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Leveraging the Bandwagon Effect
Read time 1.8 minutes.
Everyone knows that once one VC invests, its a lot easier to get others to join your round. This is the bandwagon effect.
What some people don’t know is how to optimize the bandwagon effect and leverage it to raise the most amount of money possible. The key to doing this is understanding the Risk Relation of any investment made in your business.
What is Risk Relation?
Risk Relation is an understanding of how the investment by another VC changes the risk/reward proposition for future investors.
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Scenario 1:
Think of it this way: let’s say you raise $2M from a $10M fund that normally invests a maximum of $500k per company. If you aren’t explaining to other VCs that your existing investor has gone (1) off thesis, (2) 4x normal spend, (3) risked 20% of their fund on you, then you are missing an opportunity.
By explaining this, you are telling VCs that you saying that someone is risking their career, reputation, and fund for you because they believe in you. This kicks up the psychological pressure on future investors. Either your investor is insane, or they are missing something. Suddenly, putting in $200k just to make sure they aren’t missing out seems like an obvious thing to do.
Scenario 2:
Now, let’s think of another scenario. You raise from a16z, Sequoia or another major firm. How does that impact Risk Relation?
Now, to a major firm, you are just a lottery ticket; they have thousands of bets. Some VCs look down on this; they know an investment from a major firm isn’t always the endorsement founders think it is. You can’t say they are risking their fund on you; instead, what you can do is say that they have agreed to take an X% allocation in future rounds or that they have resources to support your growth. What you are doing is promoting how this investment is more than just money; this will make it seem as if the risk is lower for the next investor and the price is lower as they don’t need to provide anything more than the cash.
Overview
So, moving forward, leverage the powerful Bandwagon Effect to the maximum by understanding Risk Relation and using it to get a supercharged bandwagon effect, prompting many people to invest in your business.
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Onwards and Upwards,
P.S. Are you ready to take the next step in raising venture capital for your company? If so, you can book a 1:1 strategy call with me to help get you going in the right direction!
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