Early-Stage Fundraising: Get the First Term Sheet Quickly

An important principle of early-stage startup fundraising is to get the first term sheet as quickly as possible. Once you have the first offer, you gain the initiative. ---- One of the most important factors in successful early-stage fundraising is securing that first statement of investment intent—a term sheet. You can think of it roughly as a job offer. Your fundraising situation is completely different depending on whether you have that first term sheet or offer. Getting it quickly is therefore crucial. This principle yields several practical guidelines: As with scheduling job interviews, first identify a broad set of firms from which you would like to raise money, then prioritize your meetings. Paul Graham has said: “One of the mistakes I most often see when helping friends raise money is that founders do not plan investor priorities or meeting order at all. They meet whoever happens to be available. That is very unfavorable to their fundraising.” Imagine you are looking for a job and have identified twenty potential employers. Given a choice, you should not begin with the one you most want to join. You may not yet be familiar with common interview questions and processes, making a poor initial performance more likely. A better process is to try companies you want somewhat less, whose interviews are less complicated, or whose selection standards are less demanding. You gain experience, and because their requirements are lower, they may offer you a position first. You then approach more difficult interviews with greater confidence and may perform better. The same applies to fundraising. The first or second investor you meet should ideally not be your favorite, but someone friendly, willing to give advice, with a straightforward process and the ability to make an offer quickly. Once you have a term sheet, the rest becomes easier. Conversely, do not leave your favorite until last. In job hunting, the company may already have hired someone. Investment firms may not have a fixed limit on their number of investments, but startup and investor circles are small. If you spend a long time raising money unsuccessfully, meeting rejection everywhere, other investors will eventually hear. The best investors understand that great ideas are often counterintuitive and initially unpopular, but the “best” are a minority in any field. Planning priorities therefore improves your odds. In one essay, Paul Graham describes a way to prioritize. Assign an investor two parameters: the likelihood of investing in you—or the complexity involved—and the weight that investment would carry. Your expected value from that investor is the product of the two. There is no fixed rule about whether to meet high- or low-expected-value investors first. The goal is an early first offer, but you also need practice. You might start low, then move to medium-high, then high. Or start medium-high and then high. Neither sequence is mandatory. An influential investor might prompt many others to compete for your round, but demand exceptionally high standards, take a long time to deliberate, and require many meetings. A lesser-known investor might invest less but be easy to persuade and quick to decide. Their priority or expected value could be similar. If an investor is little known and average in ability, yet still creates endless complications before investing, you should know where to put them in the priority order. Do your homework before fundraising. 丨Only Written Investment Agreements Count To get the first offer quickly, process and priorities matter. The next point is this: if an investor has not provided a written document stating an intention to invest, nothing they say counts. This is a problem many founders encounter. The reason is simple: entrepreneurship is anxiety-inducing, and fundraising can be the most anxious part of all. We become eager to believe even the smallest sign of hope or good news. But bluntly, whether an investor says, “We think your venture is excellent; we’ll discuss it internally,” “Send the data and we’ll decide after reviewing it,” or even, “No problem—we will invest this amount for this stake; it’s settled,” it is as though nothing has been said. Unless all the investment terms are written down for you to sign, every other promise is empty. This is not necessarily an accusation of dishonesty. Investing is complicated and often involves a collective decision. The person you meet may not be able to decide alone. Early-stage startups also develop rapidly. In a week or two, the entire situation may change, so investors sometimes genuinely want to observe a little longer. For all these reasons, investors have strong incentives to keep you waiting. YC’s slogan is blunt: unless the investor says yes and puts it in writing, treat the answer as no. 丨Create a Concentrated Competitive Process I have repeatedly emphasized getting the first offer. Fundamentally, fundraising requires a competitive environment. Arrange the process within a relatively concentrated period, then obtain the first offer to gain the initiative. If nobody else follows, you can accept it. If other investors do follow, you have much more room to negotiate price and terms. Once you have a good competitive environment, circumstances can change dramatically. A firm that was too busy to meet two weeks earlier may suddenly make all its partners available next week. Harsh terms an investor previously demanded may automatically disappear once you receive another offer. This is part of business itself: cooperation and competition are constantly evolving. That is the third fundraising principle: create a concentrated competitive process. #得到 #張瀟雨商業經典案例課 (Dedao; Zhang Xiaoyu’s Classic Business Case Course)