The Herd Effect in Fundraising

• Every dollar raised reduces a startup’s risk of failure, making it a safer bet for subsequent investors.

• After your startup raises its first significant check, the company’s value literally increases because it now has more capital to fund operations and growth.

• Practical Tip: This logic justifies raising your valuation for later investors. Early investors took on more risk and deserve higher returns. However, tread carefully—some investors resist paying a premium and may walk away if they perceive an imbalance.

• Success in fundraising often boosts founders’ confidence, and confidence is contagious. Investors frequently base their opinion of a startup on their perception of the founders’ conviction and capability.

• When fundraising is going well, your increased confidence becomes palpable in meetings and pitches. Investors, particularly those with strong people-reading skills, quickly pick up on this energy and are more likely to commit.

• Evaluating startups is challenging, even for experienced investors. Many rely on signals from other investors to validate their decisions.

• This tendency leads to the creation of “hot deals,” where startups attract more investor interest than they can handle. These deals aren’t necessarily the best opportunities; they simply benefit from amplified momentum.

• As one investor progresses toward an offer, others may feel pressured to act quickly to avoid losing out.

• This urgency, while beneficial for founders, can create a frenzied pace that must be carefully managed. Investors who act under pressure may later experience buyer’s remorse, which can disrupt your fundraising efforts.

• A stampede of investor interest doesn’t guarantee a strong company. Some startups that spark intense competition among investors fail spectacularly, often due to unrealistic expectations or poor execution.

• Conversely, many highly successful startups struggled to gain traction in their early fundraising efforts. Founders should focus on building a great business rather than orchestrating artificial hype.

• Investors, despite their professional façade, can be deeply emotional. Indignation is a common reaction when they feel slighted—for example, if they perceive they’re being offered less favorable terms than earlier investors.

• This emotionality can lead to irrational decisions, such as refusing to invest even when the opportunity aligns with their portfolio goals.

• The hardest part of fundraising is often securing the first commitment. Until then, the lack of momentum can make investors hesitant. Understanding that this difficulty is external rather than a reflection of your startup can help maintain morale.

• Leverage the first commitment to build momentum with other investors. Share your progress strategically, but avoid exaggerating or manufacturing interest.

• Keep the focus on your growth metrics, traction, and team capabilities—these are the ultimate drivers of investor confidence.

• If you’re making progress with one investor but would prefer another, be transparent about the situation without naming names.

• Avoid exaggeration or artificial pressure tactics. Investors are highly attuned to manipulation and may lose trust if they sense dishonesty.

• Focus on securing strong, reputable investors rather than chasing a stampede. Over-optimization for herd dynamics can distract you from the core goal of building a sustainable business.

• Momentum Builder: Once the first check is secured, subsequent commitments often come more easily.

• Increased Confidence: Your confidence will naturally grow after the first commitment, and this will be evident in your interactions with other investors.

• Social Proof: Investors are more likely to engage when they see that others have already committed.

• Highlight tangible achievements such as revenue growth, user acquisition, or partnerships. These metrics provide investors with concrete reasons to believe in your potential.

• Avoid inflating your valuation in the early stages. A modest valuation can help attract early investors and build momentum, which you can leverage for subsequent rounds.

• Be respectful and professional, even with investors who decline. Rejections often stem from circumstances unrelated to your business, and those same investors may be open to funding you in the future.