3 Frames That Control Small Check Investors
Do you know the biggest myths about raising small rounds from small investors?
Before we get into today’s Playbook, I wanted to say THANK YOU to all the people who’ve participated in these polls so far.
I read every single comment you leave, and today, I’m going to do a “Mailbag” edition and respond to some of the most interesting or insightful ones.
Let’s dive in.
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The Pitch Anything Playbook:
Yesterday, I asked our Pitch Anything Playbook community what the SMALLEST check size they’d take in a $5m round…
And I’ve gotta say, I was a bit surprised by the results – and some of your comments 😛 – so far.
About 24% of people who took the poll are willing to accept a minimum check size in the $50k-$100k range…
And based on some of the comments I read – which I’ll be responding to some of them below – there’s way too much confusion out there around working with small balance check writers.
If you have High Status and you’re using the Pitch Anything Process, small investors can be an extremely lucrative channel for your capital raising program - no matter what stage you’re at.
If you have low Status… small check writers are going to drive you insane.
The secret to tapping into this lucrative retail market of small balance investors?
Frame your pitch as a financial product that is easy to understand, and easy to buy.
Because if you are a master of pitching your deal – and have tight securities documents that provided all the required disclosures – you can pick up $25k-$100k checks in 15 minutes of easy work.
Pretty soon, 25K + 50k … 50k +100k …. that turns into real money that other entrepreneurs and VC would be jealous of.
This is why I want to unpack some of the underlying reasons why you’re experiencing friction in general when raising capital, especially from small balance check writers.
In one way or another, you’ll see that all of my responses below will come back to “Fix All Your Money Problems using The F.A.S.T. Funding Method.”
Mailbag #1: “… takes too much time…”
On the surface, this argument sounds completely logical because on a dollars-raised-per-hour basis, because if I can get a $500k check for 4-hours of work, that’s better than just $50k.
But the truth is, the $500k - $1m is one of the hardest check sizes to get.
Look. $500k is real money. This type of check requires some actual hard work by the investor just to fund you: he has to get that money liquid (It’s likely not sitting in cash), it has to go through tax, legal and accounting.
By the way, I’ve found that “tax, legal and accounting” are the Three Wise Men telling your investor NOT to do your deal - another hurdle for you to overcome.
Let’s talk about who this $500k check writer actually is (and how he’s probably within 12 miles of your office:)
He is a $100m+ Crazy Rich Guy (CRG): Guy or Gal, these can either be great passive investors or a complete nightmare to have on your cap table. If you don’t know how to control these personalities – and can keep them away from you, your team, your clients, and the office – avoid them entirely at this stage of your business.
This is an Industry insider in whatever business/market you do: These investors are in your deal because they have some sort of experience in the thing you do, can underwrite the deal themselves, and if something goes horribly wrong they can step in to save the day and manage the downside risk. You’d be surprised by the number of companies I’ve seen that are run by an investor who had to step in and take over to protect their investment.
Both of these $500K “local-area” investors sounds appealing, but come with some weird problems…
Mainly, they’re big enough to push you around on terms, and then wind up with too much ability to influence you and your decisions.
That’s the real upside to getting good at smaller check writers – Because no one will have any substantial equity or voting rights, you can significantly reduce the risk of you losing control.
Summary: What I can clearly read from this comment is that they don’t have a 15-minute pitch with a “toughluck” time frame.
Ultimately, they are giving control of the process to small investors.
This is a slam dunk case of “not having a scalable process” for running a capital raise.
Because here’s the reality of being a Captial Raising CEO. At all times, you’re doing one of three things.
Raising a Round: You are currently running a process that involves moving cohorts of investors through defined stages – Introductions, Submit an Indication of Interest, Due Diligence, and Submit a Letter of Intent.
Closing a Round: You never want to arrive at the closing table with ONE investor. This is a recipe for getting re-traded at the last minute when you have no other options and you’re out of time. Make sure you’ve got optionality at closing by having enough buyers at the table.
Pre-selling the Next Round: There is almost zero chance that you will only raise one round of capital for the remainder of your business (unless you sell it or go bankrupt). Any time you’re not actively fundraising, you are expanding your investor relations program to get yourself prepared for the next round of financing, whenever it is you finally need to tap into it.
If you don’t have these three processes completely nailed, it means you don’t have a way of corralling all these interested small check writers into a single fundraising event.
If you feel like you’re hand-holding small investors, what’s probably happening is you’ve allowed the investor to feel like a big shot Venture Capitalist, and he feels obligated to ask tons of hard-to-answer questions… eg. “what’s the statistical basis for your market size assumption.”
You don’t need to let small check writers act like big ones. They are buying an off-the-shelf “retail” investment product from you that provides limited access to a great deal. That’s the ONLY conversation.
The whole point of moving to smaller check sizes is you don’t have to be as concerned about the investor. You don’t need to meet his grandparents, take him to dinner at Mastro’s Steakhouse and debate whether or not Kirk really did find God in Star Trek IV.
Here’s the key takeaways about
Take the investor. If you don’t like them later you can just kick them out and give their money back.
It’s not enough money for them to track monthly about whats happening in the company
You can bundle them up into one line item on the cap table called “Common A Retail”
You’re not giving up board seats, observation rights, significant voting rights, or control provisions
Most important, THEY are signing YOUR documents, not the other way around. This means you dictate price AND terms… a very rare thing for a small company.
“How do I package a $5m round, $50k at a time, and still have time to run my business?”
If you’re an operating company who is highly interested in raising your next round from small balance investors…
I’ll be publishing some more content about this topic as long as there’s participation in these polls. Take
How much time per WEEK do you spend on capital raising activities?
Pick select an option below. On the next page, leave a comment and let me know whats working (and whats not)