What To Do When A Major Investor Backs Out: Pivoting Your Fundraising Strategy

What to do when a major investor backs out? Every entrepreneur has to face this situation at some point in their careers. Top founders who have built multi-million dollar companies must also deal with main investors pulling out. So, how do you handle the situation and keep the company running?

Landing the initial investors for your startup is the hardest since you’ve yet to build credibility and trust in the market. Scaling the business and creating a market presence without this capital injection is exceptionally challenging. Amidst this situation, having an investor pull out can be devastating.

This blog explores in detail what you can do to prevent this situation. And the next steps to take if it happens. Understanding why investors quit is a great first step to preventing the financial gap you’ll be left with.

Fundraising is a long, hard road. Entrepreneurs invest time and a fair amount of resources to connect with the right investors. A rejection coming just when you’re about to close the deal and sign the paperwork can come as a shock. The emotional toll is just one of the setbacks.

Understand Why Investors Pull Out

Before diving into what to do when a major investor backs out, you’ll start by exploring the possible scenarios. This will help you create a plan B to fall back on.

• Macroeconomic, geo-political, or regulatory changes may alter the viability of your business idea without warning. Investors sink money into a company with the expectation of rich returns. However, they may rethink their investment decision when their confidence is shaken.
• Most investment firms, including venture capitalists, private equity, family offices, and angels, invest in multiple projects. Chances at the firm is facing a cash crunch or hasn’t been able to sell your company to other investors. If that happens, it might stop responding to your calls.
• As the most successful founders will advise, it is crucial to have investors whose interests align with the entrepreneur and share their vision.
• Investment is more than just capital. It is also about expertise and strategic support. Without this alignment, disagreements are likely to arise. If that happens, the investor may choose to pull out before the agreement is finalized.

What to Do When a Major Investor Backs Out: Your Next Step? Stay Afloat

An investor quitting can trigger a panic situation, which you must avoid. Now is the time to rally your team and resources and work out failsafe plans to bridge the unexpected gaps. Here’s what you’ll do.

Start Planning the Next Steps

Transparency is crucial for any company’s success and a crisis is when this rule holds true. Reach out to your partners, team, and other stakeholders who will likely face the brunt of the loss. Inform them of the situation and start by accounting for all the scenarios–best and worst.

A good step in this direction is to check for your available finances and calculate the runway. Also, add up the timeframe to keep the company running. Scout for cash sources like cutting back on expenses and tapping accounts receivables for early payments.

Or ramping up production to complete cash deliveries. Think about how you can bridge the temporary financial gap with possible loans from friends and family. List the likely outcomes, such as having to close down the company. Timing is critical here, and you’ll have to move quickly.

Reach Out to Your Team

If you have successfully instituted a great company culture, it will become a huge asset at this point. Your team will likely have individuals who align with the company vision and are loyal. Talk openly and ask for inputs on what what to do when a major investor backs out.

Explain the worst-possible scenarios the company faces and enlist their help in getting out of the jam. They are experts in their respective fields and may just surprise you with innovative and constructive solutions. You could possibly leverage their help to connect with new investors.

If you’ve invested in your employees, they will come through for you. Think temporary salary cuts across the board, offers to accept option pools, and putting in extra hours to stabilize the company. Inform them by organizing a meeting and talking to them in person. They will appreciate the honesty.

It is also preferable that they hear the bad news from the company owner and not through their co-workers. The information you relay will be accurate and leave no room for speculation.

Contact Other Investors to Confirm Their Support

If investors have withdrawn support because of macroeconomic and geo-political conditions, others will likely follow. One of the first steps you must take is to connect with them. Confirm that you still have their support.

You’ll extend the courtesy of apprising them about the situation to indicate complete transparency. Offer them the option to raise their investment stake to cover the shortfall. And be ready with answers when they ask about the pull-out. You’ll also present your failsafe plan to stabilize the company.

Ensure you come across as confident and in control to reassure them and prevent a possible domino effect. Be ready with updated statistics demonstrating the company is gaining traction with increasing customers, sales, and revenues.

Reiterating key inflection points and the reasons that initially attracted investors is a strategic move.

Bring New Investors on Board

Leverage your network to quickly connect with new investors who might be interested in backing the company with capital infusion. Lining up new investors could also entice existing investors to deploy more money to cover the shortfall.

Don’t hesitate to offer them incentives like changing stock classes, super pro-rata rights, liquidation rights, preferred shares, and board seats. Instead of board seats, you can also offer board observer seats without relinquishing decision-making rights.

You’ll do whatever it takes to get the crucial funding for the company. At the same time, be strategic in your approach. For starters, make sure you don’t come across as desperate and don’t offer terms that are hard to honor later.

Balance the urgent need for capital with carefully thought-out incentives and terms that won’t harm the company’s growth. Consider offering the staggered capital infusion technique. If investors are hesitant to offer funding, set up a series of milestones.

You can call in the next installment of funding each time the company completes a new milestone. Also, outline the steps you intend to take to attain the milestones. This strategy indicates that the founder is on top of the situation and demonstrates impressive business acumen.

Keep in mind that storytelling is everything in fundraising. 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), which I recently covered. Thiel was the first angel investor on 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.

Reach Out to the Company’s Creditors and Debtors

Contact the company’s creditors and give them detailed updates. It’s advisable that they hear about your financial challenges from you instead of third parties and social media channels. Discuss new payment terms with them and ask for extended deadlines while you arrange for the cash.

Be clear about the expected timeframe for the delays and the steps you’re taking to generate cash. Now that you’ve dealt with account payables, target account receivables. Talk to your customers and ask if they can make advance payments for consignments they have yet to receive.

Inform them that you intend to ramp up production and fulfill orders before time. You can also request to shorten the credit period and collect unpaid invoices asap. Financing their invoices and getting loans is another strategy you can deploy.

Explore Other Temporary Revenue Streams

Revisit the company’s assets and determine how to monetize them temporarily for cash. For instance, consider renting out IP and IA for a short-term contract with pre-payment terms and conditions. At the same time, you’ll take the necessary steps to secure the IP and its ownership titles.

Reconsider the company’s products and services and think about other items your facility and team can manufacture. A short-term pivot could help you generate some extra cash and get over the current financial situation.

Use this strategy when considering what to do when a major investor backs out.

Adopt Leaner Practices Until the Company Stabilizes

Identify all the unnecessary expenses the company raises and start serious cost-cutting practices starting at the top rung of the ladder. Convince your partners to join you in cutting salaries for C-Suite executives and owners, including yourself.

Determine the costs the company can cut without compromising product quality and functionality. Going back to the basics and delivering only the MVP won’t hurt. Inform your customers that you’ll cover the additional features once they’ve had the time to offer feedback.

Also, examine the cash flow charts and stop cash outflows as much as possible. Tap suppliers and vendors for extra credit and extended payment terms.

Ensure Your Company Never Faces a Similar Situation Again

When you’re working out what to do when a major investor backs out, you’ll ensure this situation never arises again. Here are some of the steps you can take:

Make Sure You Get the Investment Commitment on Paper

Many entrepreneurs make the critical error of assuming they have a relationship with the investor after the preliminary discussions. The initial meeting may have gone very well, but don’t make the mistake of relying on a handshake deal.

You absolutely must continue reaching out to other investors until you have a term sheet in hand. The investor’s intentions, terms, and conditions should be clearly outlined so you have time to negotiate if necessary. Never rely on verbal commitments to back your company.

Be Forthcoming About Relevant Information

Never allow a deal to fall through just because the investor was unable to get all the data they need. Participate wholeheartedly in the due diligence and provide verifiable data indicating how the money will be spent. Outline the direction the company will take thanks to the capital injection.

Your financials going back at least three years will be under scrutiny along with cash flows. This document will indicate exactly how cash travels through the company and is crucial to demonstrate lean operating practices.

Investors need to see that their money will be spent well and generate revenues and profits. Protecting company secrets and IP is undoubtedly high on your list of priorities. However, investors will also hesitate to invest without knowing what the product is about.

You’ll explain the product, specs, and functionality in layperson terms that are easy to understand. Leave out technical jargon that will only confuse and deflect investor attention. Break down the core components of the company and its structure in simple language. That’s how you’ll generate trust.

Keep Information About the Investment Private

Having secured a top-tier investor, entrepreneurs are understandably anxious to go public with the news. However, keeping news of the collaboration private is advisable until the papers are signed and the deal materializes.

Refrain from releasing any information about the investor’s interest on the company’s social media, networks, and LinkedIn pages. When the deal culminates, and you have money in the bank, that’s the time for a formal press release.

When reviewing the hurdle you just overcame, one of the first things you should explore is what startup investors look for in entrepreneurs before investing. This information could prove to be useful in further funding rounds. Check out this video in which I have explained everything you need to know.

Don’t Hesitate to Contact the Investor Who Backed Out

Yes, the deal fell through, and you had to deal with financial difficulties for a while. But, you must be professional about the whole situation and focus on building long-term relationships. Put down the entire episode as a learning experience.

Contact the investor for a sit-down and ask for explanations about what went wrong. Building and scaling a company is challenging, but you can use all the advice and information available. Keep an open mind and learn what not to do moving forward.

You might just be able to convince the investor to participate in the next funding round. Understanding what to do when a major investor backs out is a part of the ups and downs of the entrepreneurial journey.

Consider it a test of your resilience, patience, and ingenuity. If you believe in the business concept and vision, don’t let these deterrents discourage you from moving forward. Rally your partners, team, and other stakeholders, roll up your sleeves, and get to work to resolve the situation.

You may find our free library of business templates interesting as well. There, you will find every single template you will need when building and scaling your business completely for free. See it here.