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Won Funding? Why You Should Wait to Celebrate.

Won Funding? Why You Should Wait to Celebrate.
Image credit: Illustration by Edmon de Haro
This story appears in the September 2016 issue of Entrepreneur. Subscribe »

The founders of PVP Live were itching to make the announcement: They’d raised a big Series A! This was in 2015, and the company -- which covers competitive video games the way ESPN covers sports -- had just accepted an investment from a local Dallas private equity firm.

“We were three days away from making a public announcement,” says CEO and co-founder Casey Wehr, “but our PR firm had told us to sit tight and not say anything until the money was in the bank.” It was good advice. As it turns out, their investor was heavy into oil and gas. Between the time PVP Live signed with the investor and the money was supposed to enter their bank, the energy industry took a dive, the investor got spooked and the investment disappeared.

“It was demoralizing,” Wehr says. “We had to start back at square one; the other firms who’d offered us term sheets had already reallocated their funds or rejected us because we didn’t choose them first.”

Related: No Money to Start a Business? No Problem. Try These 5 Options.

This is an all-too-common story -- and the reason why a startup should never, ever, ever announce a deal before the money is real. Ross Emmerman, partner at the Chicago office of the law firm Loeb & Loeb, says he sees trouble like this all the time. In one deal his firm closed, a startup waited 14 months for its money. “That’s why you hear stories about guys in incubators living on granola bars, waiting for checks to clear,” he says.

Related: Are You Ready to Pitch Investors for Funding?

But for persistent (and patient) startups, the big day will eventually come. PVP Live had to furlough employees while it sought new funding. Some left; others stayed, taking part-time jobs to pay the bills. But Wehr was transparent with prospective investors and his staff, and that bought enough goodwill and time to finally close a deal. Eight months later, PVP Live announced a $2 million fundraise. And this time, the money reached the bank.

Related: Where Startup Funding Really Comes From (Infographic)

...And what to do while you wait

Advice from Emmerman and Entrepreneur VC columnist Sam Hogg.

Deal day: Celebrate, in moderation. A term sheet is generally a midpoint in the fundraising process, not the finish line. Now zip your lip about it. If the deal publicly falls through, it can reflect poorly on your company.

Week 1: Get back to work, because it’s likely that your past months of fundraising took you too far away from your company. It’s OK to tell select staff about the deal, as a way to keep morale high. But be very clear that the news is confidential. 

Week 2: Now that you’re caught up on work, start planning for many different outcomes. You and your investors may have agreed on a timeline to work out the details and transfer the funds -- two months is common -- but it may actually take much longer. 

Week 3: You’ve got a plan for the future. Now get back to work on your product. If things take a dive in the middle of the deal, investors can easily change their minds (see PVP Live, above).

Week 4: Call your lawyer for progress reports, and offer help negotiating the investors’ terms and contingencies. (They may change many times.) The key is for you to push the investors to provide definitive legal documents as soon as possible.

Week 5: If it looks like the money may come in the next few weeks as hoped, it’s time to get ready to execute your plan. What will your company do once the money hits your account?

Week 6+: Wait. Pop the Champagne only after the money clears the bank. Then, finally, tell people, get to work -- and start raising more funding. 

Edition: October 2016

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