the pitfalls to success are hidden in the nuances. Here are three syndication gotchas that can sneak up on CEOs and deal leads, becoming obvious only when it’s too late to stop the inevitable.
Trap #1: Taking Your Eye off the Ball
Raising money is important, but its never more important than ensuring the day-to-day operation of the business. Do not allow your CEO to take her eye off the ball on the business. Fundraising takes a long time and the CEO needs to find a way to keep the growth going while she fund raises. To ensure that momentum in a round is maintained, a company must be able to keep a steady drumbeat of new developments and demonstrate ongoing progress in the underlying business itself to keep excitement high. This requires an expert ability to balance and set priorities. No matter what, the business must be the number one priority. Raising funds will be a close second, but remember—no one ever invests in a failing venture. Given how demanding both these tasks are, the reality is that your CEO is going to have to delegate some things to trusted team mates and most of the team will need to put in some extra hours on nights and weekends during the fund-raising process.
Trap #2: Relying too Much on Surrogates to Represent the CEO In Fundraising
Your CEO will be trying to constantly maintain a balance between successfully running the business and syndicating her round, so naturally she will seek out different types of work to delegate. Every good leader must learn to delegate, but it’s equally important to know what not to delegate. When investors commit funds to a startup they are building a fairly personal relationship. The lead investor can make useful introductions, but the CEO cannot rely on deal leads and group “point people” to do everything. As a deal lead you should try to help as much as you can, but you are no substitute for the CEO. It’s important for the CEO to personally take time to reach out into her base of individual investors as they commit to the round. She should personally thank them and ask each of them to make 1:1 introductions to other investors who they think might be interested. This is a highly leveraged task that can pay big dividends. Nothing sells a deal like a peer telling you they are in and you should consider coming in too. Coach your CEO to work through these folks by hand and ask each of them to make a couple of introductions – they are much more likely to do it if the CEO makes the request personally. And many investors will be more likely to invest if the CEO asks them personally. I know of at least one investor who never invests unless he is asked personally by the CEO to invest.
Trap #3: Exaggerating Levels of Commitment
If you are working with a first time CEO, early investors in the company are not betting on a proven track record of performance. Instead they are making a bet on the CEO's potential and investing in her word. Being truthful and honest means everything – virtually all investors will head for the hills at the slightest whiff of an integrity issue. So the CEO has to be careful never to cross the invisible line that will deteriorate an investor’s trust in her. In the context of building a syndicate, this means the CEO and the deal lead must avoid the temptation to exaggerate about where people stand. Never overstate the level of someone’s commitment to a deal. Remember, the professional angel world is a small and tightly inter-connected community of people who end up co-investing with each other all the time and knowing each other well. If the CEO overstates or misrepresents someone’s level of interest in her deal, she can be certain that she will get caught in a lie. It is an absolute certainty that a prospective investor will end up calling that person the CEO just “name dropped” to ask them what they think about the deal. If they say they are on the fence when the CEO has said they are committed, the CEO's credibility is gone for good.
Raising the funds to build a solid company is not easy. The pace is relentless and the syndication process will certainly turn up the heat. By the time the company has a little money into their round, it may be tempting to slow down and catch a breath. But this is precisely the worst time to let up. A good fast syndication is vitally important. It builds momentum, and once a round has momentum, it can achieve its syndication goals faster and get the team back to doing what they love best—running the business. By avoiding these three pitfalls, a deal lead can be sure they will be avoiding the worst mistakes that might prevent that from happening.