Manufacturing scarcity & urgency during a fundraise

Unless you’re in the top 1% of companies, scarcity and urgency won’t naturally occur when you’re trying to attract capital – you’ll need to manufacture it. Scarcity alone isn’t enough to close a deal, and isn’t always necessary, but putting “pressure” on investors can increase your odds of getting the best outcome possible.

Sam Hasty is a partner at Active Impact Investments. We sat down with him to discuss why scarcity has an impact on VCs and ways to turn up the pressure.

Why scarcity matters

In fundraising, scarcity occurs when you have more capital available to you than you need. For example, you might be raising $5m but attract $10m in interest, forcing you to bat investors away. 

This is important because VCs are hard-wired to respond to scarcity. Since they’re oriented around upside, what they fear isn’t making a few bad bets, but failing to make a great one. 

A key mistake when manufacturing scarcity

While your goal is to ensure scarcity – making VCs believe they’ll miss out if they don’t act fast – it’s crucial you don’t come in too hot, because lots of founders try to create scarcity, and VC’s are also wired to respond with “prove it” when someone tries to claim they have the hottest deal on the planet. Creating scarcity is a process, not one all-or-nothing moment, so don’t lead with claims that “your business is flawless and the round will close in two weeks”. 

Instead, start with humility, curiosity and listening carefully. Curiosity and humility will help build trust, and over time, investors will come to trust your updates about how things are moving. Think of it like a crescendo: everything you do should be deliberately calibrated to build to the loudest point, but if you start too loud, you could lose credibility very quickly. 

Steps to manufacturing scarcity & urgency

1. Get the right volume
Building momentum starts prior to any conversations with investors.  Before you raise, you need to be sure you have enough volume to start a process of any meaningful size.  At least 100 investors need to be willing to see your deck by the time you’re “in market” or formally fundraising. 

To get to this number, you’ll need to nail your intro blurb, with a few bullet points that capture who you are, your biggest recent achievement, and your market credibility. Then, start shopping this summary around and ask prospects whether they want to see your materials.  

2. Coordinate your funnel
Ideally, everyone in your funnel should go through each stage of your process at the same time. If not, you can’t play investors off each other. This is a pivotal point and takes discipline to wait to share materials or a data room you’ve worked so hard on until you have adequate volume. If you have one or two people in your data room while most of your funnel is still looking at your deck, you don’t have adequate volume to create scarcity or urgency. 

It’s okay to say things like “we’re just finalizing a few things in the data room and will share with you once it’s ready” to buy yourself some time to ensure adequate volume, but I’d also say that timing this is important. If you keep people waiting over 3 weeks for a data room, you start to lose momentum. 

The balance and challenge here is that you need to get in touch with everyone in your funnel at around the same time once they’ve seen the deck and met with you and confirmed interest and get them in the data room in a relatively short timeframe (over a few weeks). If people aren’t getting into your data room quickly, it’s not a priority for them, and it may be time to pivot off of this round size or broader strategy, because it’s not resonating enough to get people to dig in.

To be clear, there will always be stragglers that join late, and it’s okay to catch people up, but the point is, if only 1 or 2 are in your data room when you launch it, you simply don’t have enough volume to create scarcity, and adding folks later won’t catch you up because once you get new folks in, the first 1 or 2 have likely become stale or already passed. 

With that in mind, the general guidance is that you shouldn’t open your data room to anyone  until you have at least 15 entities who want it and are willing to lead (if you’re feeling frisky you might be able to get away with 10). A lone investor won’t feel any pressure, but if you can credibly tell someone you have eight others in your data room who are lead investors, it will send a different signal. 

Similarly, wait to set a term sheet deadline until you have either double-digit leads in your data room or, for a more conservative approach, until at least 10 leads have engaged further with follow-up questions. Keep in mind: sending VCs the data room before they ask for it doesn’t count as “a VC in your data room”. Legitimate engagement only counts if VC’s proactively ask for data room access without prompting and ask thoughtful questions about the materials that exist in your data room after the fact.

3. Don’t drop names
If an investor ever asks you who else is looking at the deal, don’t tell them. Only share details if you’ve signed a term sheet and they’ve given you explicit permission to tell other people. Investors talk – and could talk each other out of the deal. Curiosity is your friend in a fundraising process.

4. Announce updates effectively 
Be thoughtful about when to give updates and which ones are most meaningful. Some investors care more about product milestones, others care more about additions to the team, and still others care more about signed contracts. If you ask the right questions, you can get clarity on what types of updates would most move the needle for a given IC. 

Sometimes it might make sense to  hold back updates strategically so they land when it matters most, i.e. when the investor is ready to move to IC. If you expect to sign something in 10 days, don’t necessarily announce it to VCs before it’s signed in a feeble attempt to show there’s real momentum. Think about where they are in their decision process and provide a meaningful update when it’s concrete and aligned with their next key decision point. Sometimes that’s a week or two after something signs.  

And, alongside fundraising updates, sharing concrete examples of how the business is performing will also create a sense of urgency. If you’ve added $30k of new MRR in the last month, for instance, that could shift terms in your favor.

5. Show continued curiosity
Generally, founders might ask questions in the first meeting such as "what's your check size?" or "do you like to take board seats?" but fail to keep up this habit. But to know when to increase the noise and so successfully build scarcity, you’ll have to constantly heighten your understanding of where your investor stands, what their barriers are, and how their thinking is evolving. 

Keep asking questions about where they are in their process and what they’re struggling with. For example: “I know we’ve been talking for a few weeks, have you had a chance to socialize the deal with any members of your IC?” or “What don’t you like about this opportunity?” When people are moving through a process, they often get less comfortable asking hard questions or asking questions that might yield negative answers because they don’t want to rock the boat or hurt good vibes, but asking the hard and uncomfortable questions is important especially as you go deeper in a fundraising process. 

One last note on this: it’s important to ask these questions in a way that shows you understand their position and demonstrates empathy. This can be a tricky balance to strike, but very powerful. A great example might be “Hey, I know agtech has seen some headwinds recently and farmers have been hard to sell to for many of our predecessors. Are ag tech plays generally tricky to sell to your IC right now and get buy-in on?” This shows an empathy and understanding for the job they have to do (sell a deal to their IC or partners) and unearths potential hurdles that can be helpful to you. 

6. Make the next yes easy
The easiest yes you’ll hear is in response to "can I show you my materials?". In many cases, it’s the job of the person you’re reaching out to understand what’s out there. However, your selling process will be easier if you can create easy “yes’s” along the way.

So, rather than cutting to the chase with aggressive questions about going to IC or writing you a check after the first meeting, your asks should get incrementally more substantial. 

An example might be “It was great to connect with you last week, we just came across a piece that highlights the pain point we’re solving a bit more clearly written by industry expert XYZ. Do you want to take a look?” Remember, a meeting is a big ask, so it’s a good idea to ask for things that move your process forward and are very easy to say yes to. 

If you:

1. Have adequate volume at each stage of your fundraising process 
2. The discipline to keep people at a similar stage at a similar time to create scarcity
3. Don’t BS yourself about what the actions people are taking are telling you about their level of interest
4. Ask empathetic and thoughtful questions throughout the process to ensure you have a clear picture of where people are
5. Provide updates that are consistent and thoughtful with actual business progress that aligns with the priorities of your prospect
6. Create easy “yes’s” that advance your discussions without asking for big lifts of time from an investor

Then you’re positioning yourself well to create scarcity AND urgency. Now you just have to close :)

Sam Hasty is a guy who’s doing his best to help great people make the world better.

Sam has studied financing and support systems for startups around the world, including time as a Fulbright Scholar in Poland. He has lost plenty of money as an angel investor, with a portfolio including companies in Aerospace & Defense, Agriculture, Healthcare, Insurtech, Logistics Tech and Advanced Materials. At Active Impact, Sam focuses on Infrastructure and Carbon Solutions innovations, and serves on the board of directors for SWTCH, King Energy, Aquacycl and Flair. Sam started his career as a middle school math teacher and proudly supports education reform and innovation.