Negotiating with Investors
First off, we’re no experts in this. Recently we’ve been fortunate enough to have the opportunity to pitch to a number of different angel investors, of varying personal wealth, in regards to our co-living startup. All of them have gone a little differently and although we’re not about to reveal the blueprint for a perfect pitch (there’s plenty of that already on Medium), we are going to give a snapshot of our own experiences. We hope this will include maybe a few hints and tips that might help another aspiring startup founder/entrepreneur on their own investment journey.
To begin with, pitching to and meeting with investors is extremely exciting. It’s what you dreamt of, right? When you first thought up that seemingly impossible dream at some moment in the past, pitching to an investor for X amount of capital was the point you aspired to reach to at least give yourself a shot at making that dream a reality. And that passion and excitement you feel for your idea are emotions that should be bursting out of you when you first meet any potential investor. You have no hope of convincing someone your idea can be a billion pound company if it doesn’t look like you believe it yourself! Convey that drive and enthusiasm and you’ll be off to a winning start.
The bulk of your interaction will clearly then revolve around your pitch. We spent hours/days/weeks preparing and learning our pitch deck, until I could reel off the whole thing with no prompts. But in a number of the meetings the investor didn’t want to see any slides. They weren’t interested in hearing my carefully prepared pitch that I’d spent considerable time perfecting every word on, they just wanted to chat. This sounds easier, doesn’t it? Not necessarily. When you’re heading to a meeting that you’re so sure will follow a set structure, but then goes completely off-piste, it can throw you. Some have been far more informal than I had expected and much more a Q&A type scenario, that I then tried my best to shoehorn in all my well prepared one liners from the pitch deck. So keep an open mind! And don’t be certain you know the course of the meet up before it’s even happened.
So the pitch is going well, they like you and the concept, what’s the next logical step? Well, their stake in your company, obviously. This is an extremely tricky part and sometimes a point where negotiations can break down. It’s vital you value the work you’ve done up to that point and think long term about the progression of your business. This investor might give you the jumpstart you need to begin, but what’s the long term play? If they can’t help you with the growth and scale of the company 2 years down the line, then how big should their stake be? All questions that unfortunately there’s no straight answer too and it’s something you have to think really hard about both before and after the initial meeting.
Do your due diligence on the investors intensely and don’t make any snap decisions, take your time to understand the offer and everything that it involves. Is it just money, or are they contributing through their own personal experiences and skills too? If so, how will that look? Draw up a contract that outlines their exact commitment and fully understand how the dynamics of your relationship will work.
Remember there’s a number of ways a deal between you and an investor can be structured. Their shares could be ‘vesting’ over a set period, typically 4 years, which means an uplift in their equity is only realised when certain time/performance milestones are hit. This can also include a ‘cliff’, usually of 1 year, which means they receive no equity until that milestone is reached. This helps to incentivise the investor to work towards the growth of your company and allows you to test and adjust your relationships without fully committing at the beginning.
From our (limited) experience an investor is probably analysing three things:
1. The Person
2. The Product
3. The Profit
Now everyone’s different, but from what we’ve found, they come in that order. The ability to convince an investor you have the skills to execute your plan outweighs the 10X profit estimations you gave on your revenue slides. If they like you, and believe you’re competent enough to actually do what you say you will, there’s a possibility they may want to have a second conversation.
Overall we’d say be patient, logical and un-emotional. You’ve FINALLY been given the offer that could transform your business, but is it the right one for you and the long-term growth of your company? Always be wary of taking early money. Fight, scrap and hustle in the early days to live off a shoe-string budget and you’ll thank yourself down the line.
And most of all, don’t get downhearted! Just because one investor doesn’t see the potential in you or your product it absolutely doesn’t mean that everyone else you meet with feel the same way. Stay dedicated and keep positive.
Good luck! :)
SYZO
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