Raise More by Asking for Less

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Lloyd and Mary from Dumb and Dumber

“I want to ask you a question… straight out, flat out… and I want you to give me an honest answer. What do you think the chances of a guy like you and a girl like me… ending up together?”
“Well, that’s pretty difficult to say.”
“Hit me with it! I’ve come a long way to see you, Mary. The least you can do is level with me. What are my chances?”
“Not good.”
“You mean, not good like one out of a hundred?”
“I’d say more like one out of a million.”
“So you’re telling me there’s a chance.”

- Lloyd and Mary in Dumb & Dumber

One of the biggest mistakes seed-stage entrepreneurs make is asking for too much money.

If you are an entrepreneur, you have probably heard from countless advisors and pseudo-advisors that you should raise enough money for 12-18 months of runway, have a plan for use of these proceeds, and understand what milestones are needed for profitability or another round of financing.   You probably also have heard that startups almost always require more capital than called for in an original business plan.  So raising more money typically makes sense.

But just because you want to raise more money doesn’t mean you should ask for it.

Investors tend not to be as bold as entrepreneurs.  If you have invested in a couple angel deals, you likely have been burned at least once.  A classic mistake angel investors make is backing an entrepreneur early and then having him or her fail to raise the rest of a round.  That’s one reason a lot of angel investors are gun-shy.

Most investors secretly love to be in an oversubscribed round.  An oversubscribed round makes an early-stage investor feel smart and validated.

So what does this mean for you?  If you want to raise somewhere between $750,000 and $1 million but think it might be hard to get to the top of that range, ask for something less and aim to be oversubscribed.

Which sounds better?  (This is not a trick question.)

(a)    I am raising $1 million.  The good news is that I have $250,000 committed and a little more than that soft-circled.   I would love to have you participate for any amount you would like.

(b)   I am raising $750,000.  I have $250,000 committed and most of the rest of the round soft-circled.  I would love to have you participate and would try to make room for a small investment if you are interested.

The first pitch isn’t bad.  But I guarantee you that many angel investors will start thinking about their kid’s baseball game later that day as soon as they hear $250,000 committed on a $1 million target.  The second pitch creates more of a sense of urgency using the same fact pattern.  The second one says, “This train is leaving the station.  Hop on if you want to get a seat.”

Now, here are two important caveats.  First, setting a lower target is different than misleading about dollar amounts raised or other elements of the financing.  If you say you have a certain amount committed and then an investor later finds out you don’t, that’s a red flag.  You can be strategic about marketing your financing without sacrificing your integrity.  Second, this method works less well with venture capitalists who have large dollar amounts that they need to put to work.  In that case, having only a small amount of room may preclude an institutional VC from investing.

If you are targeting angels and super-angels, the strategy of lowering your target may enable you to raise more money, more quickly.