Bursts of Color - Happy Ears & Extension Rounds
Happy ears is a clever way to describe our human tendency to hear what we want to hear. This is especially common when we're trying to win someone over, as in sales, recruiting or fundraising. While it's great to be optimistic, happy ears can cause trouble when we overweight our chances of success.
A Common 2022 Scenario: Extension Rounds
Let's pretend that your startup raised a $4m Seed round last year. The business has grown quickly since then - say tripled or more. You had hoped to raise a $10m Series A by now, but given market conditions, you have reset your sights on a $5m Seed Extension that buys another 18 months of runway. You run this plan by your largest inside investor, who led your Seed round and owns 15% of total equity. She sounds enthusiastic and says:
That sounds like a great idea. We will definitely support that kind of round. We also know some co-investors who might be interested.
What the Founder Often Hears
Happy ears come into play when we hear something positive-but-vague like this and conclude something more specific like:
Hallelujah! This means they will likely invest at least $2-3m directly, and then make some introductions that will get us to the full $5m quickly.
What the Investor May Mean
The founder's optimistic take here might be right. But "we will support you" might instead mean something more typical like:
If you can get a new outside investor to lead a priced round with clean terms, then we will probably want to invest our pro rata of about $750k (15% of $5m).
Oh and if you can't get a new outside investor to lead a round, then we will keep trying to help with advice and introductions, but not much money.
The Solution: Get Specific
To mitigate happy ears in this situation or any other, we may have to push through the discomfort and get specific by asking the next question, and the next one after that. At the risk of belaboring the obvious, this set of questions might go something like:
Of the $5m round, what dollar range is your firm willing to invest in this round?
Would you be willing to write a term sheet and lead the round? If yes, what do you need from me and what are the next steps?
If no and we can't find a new outside lead in the next 8 weeks, would you invest in a SAFE? How much and on what terms?
In Conclusion
By all means, let's stay optimistic and keep hoping for the best... without letting happy ears cloud our plans.