What Are Oversubscribed Financing Rounds?

What are oversubscribed financing rounds? Every company has a target set for the amount of financing they want to raise during each financing round. However, it is possible for them to raise more funds than they originally asked for with more interest from investors. Investors love a good investment opportunity and might be willing to invest more than you asked for if they believe in your company.

Most companies are either not ready for oversubscribed financing rounds or they don’t expect to be oversubscribed. So if you are a startup that is just starting out with your financing rounds, or a company that is in later financing stages and about to go public, then keep reading. This article will explain what oversubscribed financing rounds are all about and how to maximize your chances of getting oversubscribed.

What are oversubscribed financing rounds?

Before you can ask how startup funding rounds get oversubscribed, you must first understand what it means to be oversubscribed. A company’s campaign is “oversubscribed” when they get more commitments to invest than they planned to close on. For example, a company can legally raise up to $5M through some types of crowdfunding in one year. So companies may set a lower funding goal so that they don’t breach that cap.

When you are “oversubscribed,” it means that you have received more offers of investment or financial support than you had sought. Therefore, if you launched a campaign with the goal of raising $2 million for a pre-seed round and a lot of investors were interested in the opportunity and eager to put in $3M or more, your round is oversubscribed.

What if you don’t want to turn down the funding?

It is understandable that entrepreneurs do not want to turn down additional funding. You might want to obtain as much money as possible while it’s still accessible, and bring in those contributors, even if it means a bit more dilution than you expected.

In some fundraising campaigns, oversubscription might be easy to handle if too many people sign up. With that said, when investors have already agreed on certain terms, it can make things more complicated. In either case, showing that you were oversubscribed in the past will help your business, brand, and future rounds of funding.

Keep in mind that in fundraising, storytelling is everything. In this regard for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

How does oversubscription work?

How oversubscription works during the initial rounds of funding

If you do decide to roll with oversubscribed financing rounds, the easiest way to deal with this is to just make your funding round bigger. Of course, getting more investors on board can mean more dilution for you as a founder. So you’ll need to think carefully about whether or not it’s worth it.

Talk to your cofounders first, and then soon after, talk to your lead investor about how they feel about the potential addition of the new investor and the idea of making the round bigger. You’ll need to get your lead investor on board with this as soon as possible since the dynamics may be changing in ways they didn’t expect when they signed your term sheet.

If your round is oversubscribed, one option may be to open a parallel round under Regulation D to allow for more investments to flow in. If accredited investors are the only ones who can take part, and the funds raised don’t count toward the limits set by regulation crowdfunding it will be fine.

Otherwise, if there are more investors than opportunities, investments are accepted on a first come first serve basis unless you have some alternative plan laid out.

Oversubscription at the IPO stage

IPOs of more established companies that are about to go public can also be oversubscribed. For startups about to go public, a security offering is said to be oversubscribed when the number of people who want to buy securities through an initial public offering (IPO) is higher than the number of securities that are actually available.

This is very different from under subscription, which happens when the number of shares offered is more than the number of shares investors want, making a surplus.

The amount of oversubscription is shown as a multiple of the number of shares of bonds that are still available. For example, if a company has an IPO of 40,000 shares and 80,000 people want to buy them, the IPO can be said to be two times oversubscribed.

Most of the time, underwriters set the prices of shares or bonds offered through an IPO so that there won’t be too few or too many of them. If there aren’t enough securities to go around due to oversubscription, the underwriters can raise the price per unit of the securities they are selling. This also helps the business bring in more money to fund its operations. So, take the time to understand how oversubscribed financing rounds work.

How can you strategize to get oversubscribed during your funding rounds?

It’s not just a matter of luck if you get more money than you need during your funding rounds. You have a lot of power to make sure that your next campaign gets more people than it can handle. Have a plan if you want your next round of funding to bring in more money than you need. In other words, plan in advance for the possibility of oversubscribed financing rounds.

It’s much better to have more people buy-in than to have too few investors interested. If you get a lot more money than you expected, you can use it to grow faster.

Here are some of the ways you can work to get more funding that you need, or initially ask for.

Be ready to back up what you’re saying:

It seems like a simple thing to do, but too many business owners put more effort into their pitch than into their product, service, or offering. Preparation is very important, and not just in terms of figuring out how much money you could make. You also need to make sure that you can back up your pitch, the product and service you are offering, and solve the problem you are bringing attention to.

Make sure you can back up what you say, or you could lose investors and potential business partners.

Start getting ready early:

When everything is prepared and set up ahead of time, and proper preparation has been made, financing arrives on time. When you hear about hot fundraising campaigns that raise more money than they need in a matter of hours, it’s generally due to months of preparation.

This is especially true when attempting to seek funds offline from angel investors and venture capitalists. It takes time to get acquainted with them and become friends with them.

It also allows you to get plenty of pre-commitments and launch your campaign already half-funded.

Master the art of telling a story:

The simpler you can make your elevator pitch, the more investors will be interested. One of your most important skills should be being able to walk into a room with an investor and quickly and easily help them see your vision for the future. Telling a story is a great way to do this.

Many entrepreneurs make one of the biggest mistakes by not putting nearly enough time, energy, and effort into telling stories or simplifying their pitch deck.

You can have the most interesting numbers or projections of sales in the world. But that may only be a small part of the bigger story you’re trying to tell. People are naturally drawn to stories because they help us make sense of the world and turn what can seem like chaos into something more like a pattern.

Try to get advance commitments

Getting advance commitments from investors is one of the most important things that can get you oversubscribed. When no one else is in, rounds take a long time and stay empty. No one wants to be the first one to invest in your company when no one else has already invested or when you don’t have a lead investor.

When investors see that things are going well with your company, they want to join in. They’ll want to be there. You should be able to get advance commitments for 25% to 30% of your total target. To put it another way, your initial request should not exceed 70–75 percent of what you presently have. If you achieve your initial goal fast, you can always extend the round to receive additional money.

If you don’t have any commitments, you should at least have a large list of potential investors who are a good fit and keep them in your database. Or you may want to consider another method of capitalizing your venture and ensuring oversubscribed financing rounds.

A great first step in avoiding the possibility of an over-subscription is knowing how to determine the amount to raise in your financing round. if you need more information on how to do that, check out this video I have created. You’re sure to find it helpful.

Marketing:

When raising money for a startup, marketing the funding round is one of the most important things to bear in mind. Marketing also needs money, time, and a plan. You don’t want to try to put it together in a hurry when you only have a couple of weeks to close a round.

Long before you start the round, you should start marketing, developing your brand, positioning yourself in the press, and making relationships. All of your most important targets should be eager for the moment you inform them they can finally participate.

Things will be moving quickly during the weeks when you’re actively raising money and you won’t have enough time to effectively market your funding round. You need to get people’s attention and stand out from the crowd; make them feel like they’ll miss out if they don’t act right away. That’s how you’ll ensure oversubscribed financing rounds.

Mistakes companies make when striving for oversubscription

Spending too much time raising funding:

A company shouldn’t put everything in a funding round. Because while funding is important, it is how you put the funding to use that matters the most. The goal should be to take as little time as possible to get a good round of funding. Fundraising can take too much time away from the most important long-term goal: building a big, successful company. A major factor in securing a big investment round is about letting the investors know that you are not just in it for the money but you are passionate about your business.

Ignoring your lead investors when aiming for oversubscription:

No one will want to be the first one in. They all want to know who has already committed to investing in your company. Once you land that all-important first lead investor, many others will come far more easily. Focus on securing your lead investor, and the rest should fall into place.

Conclusion

Oversubscribed financing rounds are not a myth, and with the average size of funding rounds increasing, it is getting easier to achieve being oversubscribed. With a good plan and a little strategy, you should be able to attract the funding you need. Even if that means starting with a smaller ask, and then attracting a lot more attention and interest. Once you nail this, it will be even easier to raise subsequent rounds of financing.

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