Close the loop as you close the funding round
*I am restricting the scope of this piece to an active funding round wherein there is interest from both sides and in-depth interactions have happened, rather than routine first meetings and preliminary interactions. For the record, closure is equally important in both cases.
The last couple of months have been particularly enjoyable for me as a venture investor. With several new deals and follow-on rounds in the works during this period, I have had the opportunity to observe some fantastic founders and co-investors in action. And interestingly, a specific characteristic has stood out that makes them awesome – consciously and elegantly ‘closing the loop’ once the term sheet has been signed.There is enough written about how VCs don’t respond adequately and drop conversation threads abruptly, in context of deals they are rejecting. However, the importance of positive closure is actually two-sided – it applies both to -
(a) entrepreneurs, who need to close the thread with investors that actively pursued them, spent considerable time evaluating their venture but ultimately ended up not doing the deal for a variety of reasons; and
(b) investors, who need to give honest feedback and help out founders that gave them the opportunity to evaluate their funding round and allocated significant bandwidth to help with diligence efforts.
1. The founder’s view
In any funding round, though a founding team might interact with tens of investors, typically there would be 1-2 firms (in addition to the eventual investor) that would have been genuinely interested in the opportunity. They would also have devoted fair amount of effort to diligence, and in the process, the respective deal teams would have established a personal rapport with the founders. In several cases, these deal teams would have either been unable to convince their Investment Committees on the opportunity, or would have lost out to the eventual investor on deal terms.
Even after the round has been successfully closed, these firms would continue to be of strategic importance to the venture for several reasons:
- Given that fundraising is a continuous part of a venture’s life cycle and that several investors participate across stages, there is a good chance that the venture will encounter many of the same names while raising future rounds as well.
- Investors bring strong global networks and relationships to the table, both at the firm and individual level. Even if a particular deal doesn’t go through, the respective deal team can always provide helpful introductions and business leads to the venture going forward.
- The investor community actively discusses promising startups and venture deals with each other, both formally and informally. Having a bunch of investors talk highly about a venture and its founders can lead to positive word-of-mouth and investing vibe.
To take advantage of these benefits, it’s important that post signing of term sheet, the founding team picks up the phone and personally closes the loop with top 2-3 firms that engaged with them the most. Though there is no obligation, it’s always good to hear from founders why they chose one investor over the other (could be valuation or other deal terms, sector focus, pace of closure etc.). Even if there is a banker running the deal, the CEO closing the loop personally is an extremely positive reflection of the founding team.
2. The investor’s view
To be honest, investors are guiltier of dropping the ball on this front as compared to founders. VCs are essentially in a ‘services’ business, with founders as their clients. As with any business, even though things might not have worked out this time around, the same client can again buy from you at a later stage. This client will also talk about you among peers, giving you either a positive or negative word-of-mouth. The same client could also be a potential customer, supplier or business partner for your other clients. Investors can ill-afford to ignore these dynamics.
The key, again, is to actively communicate, irrespective of the deal outcome. In case the investor is rejecting the deal after putting significant effort on it, it’s always helpful to genuinely share key concern areas directly with the founders over a call. This will help them preempt and address these issues with other potential investors that might be in advanced stages of diligence.
Even if founders have signed the term sheet with another investor, it’s important that the investor continues demonstrating commitment towards building the relationship and exploring areas where both sides can help each other. For instance, venture firms can provide valuable customer introductions while founders can be valuable sources of quality deal flow and domain knowledge/ expertise for the firm.
It’s amazing how something as simple as picking up the phone and closing a conversation thread gets overlooked so often by both founders and investors. Deals are momentary but relationships are built for life – internalizing and implementing this thought is what differentiates outstanding entrepreneurs and VC firms.