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Closing an Investment Deal by Text Message

Posted on May 15, 2012 by  | 0 Comments

By Dug Campbell

As I worked my way through the relentless advance of the RSS feeds on my Google Reader account over breakfast on Tuesday morning , one article stood out. As some of you may have read, it was an article in TNW reporting that Dave McClure has just completed a $1m financing round by simply sending a text. On a closer read, the author does let slip towards the end that McClure did actually also use the same mobile for a couple of phone conversations with the company before money changed hands. 

As someone who knows Dave McClure only by reputation, I wouldn’t be particularly surprised if there was some truth to the reputation – he is, after all, famous for his unorthodox style and irreverent approach to the early-stage scene. And why not? If an investor (whether that’s an individual or a fund) is looking for a model which provides a sustainable opportunity to invest across a large number of startups, it’s hardly rocket science to understand that achieving efficiency at every stage of the process is crucial for success. After all, risk capital is precisely that – uncertain and precarious – and adopting a blanket investment technique (such as the standing offer by Yuri Milner and Ron Conway of convertible debt to all Y Combinator startups) which may appear profligate in any other environment starts to makes sense when you look at the potential return of early-stage investment made on a portfolio basis. Or, to use the words of Paul Graham, “This is a hits driven business”.  Why spend time attempting to de-risk multiple investments if you might only succeed in delaying a company’s progress at a critical stage when agility might be its best chance for survival?

So McClure is certainly not alone in his approach. From experience, however, there are a range of other issues at play here which the article doesn’t mention. The existence of the often-discussed ‘standard form’ early-stage documents is likely to have played a vital role. Put simply, it’s far easier for an investor to reach agreement with someone who is happy to sign up to terms that you’ve used before. However, the difficulty is that every single deal throws up its own unique circumstances which may mean that the same standard terms may in practice be weighted in favour of any one or more of the parties (investor, company or individual founders). It is not hard to see how an individual angel in deciding whether or not to invest his or her personal wealth and faced with the prospect of making a smaller number of investments over the course of a defined period, may be less keen to accept terms that differ from those that he negotiated in previous deals. You’ll also see that one of the texts in the TNW article refers to ‘signed’. Standard documents or not, putting pen to paper remains an essential part of the process so, as much as we’d all like to believe that the transaction could be done by text, the reality was, I suspect slightly more formal. Believe it or not, most startup lawyers that I know are in favour of standardisation in the early stages where possible. I suspect that those days will be with us very shortly. However, until that day comes, I suspect that the majority of angels in this country will remain more interested in EIS than SMS. 

What are your thoughts on the article? Would you prefer to see deals done by text in an ideal world or do you think people like Dave McClure are simply acting as outliers? All thoughts welcome below. 

@dugcampbell

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