that’s about three times what you have committed. That’s the shortcut, it’s like magic.”
“Investors like to invest in companies with momentum,” he said. “A third, it turns out, is real momentum. Half is a lot of momentum. There are a lot of followers, especially angels, that will come in only once there’s significant momentum in the round.”
Cohen conceded that reaching that milestone isn’t necessarily easy. “Getting the first third is actually the hardest,” he said. “It can take four months to raise the first third, then the rest can take a month,” he said.
A corollary to that is that entrepreneurs might want to aim a little low when setting their goal for their seed round.
That’s okay, he said, because experience with Techstars and other startups has shown that companies that successfully hit their target often raise more than they originally expected.
“Almost everyone who successfully raises money raises more than they set out to initially,” Cohen said. “Asking for less can get you more.”
The art of the soft commit
Investors can be a lot like dates—they like to get to know a person before making a commitment and often like to be courted. But try to get serious too quickly, and it can scare them away.
That’s why eager entrepreneurs should take it slow and look for something less than a full commitment in the early days of their relationship with an investor. It might mean fighting their gut instincts to close the deal right away, but it’s a better way to go.
“The idea is you want to reach a soft commitment,” Cohen said. “Soft commitments are a very, very powerful tool.”
Cohen said the key feature of soft commitments is they come with “specific, well-understood conditions.” If the entrepreneur can’t meet the conditions, he or she should expect the investor to walk away from the deal.
Determining those conditions is a key part of the negotiation. For that, Cohen recommends entrepreneurs learn about reflective listening. It’s a technique often recommended by therapists to make sure couples are on the same page. In the case of entrepreneurs, it means “playing back” key parts of a conversation to make sure there are no misunderstandings over conditions, terms, and next steps.
It’s also a lot like traditional salesmanship as you work through sticking points to close a deal, he said.
Soft commitments can open doors for entrepreneurs, Cohen said. For one thing, they can lead to introductions to people in the investor’s network. They can also allow an entrepreneur to tell others an investor has committed, helping to build up the momentum necessary to raise that crucial first third of a round.
Raising money is hard. Find people who can help.
For all his talk of puppies and dates, Cohen’s ultimate message was one of caution.
“The takeaway that I hope you all get is this stuff is really easy to mess up,” he said. “You have to surround yourself with people who have done this before, because you’re at a massive, massive information disadvantage.”
“Seek people that have real experience in this, either as advisers or… investors that are just on your side,” he said. “Leverage the network you have to find people to help you with this. It’s hard.”
Cohen ended by volunteering to review term sheets of deals he isn’t a part of to help founders understand if they’re getting offers that are inline with the rest of the market.
