How We Lost $700K Investment by Failing to Follow Our Own Advice

Investors find it very hard to part with large sums of money and even a small reason can kill the deal momentum

“We want to join the round but we will put in $700K instead of $350K”. It was Thursday evening in Tel Aviv and I was on a call with 2 investors. One of them lives in the silicon wadi and the other one resides in Atlanta so the call defaulted to the evening time like many other hi-tech calls. 3 months earlier I met the taller one out of the two for the first time. An entrepreneur who sold two companies but still looked up to one of my existing investors. We made good first impressions on each other and started a lengthy evaluation process during which I met his investment partner – “the professor”. The first reaction to the offer was a huge smile that did not make it through the transatlantic phone line. “I will need to check with the team and get back to you” I replied.

Why $700K is not always better than $350K

Here is a startup cliché you must have heard before. In the world of startups there are 3 rules:
  1. Never run out of money
  2. Never run out of money
  3. Don’t forget the first rule
A company that doesn’t generate any revenues has a very low tolerance for lack of cash and so there are many wisdom pearls like the one above. “You raise money when you can and not when you need” is another one.
So when does more money ever become a bad thing? The response is that it never does. The only bad thing about it is that it might be conditioned with certain rights and control provisions and these are not good. Other than that, there are some people who believe that dilution is bad for your startup. If you read some of my previous posts, you already know that I’m not one of them.

Adapting quickly to a new situation – all or nothing

The offer that the professor and the tall guy made didn’t include 2 options: $350K and $700K. There was only one option – $700K and of course the option of saying no. This was the new situation and there was a need to adapt quickly. The $350K was no longer on the table. Between the real options, the choice should have been easy. Although we recently raised a round, the more runway you have the better your chances to succeed are. However, we just closed a round and that’s pretty much the only time in startup life you can play it a bit hard to get. I came back with an offer that they will invest $600K. I didn’t care too much about the investment amount but I wanted to make sure they will not ask for control provisions and additional rights. “We can’t let them feel we are too eager” I thought.

Deal momentum – negotiating is risky

One of the things you learn about making deals is that it’s momentum driven. All deals are fragile, investment deals are even more and private investments are the most fragile. Convincing someone to transfer a large sum out of his private bank account and getting nothing immediate in return is extremely hard. Therefore, negotiating back drastically increases the risk of losing the deal. 2 days later, we had another call. The two investors responded that they are not going to invest. “We love the company, love the team and we think you are very likely to succeed” Ok, that sounds great where is the ‘but’? “But we feel that we wouldn’t be able to get as much involved as we like”. What they really meant is that they felt they are not needed and investors want to feel they are needed. It’s a small reason and not even a true one but it really takes a small reason to break the momentum.
For SOOMLA, the investment wasn’t critical, as I mentioned, we just closed a round so there couldn’t have been a better time for us to miss an investment opportunity. If you are raising a round that you can’t afford not to have, adapting quickly to the situation and not losing momentum could be critical.
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