Chapter 6 - Negotiating the Deal
IN THIS LESSON
Using Your Wins to Fill Out Your Round
A phenomenon called the “herd mentality” is prevalent among venture capitalists. This means that many VCs are inclined to follow the crowd of VCs (aka “the herd) who are investing in a certain company. A perception exists that it reduces risk; the VC who follows will not be blamed for having been “the first” to take a chance on a new company.
Because one investor, who has credibility, has chosen to invest money to a start-up, it often triggers questioning and assumptions from other investors – What does he know that we don’t know? He must have done due diligence, so it must be a safer bet.
You can use this type of inclination among VCs to your advantage. Here’s what you do: when you get your first major investor locked in, promote it, promote it, promote it. Your “win” can tap into the pulse of the herd mentality and cause other investors to look at your company afresh when normally they may not. If your lead investor is a highly respected VC or you have a celebrity investor, you can leverage it to the hilt, attracting more investors (Whispers: “Oh, do you know Mark Cuban invested in that start-up in Austin?”) Don’t hide or downplay your wins. When opportunity arises, you need to strike.
However, this herd mentality among VCs can go down a bad direction for VCs themselves. Case in point – Theano’s, a healthcare technology company that had raised $700 million from VCs and private investors, resulting in a $10 billion valuation at its peak in the 2013-2014 timeframe. Early investors triggered an investing spree in this company that claimed to have developed innovation blood testing technology. In a stunning twist, by 2018, the company shutdown operations because the whole thing was based on a lie. The company was a scam. Their technology did not live up to the hype. The herd mentality had worked against the VC community.
VCs see themselves as the source of “smart money,” but given the Theranos example, it is no less vulnerable to biases than a normal investor. But it proves that investors feel comfortable with “social proofing” – evidence that other investors are willing to take the risk and invest. They let their guard down a little bit because “everyone else is investing.” It seems like the “safe” thing to do.
Many times, it may be the right thing to do, and when they invest in your company because of a domino effect from your win, you’ll be feeling good that the big win was what made your job easier to fill out your round of fundraising.