Some startup founders use a strategy called investor blocking. Here is what it is and why it isn’t always ethical. Investor blocking is sometimes used to stop the competition from raising money from the same investors
Some investors are more popular than others. If you have been around the startup ecosystem for any period of time then you have probably heard of some of the more popular venture capital firms. Firms such as Kleiner Perkins, Tiger Global, Sequoia, etc. Some startup founders will intentionally participate in what I call investor blocking.
Venture capital firms are usually managing large funds. I’m talking about hundreds of millions of dollars. Those dollars are spread across multiple investments. So, it isn’t uncommon for a venture capital firm to only invest in one startup within a given space.
Knowing that, savvy startup founders sometimes take term sheets from one or more of the most popular firms when they can. By doing this they are essentially blocking other startups in the same space from raising capital from the same set of investors.
That is what we call investor blocking.
There is some gamification that occurs and it isn’t necessarily a good thing. There are stories of startup founders “investor blocking” other startups, without the intention of closing the deal, when they are in the middle of a critical round of funding.
Setting those tactics aside, which I considered shady, investor blocking as a principle is not necessarily an immoral, unethical practice. If you can lock up the best investors in your space then you are gaining some level of strategic advantage over the competition. Doing so also ensures that you will have the best-of-the-best advising you.
Remember, landing an investor isn’t just about the money they will invest in you. The best investors also bring contacts and experience to the table as well.
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