HQQA27 Are your existing investors investing in this round?

What they mean

Investors expect your investors to be investing again. If they don’t it’s a really bad sign.

Investors look for signals, both good and bad. Investors doing the pro rata is a neutral signal. Investors doing super pro rata is a positive signal. Investors doing no pro rata is a potential deal killer unless there are specific reasons.

It’s okay for angel investors not to do a pro rata because they don’t have any more money and this is a large around. If your lead investor is known to have money and they are not following on then this is really bad.

As a word of caution, if you raise from a top tier fund like Sequoia and they do not follow on or lead your A round, then you are pretty much screwed. Investors know you make your money on the big winners. Why would an investor not invest into a winner?

Investors always assume that investors have the inside track and if they are not investing, then something must be wrong and that you the founder are not telling them something.

Before you start raising, you have to discuss the fundraise with your investors and know whether or not they are going to invest. If they are not going to invest then you have to make sure that there is a good reason, and that you both tell the same story, otherwise your investor is fucking you. This is the worst possible thing to happen. A malicious investor can literally kill your deal.

What you need to say

“Yes, all our angels will be doing their pro rata, other than some of the less rich angels that just don’t have enough powder. However, our lead investor from our Seed, Index, has too much capital tied up in the on-demand industry and their limited partners do not want them allocating any more capital to it. It sucks, but they are really supportive and are making intros for us. You can call Danny. He knows the signal this sends and so is going out of his way to help and let investors know this isn’t because they don’t believe in our business.”