Once or twice a year, a founder passes on me. Here’s how it happens and why I never take it personally…

“Sorry, We’re Oversubscribed”

I pass on 2,000 deals a year. But in the 4.5 years I’ve been investing, I’ve had a founder pass on me 7 times.

Every time, it was because the round was oversubscribed.

Imagine a company that wants to raise $5 million. They go to market and investors collectively want to put in $10 million.

That means the startup is 2x oversubscribed.

The startup could take the whole $10 million, but that would give them more money than they need. It would also mean selling more of the company than they expected, reducing ownership for the founders and any prior investors.

A lot of founders don’t want to do that. That’s perfectly understandable.

How Investors Get Squeezed Out

So, you the founder need to refuse $5 million of those $10 million in investor commitments. One easy way to get the number down: cut out the smallest checks.

For most of my angel investing career, I wrote $5k checks. If you’re massively oversubscribed, it may make sense to squeeze the $5k guy out.

Today, I write $10k checks. But still, I can be vulnerable to being squeezed out of deals.

But before you squeeze out a small angel, think about this…

Many founders say that the most helpful people on their cap table were the smallest investors. It’s counterintuitive, but it happens over and over.

I’ve introduced founders to major funds, key employees, and highly specialized lawyers to help them with thorny problems. Being able to help is one of the best parts of the job.

Even the Big Dogs Miss Deals

It’s not just the little guys that get squeezed out. In fact, the big guys probably get squeezed out more than I do!

Big funds usually need to lead a round. In any funding round, there is usually just 1 lead.

Sometimes two funds co-lead a deal, but that’s uncommon. And I’ve never seen more than two funds write big checks into a single round.

As a founder raising money, you can take on lots of small investors like me. But you can only take 1 or 2 leads. That makes big funds especially vulnerable to being squeezed out of deals.

Strange how venture capital works, isn’t it?

Am I Missing the Best Deals?

I don’t miss out on many deals. But are those missed deals the best ones?

You’d think so. But “hottest deal” doesn’t always mean “best deal.”

I invest at pre-seed or seed. The company is usually under a year old and almost always under 2 yrs old.

These companies barely exist yet. No one can tell for sure what the best deals are.

Some hot deals work out incredibly well. Others don’t.

Some of the best deals of the last 20 years were stone cold early on. SpaceX and Airbnb are great examples of that, and they’re hardly alone.

How I React When I Miss a Deal

“Hi Francis! Unfortunately we cannot offer you an allocation in the round because it was 4x oversubscribed.”

When I get one of those messages, I reply to the founder and wish them good luck.

Here’s what I NEVER do…

I never reply with a snarky comment. I never trash the company, either to the founder or anyone else. I never try to undermine them in any way whatsoever.

For starters, it’s just wrong. Be professional. This is business.

What’s more, acting like a jerk hurts your reputation. And in this business, reputation is everything.

Never forget, startups are always raising money! Even if you missed this round, you may be able to invest in the future!

Wrap-Up

When people don’t get what they want, you see who they really are.

So whether you’re an investor or a founder, if someone passes on you, don’t get bitchy. Be polite. Be professional.

That’s how you do venture capital. That’s also how you do life.

Founders: how have you handled an oversubscribed round? Investors: how do you react to getting squeezed out?

More on tech:

How to Get Started Angel Investing

My New Investment Strategy

3 Ridiculously Easy Things Every Investor Should Be Doing

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