Soft Commitments? They suck. Why, When, and How...
Managing expectations around these insidious investor promises
I hate to do this.
In one short essay, I'm going to crush the dreams of many a fundraising founder. How? I'll smush them all just by shedding some light on what many founders have been using to fill their sails. An insidious little thing called a "soft commit." And I'll do it with nary a juvenile sexual reference, no matter how tempting it might be.
First - what is a soft commitment in fundraising?
A soft commit is when someone expresses interest in investing, but isn't actually legally binding. More importantly, it's a commitment made where the investor KNOWS they likely won't hold their end of the commitment. This is done by vaguely referencing conditions such as the company finding a lead investor, raising a certain amount of capital, or meeting certain performance indicators.
The crappy thing is even when founders do meet those vague conditions, the softly committed investor can still back out easily and without repercussions. Don't believe me? Here are just a few of the many reasons why an investor might back out of a soft commitment:
Another deal came up, sorry. Investors are constantly evaluating new investment opportunities, and it's possible that another deal came along that they found more attractive. With limited capital to deploy... these things happen🤷♂️. They'll apologize for the crappy timing but it won't make their initial soft commitment any more solid.
Lack of time. Investors are busy people - surely you understand that??? When it comes time to turning their soft commitment into a hard one... they could very well reference reference a lack of time to commit to confirmatory due diligence.
Lack of capital. Investors may not have the capital available to make a new investment. "Hey, back when I made my commitment to invest, I had the capital. Now I don't. You can't fault us for that right??"
Loss of interest. Finally, investors may just in so many words share that they lost interest in your company. "Gosh, so much has changed in the market! I learned this new thing about competitors! I didn't realize X Y and Z! I have to pull out of this one... you understand, right?"
Even bringing soft commitments up to a potential lead investor isn't that helpful because people know they can be made up without any real way to verify it. For example, a founder could claim have a million dollars in soft commitments, but really only have half a million, and they just rounded up. It's a tricky situation.
Turning soft commits into hard commits 😏
When it comes to turning soft commitments into firm commitments, there's really just one main approach with a few variations. The key is getting people to believe that a deal is happening, and that they might miss out if they don't join in. They could either lose the deal itself, or lose out on favorable pricing. There has to be a sense that things are moving forward.
For example, if you have a lead investor in place, you can go back to the soft commit folks and let them know that the deal is coming together. Tell them that there's a limited allocation for others to join, and that they need to hop on board. You've got to make them feel like it's filling up quickly. That gets the ball rolling and encourages people to lean into the deal.
Another tactic, often seen in party rounds, is to gather a bunch of soft commitments and tell them there's enough interest to make the deal happen. You're going to price it, implying that the demand is there. Ask if they want to be a part of it. If you can get the first one to say yes, you can then go to the others and say, "Hey, we already have a couple commits, and we're talking to ten more people, including you. Do you want in?" That gets the ball rolling and encourages people to lean into the deal.
Common mistakes I see founders make... (they're too soft)
The biggest misconception that founders make around soft commits is thinking they are a lot more firm than they actually are. This can lead to all sorts of problems and mistakes:
Projecting Naiveté : most experienced investors think very little of "soft commits" or a "soft circled" amount. Many founders will come in hot and excited about those soft commits and by doing so show how green they are. This isn't a good look.
Bad planning: If you think you have more money coming in than you actually do, you may make bad decisions about how to spend your capital. For example, you might hire more people than you can afford, or you might invest in projects that aren't a good fit for your company.
Easing up on the fundraise: If you think those soft commits can be counted on, you might not put in the effort to complete your fundraise with as much urgency as you would if you properly counted the risk adjusted dollar count of money close ($0). Makes sense because fundraising is a ton of work that takes away from other important tasks. So any indication that they could safely invest less time can cause founders to lay off the fundraising gas pedal. This has the potential of killing the rest of your raise.
Just kidding... these is a hard takeaway. Soft commitments aren't reliable. Don't start counting your chickens before they hatch. Don't stop working hard to raise capital just because you have a soft commitment or even a series of soft commitments.
Soft commitments are a common part of the fundraising process so approach them with caution. If you field them with full awareness of the potential pitfalls, you'll be able to play the game strategically and potentially even turn these soft commitments into firm ones. By maintaining open communication, applying pressure, and employing strategic follow-up techniques, founders can successfully navigate the delicate middle ground between soft and hard.
The simplest advice I can leave you with around soft commits? Assume they don't mean much and be pleasantly surprised later on when they do become money in the bank.
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