In this post, we will discuss how Soft Circling Strategy works, and how it can help increase the likelihood that VCs will come in on your Series A.

"Soft circling" is a venture capital term which refers to the process of achieving verbal commitments to invest, without actually taking in capital (yet). In simple terms, it's about successively building your book of investor commitments so that VCs and investors are more likely to invest in you when it comes time for you start calling in commitments. This is one element of what we call 🦄 Financial Social Proof 🦄

No one wants to be "first money in" on your round.

You need to "seed the tip jar" by bringing investors to the table before you start pursuing larger commitments, such as institutional VC capital. Being the first to invest indicates a risky investment. But when there are 10 other investors already, then you've achieved more momentum. The story is very different, you've already been looked at by others, and it appears there's a lot of interest in your round.

But you can't just claim your Series A is 60% committed when it isn't. That would be unethical at best, and potentially a lot worse. So instead, you should engineer your raise so that you're optimized for success.

Prioritize & rank your investors in descending order, with most likely to commit at the top.

In raising your round, you should be first going after nearly-guaranteed money, then in descending order from investors most likely to commit. Here's what your Series A list might look like in order of approach:

• SBA Financing, Grant money & Alternative lenders
• Existing Friends & Family investors
• Existing Angel investors
• Existing VC investors
• New Friends & Family
• New Angels you're already in contact with (warm)
• 📞 Warm-referred VCs you got intro'ed to from your Existing VC investors
• 📧 Inbound VC investors (warm)
• 💸 Cold Tier 1 VCs (the VCs that you REALLY want in your round, that aren't already investors, would sit here)

Notice that the Tier 1 investors that you REALLY want are at the bottom of this list. We'll come back to that.

Every step of the way, build up your soft-commitment figure, and use it in your pitches along the way.

Your soft-commitment figure is like the thermostat diagram you see at kids' fundraisers that shows "how much we have raised so far."

Here's an example, using the list above (say you're raising a $10M round):

• You approached your banker, who indicated you could probably get $4M in SBA debt at around a 5% rate. It's not great because you're not cash-flow positive and it would drain cash you need for growth, but for the purposes of the raise, you have a rough idea what the terms would be. Soft commitment: $4M (40%)
• You approached your five existing F&F investors and said, "We're about to run an active process, and I wanted to make sure you got first look before we take it wide on a priced round. We have rough terms on a $4M line - I'm not sure we're going to take it, but it is there potentially. Assuming we brought in a VC lead investor that you liked, what would be the rough range you might potentially be wanting to commit for this round? We're not asking for cash today, and I'm not going to hold you to it - but I wanted to have this discussion now to get an idea of where you might be at, so you don't get left out." These F&F investors' range adds up to $1M-1.5M. Soft commitment: $5-5.5M (50-55%)
• You repeat the above to your existing VCs, with the modification, "We have $5-5.5M soft-committed, which includes $4M in potential SBA financing that we have rough terms on. I'm not sure we're going to take the debt, because we'd prefer to conserve the cash, but again - it is potentially there. So we're circling up with everyone before we take this out wide." Your VCs soft-commit $2-2.5M. Soft commitment: $7-8M (70%-80%)
• Now you're approaching the VCs that your existing VCs warm-intro'ed you to. Notice the twist in bold. "We have $7-8M soft-committed, which includes $4M in potential SBA financing that we have rough terms on. I'm not sure we're going to take the debt, because we'd prefer to conserve the cash, but again - it is potentially there. Jane mentioned this could be a fit for you, and I wanted to have this chat so you could get a first look before we took it out wide. Assuming we brought on a lead that you really liked, where do you think you might be at in terms of ticket? Bear in mind, we might kick out the debt to make space for the lead, so our headroom is probably $2-3M at the moment." The warm-referred VCs soft-commit $2-2.5M. Soft commitment: $9-10.5M

Now it's time for the inbound & cold VC discussions.

By the time you got to your inbound VC leads, in theory your round is nearly full. Again, that includes the SBA debt that you just don't want to take, but you're in a position where you have a potential soft commitment for 90-105% of the round. Now it's time to swap out the debt you don't want in your commitment stack, for that sweet, sweet Tier 1 equity you do want.

The debt is still useful though! While you could always run that down and actually pull it in if you wanted the extra capital firepower, our focus is on making sure that it continues to do its job in your pitch. Here's how the ask might go to that Tier 1 VC (note the change in bold):

We have $9-10.5M soft-committed, so we're kind of 'there.' That $9-10.5 does include $4M in potential SBA financing though. We have rough terms on it, and could always access it if we want, but I'm not sure we're going to take the debt. We'd prefer to conserve the cash, but again - it is potentially there. Considering our angle and our model tracks with your other investments in the space, we thought this could potentially be a good fit for the Unicorn Capital fund2, and so I wanted to have this chat so you could get a first look before we took it out wide. Assuming we brought on a lead that you really liked, where do you think you might be at in terms of ticket? Bear in mind, we would probably kick out the debt to make space for the lead, so our headroom might be a bit limited."

But wait. Evan, didn't you just tell me that I was saying this to a Tier 1 VC I wanted to lead my round?

That is correct! I love this little move. (Author's Note: VC, if you're reading this, I'm not sorry - because you should be sharing this article with your portfolio company founders right now)

Here's why you pitch a co-investment to someone who probably leads rounds: Because of how you've worded the question, this is the point where they will correct you and tell you that they prefer to lead rounds.

And here is where you put on a slightly-confused look for a split second, and then say: "Ah - really, OK so... what might that look like?" 😉

Bonus: Circle back to your commitments. Know who has flex, and who wants more.

Once you get a dynamite lead in your stack, that's when you circle back by phone to your previously-committed investors (and even those who might have passed) and see if having a commitment from your new potential Lead Investor has modified their thinking ❤️:

"Hey Elaine, quick heads up - Unicorn Capital wants to lead the round, the Term Sheet looks pretty good and I think we're going to take it. It's a great fit, Evan Fisher @ Unicorn (super well-known in Consumer & SaaS) will be joining the board. Very excited! Expect docs coming your way once we get the attorneys to paper it. At this point, we don't have much headroom but just wanted to see where you wanted to be at in terms of final commitment. I think you had said you might be in for $750K-1M? Based on where we're at, I think the max we could probably get you on an overallotment would be only $200K over that."

I always recommend going back to your soft commitments - and those who passed - and having this brand of conversation. Inevitably, one or two may want more allocation, and that typically balances with the one or two that for whatever reason dropped out.

And that's the Strategy of Soft Circling, in a nutshell.