Finding investors and raising enough money to fill your round is something many entrepreneurs have to deal with. After exhausting friends and family money, most startups are financed using a process that investors refer to as "syndication." For entrepreneurs the syndication process can be long, arduous, frustrating and tedious. However, even worse than going through the process, is the prospect of going through it and failing.
Putting in the time and effort to raise money to grow your business-without achieving success, is both personally and professionally devastating 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 you, 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 your business. Do not take your eye off the ball on the business. Fundraising takes a long time and you need to find a way to keep the growth going while you fund raise. To ensure that momentum in a round is maintained, you 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, your 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 you are going to have to delegate some things to trusted team mates and plan to put in some extra hours on nights and weekends during the fund-raising process.
Trap #2: Relying too Much on Surrogates to Represent You In Fundraising. As you're trying to constantly maintain a balance between successfully running your business and syndicating your round, you may 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. For example, when investors commit funds to your startup you are building a personal relationship. Your lead investors can make useful introductions, but do not rely on group leaders and "point people" to do everything. They will try to help as much as they can, but they have other things on their plate. It's important for you personally to take time to reach out into your base of individual investors as they commit to the round. 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. Work through these folks by hand and ask each of them to make a couple introductions--they are much more likely to do it if you make the request personally. And many investors will be more likely to invest if you ask 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 a first time CEO, early investors in your company are not betting on a proven track record of performance. Instead they are making a bet on you and investing in your word. Being truthful and honest means everything--virtually all investors will head for the hills at the slightest whiff of an integrity issue. So you have to be careful never to cross the invisible line that will deteriorate an investor's trust in you. In the context of building a syndicate, this means you must avoid the temptation to exaggerate about where people stand. Never overstate the level of someone's commitment to your 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 you overstate or misrepresent someone's level of interest in your deal, you can be certain that you will get caught in a lie. It is an absolute certainty that a prospective investor will end up calling that person you just "name dropped" to ask them what they think about the deal. If they say they are on the fence when you have said they are committed, your credibility is gone for good.
Raising the funds to build the company of your dreams is not easy. The pace is relentless and the syndication process will certainly turn up the heat. By the time you have a little money into your round, it may be tempting to slow down and catch your breath--if only for a moment. But this is precisely the worst time to let up. A good fast syndication is vitally important. It builds momentum and once you have momentum, you can achieve your syndication goals faster and get back to doing what you love best--running the business of your dreams. By avoiding these three pitfalls, you can be sure you will be avoiding the worst mistakes that might prevent it from happening.