Trust starts with communicating, and stops when the communicating stops
Investors hate it when a founder stops communicating because they don’t have good news to report. If you’re seeking to build a relationship of trust, clamming up is bad. Communicate the good as well as the bad. When there’s no news to report, communicate that too.
Relationships built on trust last longer, are more productive and survive difficult times, but relationships never start out by being built on trust.
Think of trust as a layer of ligaments and muscle which lets the relationship do useful work and flex in response to changing forces. But the ligaments and muscles of trust don’t work unless they’re connected to something deeper.
Trust connects to a deeper layer of bone comprised of many thin layers of other things, such as responsiveness, predictable behaviour, apparent candour, professionalism and just good-old-fashioned friendliness. If one of those layers is wholly or partially missing, when force is applied, the relationship starts to unravel.
If you’re very fortunate, your reputation as a founder and the unique technology you’re developing is just so damn compelling that investors will elbow each other out of the way to write you a cheque even when there’s no bones of a trusted relationship laid down.
You may be reading this now and thinking, “yes, that’s me!”. You’ll soon be on the front page of tech publications talking humbly about how the round came together really quickly. And you’ll create a mistaken impression for you (and for other founders out there) that building a relationship with investors is as easy as sending them a deck and signing a termsheet.
Actually, the most common experience is that nobody wants to invest in your startup.
The second-most common experience is that nobody wants to invest in your startup until you have done the very thing you’re raising the funds to do.
And the third-most common experience to that is that only a few people want to invest in your startup — not enough to allow you to achieve your next milestone but not so few that you’ve utterly failed, and are left with difficult decisions around closing a smaller round, trying to continue bootstrapping instead, or listening to the market and shelving the whole endeavour for now.
Most founder/investor relationships are not what either party pretends them to be at first, and sometimes never.
But if you don’t feel you can count on being so hot that investors back you even in the absence of trust, the sooner you start building the foundations of trust, the better.
I’ve been a co-founder before and if I had to do it again, I’d start laying down the thin layers of bone to underpin this relationship from the very start:
- Making sure my cofounders and I have a detailed AngelList and LinkedIn profile where we’ve weeded out all the connections to people we don’t really know, so that only people who will vouch for us are listed.
- Making sure I start blogging about not just the achievements of the company but also the ‘known unknowns’ and the setbacks we face along the way, so future readers can take the time to learn about how my company came to be in this position. It doesn’t matter if nobody reads it – the point is to have it there as an archive for when people need to do some background research.
- Setting up a simple means of sending out a periodic email update to interested stakeholders, such as RapidReport, Mailchimp or just your email client. Then periodically communicating in a consistent format, featuring meaningful metrics and progress against measurable goals.
One that got away
Years ago, I told Will Davies of CarNextDoor that his startup wasn’t right for my investment focus at the time, and I didn’t think he’d get much interest from the rest of the local angel community because there were too many unsolved problems in his goal of renting out people’s private cars to other private citizens.
Insurance, security, human fallibility, low-density urban Australia… honestly, I thought he was doomed.
But, I said if he was able to show tenacity and progress in the right direction — communicating regularly and openly — over time, maybe he’d build a relationship of trust with people who would one day be his biggest investors and advocates.
He added me to a monthly email report he was already sending out to people he’d met, the “Car Next Door Future Investor Report”.
In his 44th edition, he announced with justified pride that the company had secured a new $5M investment round from strategic investors including Caltex, Macquarie Leasing and Hollard, a major insurer.
Will’s a machine, in the best sense of the word – executing small units of work efficiently and predictably over long periods of time. Proven by his monthly email update.
Car Next Door has doubled in size in the past year. He’s succeeding despite the odds.
His capital raises and my available free capital unfortunately never coincided, and that’s entirely my loss, as how could I say no to investing in a startup that had kept me up to date honestly and openly for 44 successive months and consistently overcame the barriers to success?
I never want to unsubscribe to Will’s Future Investors email. Every issue is a reminder to me of the importance of building trusted relationships, layer by layer. And of how, though I might be good at this, I’m not infallible. Thank you Will!
More about relationships with investors
Each relationship has several components from the founder’s side:
- The near-term private appearance (I’d like to seek your advice in this area because it seems related to some of the advice you have given to other startups a bit like mine);
- The near-term unstated agenda (I’d rather take investment from people who have relevant experience and wisdom to offer, but frankly, at this point, I’d take money from anybody just to keep the business alive);
- The medium-term public appearance (we’ve got this respected person leading our angel round, or this respected VC on our board);
- The medium-term unstated agenda (I hope we’re going to get along well, but I need to think about how to shut you out of the decision-making process if instead we don’t get along);
- The long-term private appearance (I’m going to work hard to make you a crazy amount of money); and
- The long-term unstated agenda (you’re definitely going to want preference shares, you’re probably going to start negotiations by asking for a ratchets and warrants and other exploitative tricks, even if the company goes really well, and we get along, this is actually all a smokescreen for an adversarial competition between us where each of us is trying to keep more of the money than the other).
Of course, the investor has their own set of layers in the relationship to consider too:
- The near-term private appearance (We are the smartest investors in the market right now. Our prior track record in this space means your startup is more likely to succeed within our portfolio. Our fund offers the cleanest and fairest term sheet in town. We won’t drag out the due diligence. We think you could be our brightest star).
- The near-term unstated agenda (Deal flow has really dried up of late and we really have to write some cheques. Or, the fund is past the point where we should be making new investments but we don’t want to miss out on participating in your round because our competitor looks like they’re going to lead it. Or (more likely in the US than in Australia) we don’t think this startup has legs but we’re backing you and your cofounders so that we get to back your future startup, or acquiring you for cheap into another portfolio company when this startup fails. Or, we don’t really like you but we like what you’re trying to do and think it could return the whole fund. Or, when we say you’re too early, we actually mean you’re too early, so let’s keep touching base every month or two until you really are ready to raise);
- The medium-term public appearance (we invested in this founder and this startup because it’s The Next Big Thing. It joins startups X, Y and Z in making us the fastest-moving fund in The Hot New Sector. We can’t wait to help them start building a global presence and ramping up customer acquisition);
- The medium-term unstated agenda (I hope we’re going to get along well, but I need to think about how to manage the board in your absence if your inexperience and eccentricities become a liability);
- The long-term private appearance (I want you to have a beer with the founders of these other startups in our portfolio with whom I get along so you can hear from them how great this is going to be); and
- The long-term private agenda (I suspect you’re playing me off against my rivals on this deal. Something about you reminds me of this other founder we invested in and he went bat-shit crazy and we lost our money but maybe I’m wrong. It doesn’t matter how fair the term sheet is, you’re going to whine and wheedle and moan, or try and push the pre-money valuation up just for vanity reasons.)
Of course, I’m being cynical here, but all of this is drawn from real business relationships I’ve observed. Trust doesn’t grow easily in this jungle of conflicting motives but the sooner you get started, the less undergrowth it will have to fight through to get some sunshine.