Although there is a very small difference between the words “close” and “closed,” in a start-up there is a world of difference. When an entrepreneur is working on a financing or a big customer deal, there are lots of milestones along the way, but only one that matters: closing the deal. In my experience, people around me love to offer congratulations when things are almost complete. But I’ve learned that so many things can go wrong, even at the last hour.
There have been several times during the life of Punchbowl that we’ve been very close, but not closed. As an example, let’s rewind the clock to September of 2008. At the time, the company was running out of money, and there wasn’t much cash left in the bank. The last round of capital that we raised was in October of 2007, so we needed to finalize our Series A round of financing — and get it done quickly.
We signed a term sheet for our Series A back in July of 2008, and like most negotiations, this one had taken a while. I had hoped to close the Series A in August, but with lots of people on vacation, it’s a very tough time of year to get all of the people you need to sign paperwork. We made a lot of progress in August, but it became clear that we would have to close the Series A in mid-September.
There were many important milestones along the way as we raced to a the closing. First, the Board approved the term sheet, then we got it signed by all parties. After that important milestone, we built a syndicate to fill out the round (this is much more difficult than you would ever believe). Next, we worked on the due diligence process, which seemed to last forever. At each important milestone, I can remember people congratulating me: “Congratulations on finishing the due diligence.” I graciously accepted the praise and held my breath. I knew that there is a world of difference between close and closed. Our Series A closing was scheduled for Monday, September 15, 2008.
And then the unthinkable happened. On Sunday night September 14, 2008, word leaked in the media that Lehman Brothers bank had collapsed and was going to declare bankruptcy. I didn’t know what the ramifications could possibly be on our Series A closing, but I knew it was bad. This was the doomsday scenario: something in the economy happened that would directly impact and influence our investors. And the reality for me was that if any single investor pulled out of the deal (even a small angel investor), then the Series A documents would be invalid, and we would have to re-draft everything.
The next morning, I received a few phone calls and emails from nervous investors. One particular individual told me that he was pulling out of all of his investments immediately, and he asked if he could get out of the Series A. I politely reminded him that he had already signed the paperwork and that the closing was already in motion. We spoke about the nature of start-ups and how critical it was to our business to get the financing closed. I’m not sure he was that happy, but he agreed to follow through with his investment. Throughout the day, I spoke with most of the investors. Some expressed confidence, others didn’t know what to think. Thankfully our lead investors held steady, never wavering in their support to close the round. The Dow Jones closed down just over 500 points (−4.4%) on September 15, 2008, at the time the largest drop by points in a single day since the days following the attacks on September 11, 2001.
After many tense hours of waiting, and a series of emails between lawyers, late on the evening of September 15th, I finally received an email from our lead investor: “Legal has now received all that it needs to close the Punchbowl financing. Congratulations. You are closed!”
Did I celebrate? No. Even though it looked like we were all set, I wanted to see the money actually in our bank account. So I waited. And waited. Unfortunately, the money didn’t clear until the next business day, so my celebration was put on hold. And when I saw the bank account the next day, it brought tears to my eyes. We had really closed. It was time to celebrate. And boy did we.
Please remember the above story next time you congratulate an entrepreneur. Simply ask him or her “Are you close or is it closed?” There is world of difference between the two.
Almost only counts in horseshoes and hand grenades — and doesn’t matter one bit for a start-up.