When making a pitch, you need to be very clear exactly what it is you are offering and exactly what it is you are expecting in return.
As mentioned in an earlier post, some individuals find discussing money uncomfortable. But fundraising requires you to be very, very precise. You NEED to get into the finer details of how much, when and for what.
One of the most common causes of breakdown in any relationship is what is left unsaid. This is particularly true of business relationships.
You may think you are communicating your position admirably, and that those on the other side of the table have 100% clarity on the issues. Often, however, each party brings to the table a different perspective, and view all that is said from that perspective.
I have always adhered to a simple rule when it comes to communicating/negotiating: it falls to the person doing the communicating to ensure the communication has been effective; that is, it is up to the person doing to talking to ensure that the listener completely understands what is being said.
To avoid miscommunication, unrealistic expectations and disputes, you need to crystallise all the “fluid” aspects of doing business together:
– How much is the investor investing?
– What amount(s) are payable and when?
– What is the investor getting in return?
– What rights flow to the investor following the investment?
– How much say does the investor have in strategy development?
– How much say does the investor have in day-to-day management?
– What activities and deliverables must be completed, when and by whom?
– Under what circumstance can/will further capital be raised?
– How is any “dilution” of equity created via further capital raising handled?
– How can the investor “exit” the investment?
Many entrepreneurs view investors in much the same way they view banks. However, mortgage lending (essentially debt finance) is a lot different to investing in companies (equity finance).
When a bank gives you money, all it really wants to know is that you can provide adequate security (collateral) and can meet your monthly repayments.
Investors, on the other hand, rarely receive “collateral”, in that they often invest in businesses whose sole assets are intangible – the entrepreneur and her/his ideas.
Consequently, many investors will wish to take an active role in their investment. They will want to monitor how the business is going and whether projections are being met. Some investors will look for regularly briefings (often daily).
This isn’t meddling. It is purely risk management. A bank manages its risk by taking a mortgage over your property and by only agreeing to lend less than it is worth. Banks know that, if all else fails, they can sell your property and recoup their money.
Few investors have such safeguards. Entrepreneurs are usually seeking money to start or grow a business. By definition, startup and growth businesses tend to have few (if any) assets, which means that if the venture fails, the investor usually loses the investment.
So it is quite natural for investors to want to keep an eye on their investment. Unless firm boundaries are established before the investment is made, this can lead to friction and tension. Many are the entrepreneur who misjudged the degree of involvement the investor sought in the investment.