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Alternatives make deals close faster
Without competing offers, an investor has every reason to keep pushing for more and more. The negotiation gets weird, and it becomes likely that the deal falls apart.
Uber's previous round, nine months earlier, valued the company at $3.5 billion. In mid-2014, an investor urged taking the first term sheet at a $6 billion valuation, convinced the world was about to end.
Uber held off and ran a process with alternatives instead. Two months later it closed a round at a $17.5 billion valuation. Even if the world really is about to end, having alternatives gets the deal done faster.
Why do lone term sheets lead to pushing?
Negotiators use the term BATNA, the best alternative to a negotiated agreement, to describe a party's walk-away option. Roger Fisher and William Ury introduced the term in their 1981 book Getting to Yes. A party with a strong alternative can refuse a bad offer, while one with none has little leverage to resist. An investor holding the only term sheet can see that the founder has no walk-away option.
Why do investors rush when others are bidding?
People value things more when availability looks limited. The psychologist Robert Cialdini described this scarcity principle in his 1984 book Influence. A competing offer signals that an opportunity may vanish, which pushes an investor toward a quick decision. Auction houses and real estate markets use the same signal.
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