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VC Minute: The Magic of the Soft Circle

By December 11, 2020March 21st, 2021Startups

Let’s talk about the magic of the “soft circle.”

On the last VC minute I talked about treating your fundraise like a sales process. But there are a few critical  differences between fundraising and sales, one of which is that in fundraising there’s an important stage called the “soft circle.” 

The soft circle is broadly, every investor you’ve talked to that has not yet said yes or no. So, the “maybes.” More specifically, it should be investors that have expressed interest and there’s a reasonable chance you can get them to commit to the round. 

The way you get an investor in your “soft circle” grouping is by asking direct questions: “If we were to close the round on Friday, would you invest?” The answer here is going to be some shade of “maybe” and that’s OK. The follow-up question is, “what concerns do you have?” This opens up a dialogue about where to go with that investor.  And you can specifically ask them, “is it OK if I count you in my soft circle group?”

Here’s the critical piece of why “soft circle” is so important: you use it to show one investor the interest that other investors have in your raise. For example, you could say something like, “We’re raising $750k with $500k committed and another $400k soft circled.” The investor you’re talking to knows that you won’t close everything in your soft-circled. 

I usually take that soft circled number and divide it by three to make a rough estimate of where you’ll end up. And that’s OK. You’re showing that there is interest in your raise, and if they want in, they’ll have to act. 

One quick caveat: don’t fudge these numbers and don’t lie to yourself about who’s really soft circled. Your reputation can take a ding if you stretch or overstate your numbers. If you say you have $500k committed, you better be sure that’s $500k and not $100k. 

Listen to the whole episode here:
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