Rolling Closes in Venture Rounds

I’ve had a couple conversations recently with founders about rolling closes and thought I would share my thoughts on what I’ve been observing in both the US and Europe. Many of the later stage companies I am aware of have instituted a rolling close when closing a large growth round. This is probably more a sign of the current fundraising environment at the later stage (ie $100m+ raises) than a new norm. Snapchat apparently had a rolling close with their last raise as one example.

At the earlier stages, this has also been a phenomena in the Valley for seed stage co’s. I’ve personally invested into several startups in their first angel round where they’ve kept the round open and used a convertible note to raise over a period of 2-5 months. It’s faster, has lower legal costs and allows you to bring value-add folks in that you meet as your building your company. As long as you can keep building the company without getting hugely distracted by having the occasional investor meeting, I don’t see anything wrong with this approach.

In Europe, I think the most common use of the rolling close is for Series B rounds. Funds tend to be smaller on average here compared with US VC funds, but the ambitions of founders is still large and the requirements of their companies can be equally as large once they have found what makes them scale. I was part of a round recently where the founders had a plan which required about $13m in new funding. A new VC came in to lead with $7m, the insiders invested $3m and there was $3m that both the new and existing investors would have liked to have taken up had their funds been large enough. As a syndicate, we decided to go ahead and close the round on the $10m but allowed the company to continue speaking with investors who were interested in taking the $3m. We decided to close the round quickly as we wanted them to continue executing and taking advantage of the new funding to ramp up. We did this because after introducing some new potential syndicate investors it was apparent that none of them could move quickly. So upon the first close, although the company had several interested parties, we decided to do a rolling close as the new investors just weren’t able to move on the company’s timeline.

In an ideal world, startups would be able to create enough demand to raise the full amount required. But sometimes it just doesn’t happen. In the above scenario, we had to budget the next 18 months based on an $10m raise and have a back-up plan in case another investor comes in that could take us to $13m.

If you find yourself in this position where you have secured a new lead investor and have a round coming together that is smaller than the required amount, then I highly suggest you implement a rolling close, but keep the following in mind:

  1. Any follow-on investors must commit in under 30-60 days. You can’t fundraise forever, its obviously hugely distracting.
  2. As a founder you can’t commit a lot of time beyond a few meetings with new investors and they have to be able to make a decision based on existing documentation (pitch deck, legals, possibly some reference calls, and discussions with the existing investors). Creating new reports for data requests is not kosher when everything has been tee’d up for new investors. Obviously you can talk them through any concerns, but they should walk away upfront if they feel like there is too much data missing.
  3. Rolling close new investors must be willing to sign-up to the existing legal documents because they are minority investors and you can’t change what was agreed by the new lead + existing investors. This is a non-starter.
  4. Most likely NOT get a board seat but potentially take an observer seat unless they are going to invest more than what you have left open (in this scenario you will need to get permission from your existing investors).
  5. Don’t forget to leverage your board if you find yourself needing to do a rolling close. Your investors should be willing to do some of the heavy lifting to ‘protect you’ from new investors given there is a pretty black and white deal on the table for them.

I personally like to do my own diligence on companies instead of piggy-backing on what other investors have already done if I’m being invited into a syndicate. But keep in mind this kind of investment is really only for funds that don’t want to take an active role in supporting the founders and who are likely looking for optionality to lead the next larger round. So try to figure out with your VC’s who to approach for filling-out your round as its not everybody’s cup of tea.

Finally, the key is to keep your options open. In the example I cited above, the lead investor ended up filling most of the final amount of the piece that was left open as they found some more money to do the deal as the company was performing well against their plan. Rolling close success.