When an Investment Disappears
A startup story about fundraising from angels and other small investors
Mike Isaac of the New York Times wrote this article “For Start-Ups, How Many Angels is Too Many?” — it brought back some memories:
When many angels are involved, for example, no one investor may feel compelled to help the company if it runs into trouble.
Flashback to end of 2012/ start of 2013, Optimal, Inc.: We had closed all of our Series B round from over 10 different angels and small funds, except for one small fund who’d committed to invest $500,000 to finish things up and hadn’t yet wired us their money. I’d met them through a friend who headed investments for one of their Limited Partners (LPs). While they were considering investing in our round, we’d spent some time with them as well as two of their LPs, and all three of them made valuable introductions to potential customers for our social media ad optimization technology, including a promising introduction to one of the world’s largest entertainment companies.
We’d received the money from all our other investors, but this group’s money was still “on its way”, “any day now” for several months. After we announced the funding in January, quickly we were in February, March and then April. Their reasons for not sending the money were murky and we never got a full explanation, but it appears that the money was offshore and caught up in some kind of compliance situation that made it difficult to bring back onshore. The call eventually came in: they would put in less than $50k instead of the planned $500k. Stranger still: We got a wire notification from them, that turned out to be sent to the wrong account at our bank. In the process of sorting it out and getting the money put into our account, our CFO got connected with the other accountholder which was another startup company left in an even worse situation by this fund. They were expecting a big wire like we had been, and worse, they had to send the small one they got over to us.
Our total fundraising was about $5.0 million without this piece and we were growing revenue like crazy, so why was I worried? Well, based on the total round size we were expecting, we had a commitment for a new accounts receivable and revolving loan facility from a bank to help us with working capital due to some of our large customers being slow in paying. This is an expected but chronic issue in the advertising space and hence, in the adtech vendor space we occupied. Without the facility, given the large ramp in the business, things might become tight for us money-wise around the middle to end of the year.
This sucked. We’d closed our round (with everyone else) just a few months before but without a better line of credit in place, we were now short of where we thought we needed to be cash-wise. The business was doing very well — and I was very proud of how the team was executing on both sales and technology fronts. But now, I had to go back to the existing investors and ask them for help to close the gap.
This is where relying (beyond a seed round) on a series of smaller investors can be sub-optimal. They don’t have the money set aside ahead of time to make the needed follow-up bets to keep their investment alive.
Several of the existing investors stepped up without hesitation and for that I was and will be forever grateful (I didn’t think it would be as difficult given that we were well ahead of our revenue and other forecast metrics, but nobody likes surprises!). But a few I’d expected help from told us (inter alia) that they were “fully committed” based on what they’d invested so far. Most VCs have money set aside for future investing in a company that performs, including hopefully being able to get pro-rata rights to continue to invest in companies that are doing well.
One of the investors said they couldn’t put more money in, but offered to introduce us to several outside investors they thought could help. I asked the investor, “what’s the first question they’re going to ask going to be? Are you investing?”, and since his answer was “no”, he couldn’t really put much of a spin on that one, so I told him thanks but I couldn’t take his intros.
After some money had come in, over a few weeks of back and forth, one deep-pocketed angel offered to put more money in, but wanted to be granted additional “advisory shares” in exchange for “leading” the add-on round, which would essentially lower their effective price per share at the expense of the other investors. I wasn’t comfortable with this at all — and wrestled with it (for what feels like, but wasn’t really, a long time) before deciding what to do. I remember the knot in my stomach while I tapped out the email on my iPhone at 11pm at night sitting on the stairs, telling them we would be happy to have their investment — but not on terms any different than the other investors who’d already put money in.
That was a tough email to write because it left us with only one option, essentially — which was to thread the needle by being profitable or close enough to it with the money we had, to make it. Which, thanks to an amazing CFO and continued execution we did! Our great team and a lot of luck got us there. If our metrics and momentum hadn’t been so great, it wouldn’t have seemed as crazy as it did at the time, but then we also probably would have already disappeared.
As others in startupland have said, seemingly small things can kill you even when stuff appears to be going well. My biggest lesson from this was that it’s totally okay to bring on smaller investors, but as you grow, have at least one or two bigger professional investors that (1) you trust, and trust you to do what you say you will, (2) have deep pockets of investable dollars, (3) you’re sure your investment is also meaningful to them, and (4) thus, you know they will have your back when things go sideways but are still salvageable!
Second biggest lesson: it’s okay to share and vent with other startup founders, because as I’ve learned this kind of nonsense happens a lot more than it is talked about or written about.