The most dreaded question while fundraising

I started a fintech company called Stilt Inc. and we are making financial services simple for immigrants. We went through Y Combinator in Winter of 2016 and because of YC, we have had the opportunity to meet hundreds of investors over the past year. These investors range from individuals/angels to large VC funds. I’ve been to many meetings and must have pitched our company at least 100 times at various stages of the fundraising process.

Almost all meetings always have a healthy dose of questions about the company, team, market, growth, defensibility, etc. Some of these meetings may run for 2 hours where I’m just answering questions trying to convince investors to invest in this amazing opportunity to build a bank for immigrants.

I have found one question (or some version of it) that strongly correlates with next steps from the investor:

WHO ELSE HAS ALREADY INVESTED?

They are trying to determine one of 2 things:

• If a big name investor has already invested — this is a strong vote of confidence for them and de-risks their investment. If you have investments from well known VC firms, it is highly likely that you’ll be showered with more money than you need and at valuations higher than you expected.
• If you are close to filling the round — this is where FOMO (fear of missing out) kicks in. If multiple investors are investing, they must’ve seen something and these investors don’t want to be left out. It’s also easy for them answer to their LPs if the investment doesn’t work — everyone thought the company is going to work.

Every meeting where I’ve been asked this question and haven’t given a big investor name or told them that our round is almost filled, I have been able to predict their answer with almost 100% accuracy. They are just looking for someone else to invest before they do. I have not seen any investor who asked this question move forward with the investment (if we didn’t meet one of those 2 criteria).

This is one of the most frustrating part of fundraising and not enough people talk about it. Silicon Valley is inarguably the center of tech innovation and a great ecosystem for startups with the highest density of founders and investors. The future is built here and many highly risky startups are funded every day. But no one talks about how much investor herd mentality is in the valley. There are not enough investors who have standalone conviction to invest in what they believe could be a big company in the future.

*being a YC company was one of the reasons we got many investor meetings

Thanks to Renuka Kumar for reading drafts of this.