Why Shopping Around For Funding Can Be Harmful

Most founders are anxious to raise as much money as possible so that they can create a runway and fulfil their dreams before they run out of money. A financial crunch is every entrepreneur’s major nightmare, and many founders lie awake at night worrying about how they will be able to pay their employees.

This is why they are happy to pitch to anyone and everyone who looks like he may give them money. This can actually become a problem, because if they start shopping deals to every Tom, Dick, and Harry, they will find that it becomes progressively harder to raise money.

While it’s important to talk to as many people as possible, there is a price you pay for being promiscuous, and people will no longer respect you if they feel that you’re willing to do anything in order to get money.

The problem is that the deal starts getting stale after some time, which is why no one is willing to touch it.

The Negative Bias

After all, it’s a small ecosystem, and investors talk to one another, so they know what deals are in play. If an investor has rejected you, and you then go to the next one on your list, he will often use the first rejection as a pretext to reject you again, because he now has a negative bias.

Knowing that someone else has been offered a deal before he has can also hurt people’s egos. After all, no one likes second-hand goods, and no one wants to be thought of as being a second rung investor who is being used as a backup option because the investor of choice said no.

Remember that most investors follow a herd mentality and will play follow the leaders. If one says no, the others are much more comfortable saying no, because the deal is not seen a being hot. They will pass, and will wait to see if there’s someone else who is willing to bite first and take the lead.

When the deal becomes “over-shopped,” investors sense that the company is having difficulty raising money and this stigma is hard to overcome.

In Conclusion

More is not better, and you need to learn to be choosy. Otherwise, you’ll find yourself frantically seeking cash when you’re running out of money, and smart investors will be able to sense your desperation. This will work against you, and you will end up reducing your chances of getting funded even further.

So what’s the solution? The best way to get the attention of other investors and to induce them into signing a cheque is to enhance the perception of scarcity.

Drop subtle hints about how other investors are doing their due diligence on your company so they can invest in you. Nothing gets another angel to move quicker than the fear of missing out!

This post by Dr. Aniruddha Malpani first appeared on LinkedIn and has been reproduced with permission. 

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