TBC: The Power of Closing Dates in Fundraising

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Hey, there are back channel friends. Welcome to another episode and today's episode. I want to talk about the idea of closing dates. I'm gonna explain what they are and have an open discussion around why they work. And I think that understanding of why they work might help you. Get a better sense for strategies to use as you're trying to get to a close when with any of the fundraisers that you're working on.

Okay. So what's a closing date. The closing date is a date that fundraisers set. As the date that funds will come in, that the actual raise is going to complete. Now a lot of people that come from outside of the industry and are just getting into this may think that closing dates have some sort of legal implication.

As far as I know, they don't really have any legal implications. They are. An arbitrarily set date. Now closing dates, aren't arbitrary in the sense that they're not [00:01:00] important. They are just arbitrary in the sense that there is no real teeth associated with that date or, uh, Uh, miss of that date, at least not from a legal sense. From an investor standpoint, especially in the. Closing of an investment in a company. Understanding when the closing date is as in what is the date that the founder is going to organize all the funds to come in. Is important because you don't want to be one of those investors. That funded. Assuming that a founder was going to be able to close all the funds around you at some point later on. And come to realize that you were closing, you were sending in your money. But they weren't closing any other dollars. Around you.

And so your small check ends up being naked. Not surrounded by other funds, not helping support the progress of the company. So what investors like to [00:02:00] do is make sure, okay, what's your closing date? How many people are closing around me? How much are you closing? That's what you're saying. You're going to do, that's your word?

Okay. I will come in alongside the other investors. So that's important to the investors that are coming into the actual fundraising. Now. On the other side, what happens if they don't make that close date? Well, If it actually is. A competitive process. And there really is a, uh, oversubscription, there are more people that want into the, into the deal.

Then there actually is room. And what does room even mean? Because you could. I always expand the round size, but if it is actually the case that we're setting it at $5 million. Not a penny more. And you are supposed to fund by a certain date and you don't close by a certain date. One of the repercussions, hypothetically is that you miss the date and the founder is like, Nope, you can no longer invest.

We're not going to [00:03:00] accept your money. We had a deadline. You missed it. The other one, which is more likely is that you just broke a social contract. You broke. You broke this. Understanding that we would do this deal at this time. You said you would do it that way and shame on me. We get a slap on the wrist.

We get reprimanded. We're not even explicitly, but people feel bad about not following the rules. So the closing date has that bit of a repercussion. If you don't miss it now. The first one likely won't happen. And the second one is such a soft thing. That like, why do you think that would actually ever matter?

Well, it does. People want to follow the rules. People want to be liked. People want to be thought of as somebody that is supportive and isn't messing up a flow of a fundraise. And because of all those reasons, Closing dates are extremely important for both sides and an [00:04:00] extremely effective tool in the fundraiser's toolkit to getting around done and to getting people to actually. Decide and make a move and actually commit to a deal.

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The funny thing is when we think about closing dates, I talked a little bit to my friends in the fund fundraising world, as in GPS, the leaders of venture capital firms that have to go raise capital and their counterparts, the institutional LPs, and the fund to funds that invest in them. And we talked a lot about this idea of what it means for those GPS, those VCs to set closing dates. For their fundraisers and the, and those situations.

It's, it's very funny in that. Like, they will set a first close as in a date where not the whole amount of the fund comes in, [00:06:00] but. We're expecting a portion of, of the funds that come in. And when we think about a first close, We'll think about it as like 25% of the total target fund size.

So if we're, I don't know, raising a hundred million dollar fund, our first closes at $25 million. There's still $75 million to go. So, what is the incentive for an LP? An institutional investor to come into that first close. It's just an organizing structure that helps people that are close to wanting to do the deal. To be pushed in with other people, hurted like cattles. And actually invest their money. So, if you think about this as a psychological tool, what does that mean for you as a founder or a fund manager?

That's going out to raise. Well, you gotta use it as a structure that shows people that you mean business, that there are other people around the table. Who are going to [00:07:00] conform, who are excited to do the deal. And who you will think highly of if they meet this criteria and follow the rules. And so that might feel very soft. But as you communicate to investors who are hanging around the hoop, you're going to say, Hey, We're expecting our close to be on this date We're going to get all of the commitments in beforehand. Let us know if you have any open questions, if you are in or are out or need us to provide anything else, we want to have full commitments in a week before the final close. And then the final close will be on January 27th. That's the kind of communication that helps. drive VCs who are hanging around the hoop, thinking about your deal. To finally shit or get off the pot at the end of the day. That's what it's all about. It's about knowing that someone could walk away as you set that structure in place, but that you're okay with it. And when a interested [00:08:00] investor feels that they will say, you know what. This person knows that they're going to get this money.

in I'm only one check out of a number of opportunities. I want to be part of this deal. I'm in. So. Hopefully that helps clarify a bunch of things. I bet you, a lot of you thought that a closing date was a legal structure, maybe a document. Associated with that. It's not, it's a psychological tool that a lot of you need to be using better. And the way you raise capital.

All right. Until next time, I'll see you on the back channel. ​

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