Any technology entrepreneur that is faced with raising outside capital either understands or has to acquire an understanding of the vernacular of angel and venture investment. Participating preferred, dilution, preferences and designations, conversion, reps, and warrants all sound like blah blah at first. But here’s the good news. There are a ton of great online free resources available that you can use to get smarter about the dialect of raising money. Also, an experienced lawyer or advisor who has gone through multiple financings can be enormously helpful.
What isn’t talked about so much is Why someone chooses to invest in your business. That never makes it into a term sheet. You will need to understand what might compel an investor to value to the nascent business more than their hard-earned cash. In other words, translate your message into angel venture investment speak.
The process of receiving a term sheet and closing on financing can be long and complicated. The need and motivations of an investor are sometimes not communicated to an entrepreneur. Due diligence is designed to uncover reasons for not to invest. Despite these daunting odds, there is one thing that you can do to tilt the odds in your favor.
The most important aspects of the investor: entrepreneur relationship
While early-stage investors are understandably skeptics, if, through the relationship dance, they develop the belief that they can trust you, you are in a much stronger position to close. The relationship that you build during the process will be because the investor is interested in the idea, your market and the team that you have assembled.
So, in this context, what does that trust mean? They must trust that:
… you will be a responsible steward of the cash that they invest
… you will keep them informed about the good, the bad and the ugly of what is happening in the world of your business
… you always bear in mind that they expect a return on their
It’s not a one-way street
When you’re raising money, it’s common logic that you want ‘smart money’; that is, money than help to propel the business forward. That’s not always possible, but you have every right to work with an investor that you trust to:
… respect the roles that labor and capital fulfill, provided you are executing on your plan
… assist with activities like recruiting, attracting follow-on investment and providing you with thoughtful and meaningful advice
… be honest with you, and communicate their feelings about your performance, and the performance of your company.
Trust is the Hallmark of Relationships
Despite the trials and tribulations of the process, it is the way that an investor, especially at the early stage, build the trust to make an investment decision. Use that process to build the trust that is the hallmark of great and profitable investor: entrepreneur relationships.