I think it makes sense to tell other potential investors when one investor is “close”.
“I’m expecting a term sheet soon, so let me know what I can get you to help accelerate your process. I’m here, and happy to meet or send over any information, anytime. Whatever I can do to help with your process and decision.”
Nothing wrong with that, especially if it’s true.
But, the line is fuzzy.
Telling a VC another VC is close to issuing a term sheet will create a sense of urgency if the VC is fairly interested, i.e. >33% chance she might want to invest.
But if the VC is somewhat interested, but not “leaning forward” yet — it may backfire, because he or she won’t want to put in the effort to learning more. Put differently — if I’m sort of interested, but really need to do more work to know for sure —- especially if I need more time — pressure will backfire. If I need 2–3 weeks, and you’re telling me I only have a few days — I’ll just fold and move on to the next deal.
What’s an even bigger potential mistake is putting pressure on that isn’t quite real.
It’s one thing for a VC to tell you a term sheet is coming this week. It’s another thing for a VC to just do some “due diligence”, or make a few calls, or take a second meeting. That may amount to nothing.
Don’t overplay your hand without another firm offer either in hand, or close to coming.
Sometimes that works.
But usually, it leaves you with nothing. Everyone folds.