Startup Fundraising and FOMO

The purpose of this piece is to talk about the importance of FOMO — Fear of Missing Out — for startups looking to raise funding. Since the outbreak of the pandemic, I’ve seen that FOMO has become a requirement to get investors to move as they have a cautious grip on their capital given the state of the world. FOMO is not a new concept to the investment community. In fact, FOMO can be an entrepreneur’s best friend as every VC worries about missing out on the next unicorn. Yet as existential as the term may be, FOMO needs to be real and authentic to work.

I have been investing in startups since 2011 alongside my Moonshots Capital business partner Kelly Perdew who started investing in 2004. We’ve invested in 89 companies between the two of us, and we’ve certainly made investment decisions that were powered in some large or small part by FOMO. To be clear, we would never make an investment decision based on FOMO alone. We have a list of investment criteria here that guide us, so a “yes” decision is based upon multiple factors, most importantly for us being the caliber of leadership of the founding team. But when the criteria is met, it is very often FOMO that triggers the “yes.”

So the question is: how can a startup create FOMO for investors? Here are my top ten recommendations:

1. Get your first set of terms, even if they are high-level terms in an email (versus a legally drafted term sheet). If you’ve been having conversations with multiple institutional investors, the first set of terms will instantly accelerate their decision timelines. There is probably no faster way to get an institutional investor to move.
2. Raise in advance of a milestone that will potentially change the trajectory of the company. If you have line of sight to a pilot converting to a full deployment, or to a big partnership finalizing and being announced, or to a government test that is a gating requirement to a big government contract, you can raise dollars against your pending success which the investor knows will increase the value of the company. In other words, you should invest now before the terms get more expensive after that milestone. VCs also want to be part of (and brag about) that win. The more confidence you have in the success and timing of that milestone, the faster and bolder you can move. But be careful as missing that milestone can also bring the investment process to a screeching halt.
3. Pause the fundraise to focus on sales. Mark Cuban’s number one rule is “sales cures all.” The best thing you can do for your business (and ultimately your fundraise) is demonstrate repeatable positive operational metrics. You can circle back to investors later, or, if needed, reduce burn to weather the storm. And the fact that you are telling an investor “no” (at least for some time) might actually get the investor to move.
4. Raise money when you don’t need it but instead because you need additional dollars to meet customer demand, launch operations in a new city, scale the business, or other “growth” activity. When you don’t have to raise money, you have the leverage. Raising money with limited cash runway shifts the leverage in the direction of the investor. This rule is also consistent with the rule that entrepreneurs are always raising money.
5. Use the word “oversubscribe” (if accurate). You need to be careful here as to not over promise, but if done correctly — meaning you have at least verbal commitments in excess of your target raise — ”oversubscribe” is a powerful word. VCs want to feel like they got into a deal that a lot of people were trying to get into.
6. Use your network to triangulate investors. If you have existing investors, have those investors do outreach to other investors. VCs like to talk with each other about hot deals and share them when they can. Also, use your personal network to reach out to the GP or the Associates or Principals. There is something real about “I keep hearing about this deal.”
7. Diligence the investors. Flip the script on the investor as your discussions deepen. You can ask them for references or you can look at their portfolio (which you should have done before the taking the meeting) and ask to speak to certain founders because their business is similar to yours, they live in your same city, etc. It is healthy for the investor to know that they, too, are a “candidate partner” in the same way the startup is.
8. Run a time-driven process. You might want to say that you are having conversations with institutional investors for a period of time, say two to three weeks, and then are asking for term sheets by a certain day. Or that you will be accepting term sheets anytime and not making a decision until a certain day. There is no guarantee this technique will work as firms might offer you a term sheet and give you limited time to make a decision or else they will pull the term sheet. If this happens, see rule #1 above.
9. Create an incentive for investment tied to a commitment date. This can be a tricky maneuver as you don’t want to signal desperation by having an incentive, but it can be effective. We have seen companies change the discount rate on a convertible note or change the terms of the note after a certain date based on positive activity in the business and the fact that the dollars matter more now then they will later so you are willing to offer an incentive.
10. Establish a firm closing date. This technique is effective when you have a lead investor and are looking to add additional investors into the round. Like all the above, you have to sincerely have the investor traction and interest for this to be effective. An investor does not want the door closed and locked on them so setting a hard and somewhat realistic date is a sign of strength.

FOMO is real. You (and we) would like for investors to clearly see the value proposition of the business and write the check. But it usually takes more than that. The best case scenario is when there is “mutual FOMO,” meaning you don’t want to miss out on the institutional investor as much as the institutional investor doesn’t want to miss out on you.

Moonshots Capital is a veteran-founded venture capital firm that invests in early-stage startups with extraordinary leaders.
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