Rolling Closes And A Twist On Exploding Offers

By now, we all know seed stage fundraising doesn’t happen in rounds — seed funding is a process — and it’s dragged out for many weeks, many months, and sometimes years. Founders and companies issue notes for debt which converts to equity when a round is priced by a bigger fund (most often), and those notes are usualled “capped” at some price. Likely, you’ve read about this before and/or can find more information on the intricacies of notes and capped rounds on the WWW.

I stumbled upon a lesson in raising Haystack. Because the fund is very small (like, really small) and because the LPs are mostly just individuals I know personally across the country, I can also raise the fund in a rolling model — though I can’t “split caps.” What I initially found — like a founder raising money — is that oftentimes people can wait a bit before committing to see who else comes in. No problem, but after a while, I realized it could encourage behaviors that are counterproductive.

So, instead, when someone approaches me about the fund, and there’s mutual interest, I politely mention that from the time we discuss any details, I give the person about one month to decide. It’s enough time to ask questions, poke around the web to learn about me, and to make a decision. I have now most certainly informed people after their month is up that I will happily save their name for the next fund. No harm, no foul — but I retain control and peace of mind. It sends an important signal.

Seed-stage founders could do something similar in an era of rolling closes. Instead of meeting millions of early-stage investors like me and trying to herd us like blind mice, why not put a clock on the offer? There’s so much seed funding going around, don’t worry about saying “no” to someone. It’s simple — you meet someone who inquires about your business. They dig in a little and explore. You gently suggest that your company policy is to give early-stage investors about 4 weeks from time = 0 to decide. After that, it moves on to a different “cap.” The key here is that one has to be totally comfortable with just walking away from an investor — and I’m writing this to underline the fact that oftentimes it is entirely OK to do so.

A founder I know well struggled for 8 months to just get $500k. Brutal struggle. Now, he’s in YC. When word spread, he had plenty of offers, of course. But, many of those people early didn’t invest, and he let them hang around the hoop. Now when those folks ping him, he’s quoting a higher cap. Time is money.

Haystack is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2018 Semil Shah.

“I write this not for the many, but for you; each of us is enough of an audience for the other.”— Epicurus