“I want to invest in your company.” These are words that almost any start-up owner would love to hear. However, asking someone to hand over their hard-earned cash to you and your company is like asking them to take a major leap of faith. If you’re good enough (and lucky enough) to find some interested investors, keep the following items in mind so their interest doesn’t wane to “no thanks”:
1. Keep engaging alternative investors until you sign a term sheet. Sometimes, you should keep engaging alternative investors until you close (assuming the term sheet doesn’t have a no-shop clause). In Bargaining for Advantage, G. Richard Shell writes, “Research has shown that, with leverage, even an average negotiator will do pretty well while, without leverage, only highly skilled bargainers achieve their goals.” Spending time developing alternatives is as good as spending time developing your current offer. It increases the chances of closing your current offer, it closes your current offer faster and it improves the terms of your current offer. Keep this in mind if you “don’t have time” to develop alternatives.
2. Develop your current offers or they will die. Keep developing your current and pending term sheets while you engage alternative investors. If you sit on a term sheet for 2+ weeks, there’s a good chance that the offer will disappear because the investor will move on to a shiny new company and his enthusiasm for your company will wane. Not to mention that most term sheets expire after a couple weeks. The best way to keep investors warm is to focus on fund-raising so you can (1) get all your offers at once and (2) pick the best one before any of them cool down.
3. Develop a “hot list” and keep up communication. Just like potential leads for business, relationships with potential investors need to be nurtured. Even if they’ve only showed a slight awareness in the company, don’t lose hope. Develop a “hot list” of potential investors that show some level of interest. Make sure to send updates to these people at least once every month or two so that when you find your lead investor, they’ll be warm.
4. Buy some time. When you receive your first offer, you can buy 1-2 weeks of time by saying, “We’ve promised to close out conversations with a few investors and we need to honor our promise.” Or “We’ve committed to a partner’s meeting next week and we need to honor our commitment.” No investor is going to ask you to break your previous commitments. This little tactic buys you time and increases your professional reputation, social proof and scarcity.
5. Don’t tell interested investors that you’re “shopping around.” Don’t use the words “shopping around” or “auction” with investors. Their reaction to these terms is, “What am I, a bag of money? I can only get in this deal if I pay the most?” You’re not “shopping around”; you’re “looking for the right partner”. While you’re talking to investors, you can define the right partner in terms of experience, someone who wants to invest more/less money, someone who has a history of backing the founders or anything but not: the guy who will pay the most.
6. Keep them warm, even during closing. During closing, keep your other prospective investors warm in case the deal blows up; but don’t break any binding no-shop or non-disclosure agreements in the process. Keep in touch with anyone expressing interest, provide updates, let them know what you’re doing & where you are in the development of your company and make them feel that you consider them to be a VIP in your funding process.
7. If you like this information, you’ll really like “Top 10 Mistakes That Cause Investors to Shoot Down Deals”.
8. About the author: David Brode is the Principal of the Brode Group. An economist by training, Brode has over two decades of experience helping ventures develop and communicate business strategies through financial models so they can launch, grow, and sell businesses. Brode’s financial forecasting models have been through due diligence dozens of times and have been successful in securing over $11 billion in financing for projects worldwide. Brode has a B.A. degree in Economics from the University of Michigan.
Keep Them Warm!
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