I recognize this is an overreaction. But humans have their quirks and one of mine is I cannot stand when the tech biz press uses “oversubscribed” to characterize a startup’s funding round or a venture fund’s raise. Before I share why, let me just explain what it means and is intended to convey in a financial context.
When a founder or a VC claims their round was oversubscribed they’re signaling to you that they had way more investors competing to give them money than they wanted to raise. It has nothing to do with the size or terms of the actual raise, just the presence of greater supply than demand.
Ok so why is it foolish for tech reporters to repeat this somewhat cliche talking point?
- It Leads To A Prisoner’s Dilemma/Race to the Bottom of Hyperbole: Well if every other company is saying they were oversubscribed then we should say it too. No, even better, let’s be specific and say something like “we were 5x oversubscribed for this round.” Yeah, that’ll show em. Until 10x oversubscribed is claimed by the next startup. And so on, and so on.
- Counterintuitively, It’s True of Most Reported Rounds: If a startup or a fund can reach its targeted amount, it can be ‘oversubscribed’ with the next dollar of interest. In fact, at that point it gets easier to raise the incremental capital, not harder, because you’ve solved the social signaling issue by attracting all the previous investors. In a single raise, getting your first investor is harder than getting your 101st. This is especially true when the quality of previous investors is high. There hasn’t been a seed round Homebrew participated in that wasn’t ‘oversubscribed,’ especially after we committed and signaled to other investors it was, at least in our minds, a startup to back. And I’d reckon same is true of every other peer fund of ours. And every Homebrew fund has had excess demand as well.
- It’s Easy to Manufacture By Playing Cute With Figures: “We set out to raise $10 million and raised $10 million” = not oversubscribed. “We set out to raise $8 million and there was so much demand we raised $10 million” = oversubscribed. They are the exact same fundraise and the press will cover them differently. Which is nuts! Especially since most VCs will tell a startup to not price themselves out of a round prematurely. That is, go in with a figure that’s slightly below the total you’d like to raise, or a range, and let the market move you up. If you want to raise a $15m Series A and you’re doing well, but not knock it down great? Pitch people on a $10–12m round and then as folks bite, move the round up a bit. Sometimes you won’t be able to take all the additional dollars without incremental dilution but you’ll still have a much better chance of getting to $15m without scaring away potential investors.
I don’t mean to pick on any publications or specific reporters. In Googling for examples of this trope I happened upon some of my favorite journalists, who write amazing and insightful stuff. I believe though that this is one of the areas that being on the other side of the fence provides clarity on just how silly a term it is. So let’s put a stake through the heart of “oversubscribed” and just let a fundraise be a fundraise.