Texts with Founders: When and How to Engage Follow-on Investors
Timing matters. So does narrative and what you disclose.
This is the 24th weekly post from Texts with Founders — tested tactics for early-stage startups.
News and Updates
If you’re in SF I’m hosting an Explorer Event this Thursday.
Celine Halioua’s (ODF2) company Loyal has achieved “the most important milestone in the history of longevity biotech.”
“This is the FDA’s first-ever formal acceptance that a drug can be developed and approved to extend lifespan.” (via Laura Deming)
Listen to an archival podcast interview (Spotify | Apple) I made with Celine just one and a half years into starting Loyal which is now four years old. It’s an incredible conversation and shows just how much can be accomplished in a few short years.
Congrats to Celine and the team - save the dogs, save the world!
When and How to Engage Follow-on Investors
I recently received a text from a founder asking how to communicate with potential follow-on investors after receiving a term sheet.
We got a term sheet from a lead!
Quick question re: follow-on funds…
I reached back out to all of our committed follow-ons and they asked for the name of lead (and also the terms).
We're trying to get a few more term sheets and negotiate terms. Should I only engage with follow ons after closing the lead? Or just tell everyone to sit tight until we pick the lead/terms?
It is hard to engage with follow-ons in a meaningful way unless you do one of two things:
1) disclose the lead
2) wait til you've signed a term sheet
Regarding disclosing the lead, It can be risky to share the name of the investor who offered a term sheet to existing investors.
The more other investors know the fund's name and terms, the more that can go wrong. I'm not saying that your existing investors aren't trustworthy, but that the more people who know, the more likely it is to leak out and cause you trouble.
Regarding waiting until you've signed a term sheet, This is the safer route. By waiting until you've signed the term sheet, you put yourself in a position where less can go wrong or cause the lead investor to pull out.
Assume that a bunch of investors who were "excited" about following on do not end up doing so and bow out for various reasons. Often, some of them were not as interested as you might have believed. Sometimes they're underwhelmed by the lead (even if they don't say it); other times, they're overwhelmed by the price. Occasionally, they'll have a change of heart.
I would not read too much into investors who don't end up following through on investing. I wouldn’t get annoyed about it either. It's a common occurrence.
If potential follow-on investors ask you about funding details before you have signed a term sheet, you can say something along the lines of this:
"We're thinking through offers and will finalize terms shortly. I can let you know once that has happened."
If you find yourself in the situation outlined above, you'll likely also benefit from last week's post on reference checking lead investors,
That’s all for this week — thanks for reading.
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“I met so many fascinating people in different stages of their entrepreneurial journey, some still full-time employed, some secretly working on their next thing, some exploring new ideas, and some already with shipped products and revenue.”