Negotiating with Investors: The Art and Science of Negotiation
Are you struggling to find investors for your business? Negotiating with investors is hard, not only for new startups but also for big companies. The process can be a bittersweet experience for everyone. Most people believe that negotiations are a battle of fighting for what you want. You’d either win the deal or go home with nothing.
While it’s true that winning negotiations mean achieving the main goal, a successful investor negotiation should lead to incorporating terms and ideas from involved parties. But how do you achieve a successful negotiation?
The Structure of Negotiating With Investors
Negotiating with investors begins even before sitting down with them and pitching your project. It starts way before you contact the person and request a meeting. The negotiation structure is composed of three essential compositions:
Planning your business goals
If you come unprepared, chances are the other party will reject you. How so? When you can’t answer questions, this can be interpreted as a sign of incompetence.
Knowing the outcome you want to achieve isn’t enough to get the person’s attention. It would help if you showed a plan. From how to carry out the goals to how much you want to target.
The “target” can be interpreted differently. You may consider discussing the company’s target market, end-of-year sales, and goals.
To create an effective business plan, you need to be as detailed as possible. You need to make sure the goals are manageable, strategic for your business’s growth and highlight the fund needs to attain the end goals.
Invest in business offers
At the end of the day, your investor wants something in exchange for their investments. Ask yourself this question, “What benefit would they gain if they invest in my business?”
Money isn’t always the solution and there should be more you’d be willing to offer. An offer that they won’t be able to resist. Some examples that most investors want are a part of your company stocks or a portion of ownership.
For startups, showing your business traction can help them visualize if your plan can reach more clients. A business traction measures your small business’s profit and studies how often you have negative sales. It means the higher it is; the more likely investors would be willing to sign a partnership.
Find the right investor
Research the right people to build a partnership with. Having an investor who isn’t fully committed to reaching your goals can create more problems for your business. Your main goal shouldn’t be to find money to spend for your business. But to search for investors with the same passion as you.
A person who knows about your industry will more likely accept the deal. Why? Because what every individual wants is to understand where their investments go. If the person knows the market target, they’ll study if your business has the potential to grow bigger.
Always be prepared, know what you’re willing to offer, and choose your investors carefully. Now you have an idea and are ready to discuss your business proposal with potential investors. What should you do next?
The Principles of Negotiating With Investors
Most people focus on reaching their goals and forget one factor to building a successful business. It’s not about the cash and the number of sales. Instead, it’s about maintaining a solid foundation for your company.
What do we mean? A foundation is a group of people you can reach out in difficult situations. If you need to make important business decisions, you need to discuss it with them. These groups of people are investors and co-owners. But how do you build a strong foundation? Below are five principles of investor negotiation:
Start with trust
When you’re negotiating your term sheet with investors, you’ll build a relationship with them. These people can help you make decisions for your business, especially if it’s about budget spending.
It would be best if you avoid building hopes around promises. For example, promising that your company will reach a specific profit if they give you a certain amount is how most negotiations work. But it doesn’t mean you should always negotiate this way.
Showing financial graphs and charts is one way to prove to your investors that it’s possible. You can also bring up the potential outcomes if the original goal doesn’t go as planned. This will guarantee them that their funds would be in good hands.
Open for compromise
Negotiating with investors can be intense, but you need to understand their needs and wants to avoid such scenarios. Know what the other parties want to gain, compare with your offers, and how to compromise.
If you’re hardheaded, you can delay your deals. It might also give potential investors a reason not to agree to what you want. If you keep accepting everything they ask, it isn’t a good approach as well. You should check if the deal will affect your business negatively.
The best solution is to be a good listener and always find a middle ground. Accept the other party’s request and prepare to make adjustments.
Understand their point of view
If you’re negotiating with investors, some will be hesitant to accept the offer. While other people will try to find problems to find loopholes in your proposal.
Before the meeting, understand their intentions and what they want to happen. They’ll be entrusting their money to someone they barely know. Remember, building a relationship with them is important, especially because they’ll be your business partners. You need to bring mutual value and respect to gain their trust.
Be a great communicator
Miscommunication causes arguments within the business. It can also increase costs. To avoid this, reduce any confusion by communicating fully and directly.
Be passionate and detailed about what you want. Mention what you can offer and tell them how important their participation is to the success of the company.
One way to gain their trust is to communicate and listen well. Communicating well gives you the opportunity to share why investing in your company will be an advantage for them. You can also mention the potential in the target market.
Choosing your investor
Investors continuously support your startup by allowing you to use their funds. The money will keep your business working and help increase earnings.
Choosing your investor is vital, especially for startups. Finding the right investor will take time. Here are four types of private investors:
- Angel Investors
These people earn at least $200,000 a year. They’re professionals who fund startups and small-sized companies. So if you decide to invest with them, there’s less risk compared to loans. What do they want in return? Part ownership of the company.
- P2P Lenders
Peer-to-peer is when you ask for loans from private individuals. It’s accessible for most companies because you can easily discuss terms without legal paperwork. What do they want in return? Higher interest returns.
- Personal Investors
Just like angel investors, the funds you’ll receive aren’t loans. It means you won’t have to pay high-interest rates. What do they want in return? Profit shares or stocks.
- Venture Capitalists
These people can help you connect with successful business leaders. VCs won’t require you to pay back the money. What do they want in return? Receive a certain amount of company shares.
Successfully negotiating with investors
Now you’re prepared to set a meeting and discuss your goals. It’s time to plan your business proposal, know how to build trust, and create healthy communication.
During disagreements, avoid arguments or walking out of the room. Instead, take it as a way to learn how to communicate effectively with different people. If you can handle an intense situation, you’ll be more likely to know how to walk the talk.
Layout the plan
Your presentation should show the message you want the other party to understand. Make sure everyone in the room shares and appreciates your goals for the company.
Discuss your project but don’t take too much time because people might lose interest. Ideally, it may be best to limit your presentation to 30 seconds per slide and summarize the important points in your proposal.
Build a secure foundation
Research and measure your business’s competitive advantage. Then, show charts and action plans to your investors. A well-researched business plan will catch the attention of your interested people.
If you’re a startup company, don’t be afraid to discuss the low budget. Instead, tell them the options on how you’re planning to increase your budget and profit. You can also bring up how you’ll handle the profit margins and keep operations running.
You may meet some investors who agree and understand the business value. Let them feel your commitment to pursuing your business goals and the determination to climb in the market.
Strengthen your business and potentially captivate investors by considering these strategies:
- Research on your customers: Make sure to know the customers you want to target and mention why you chose them. You should note the age group, gender, and more.
- Attitude: In the meeting, prove to them you’re trustworthy and have the leadership skills to run the business.
- Operations: Organize and maintain operations. This is where you’ll discuss what each department will focus on and their goals. The departments are sales and marketing, processing, and production.
- Financial plans: Mention how your company’s planning to utilize the funds to achieve the end goal and maintain operations.
Every meeting will test your patience and limitations. Each investor has a different way of communicating their opinions. You need to accept the feedback openly and discuss possible solutions to find a middle ground.
During confrontations, we tend to use the “fight or flight” response. While negotiating with investors, this shouldn’t always be the case. Instead, we need to thank the person for pointing out flaws in your proposal.
Learn how to accept their criticism by responding calmly: “Thank you for the feedback. I will work on the things you have pointed out to improve my business.”
If you feel that the criticism isn’t helpful, ask for clarifications to understand their point of view. For example, you can say, “May I kindly ask for an example to your claims so that I can align myself with your intentions?”
Leave a lasting impression
Sometimes you can close a deal by leaving a great impression. Show how your startup is worth investing in and how they’ll be a great asset for your company’s success.
During the first meeting, the basic rule is to show a positive attitude within the first seven seconds of your speech. Then, learn why smiling is all it takes to forge a strong connection with your audience.
Conveying your message to the investors is the best way to stand out from your competitors.
Offer alternative negotiation
What would you do if the other party brings up what they want to gain from investing in your company? But, then, the offers mentioned aren’t what you expected.
Well, it’s okay to step outside or request another meeting to discuss the arrangement. Remember, you should avoid accepting or rejecting the offer immediately.
When the meeting isn’t going the way you expected, prepare a new offer that might interest the other parties and avoid improvising. Think of possible scenarios and find a solution that’ll be favorable to both parties before setting foot into the room. However, offering alternatives is like a double-edged sword that can result in unfavorable deals.
What if there is no chance to seal the deal? You don’t have to worry. Investors come and go until you find the right one for your company. The art of negotiating with investors isn’t an all-or-nothing concept. Find options for the other party and discuss possible results.
If you tried your best and didn’t get the offer, consider it a learning curve. First, learn how to identify what the person wants for your business. Then, remember that increasing revenue isn’t the primary goal towards success. Consider looking for reliable partners who can be there for you in difficult decisions.
While you adjust and survive in the business world, you’ll need reliable partners who aren’t afraid to speak what’s on their minds. Once your company receives more popularity, you’ll be thanking them for their full support while you started from the bottom.
Negotiating with investors is both an art and a science. Investors are more than just the people who financially support your company. They will be your business partners who will guide you to reach your goals.