Fear of messing up

I was recently speaking with one of our entrepreneurs. The company is raising a new round and several investors have verbally stated that they would like to invest in the company. However, no investor has sent in a written term sheet yet.

In markets where there’s abundant capital like the US, investors act fast to make investment offers. They know that if they like a company, it’s likely that a few other investors do as well, and they don’t want to lose the deal to a competitor. Investors in markets with abundant capital are driven by a fear of missing out.

In markets where capital is scarce like Turkey, there’s little time pressure on investors to act fast. If they don’t make an offer, there are only a few competing investors who might.

In addition, the lack of other investors serving as social proof causes many investors to question their investment decision. Even if they believe that a company is a great investment opportunity, the lack of other investors that feel the same way makes them question themselves. What if they’re wrong? Investors in capital scarce markets are driven by a fear of messing up.

The obvious solution to this is for capital scarce markets to transform into markets with abundant capital. However, this is a structural change which requires that early investors achieve great returns. The exits and the strong underlying performance of the companies that have yet to exit show that this is indeed possible in Turkey. However, this is a multi-year transformation which is just getting started.

The short term solution, and that which I recommended to our entrepreneur, is to clearly communicate your fundraising timeline to investors. Rather than leave discussions open ended, clearly state how much runway you have, when you’re looking to close the round by (ideally with 3-6 months of runway remaining), and until which date you’ll be accepting term sheets to allow enough time for due diligence (1-2 months depending on how big your company is and how much you’re raising).

This is also a great way to discover which investors are serious about investing and which aren’t. The investors who try to operate outside of the timeline are likely the ones who aren’t really interested in investing. Those that are serious about partnering with you will respect your timeline.