For entrepreneurs seeking funding to start or grow a new business, pitching the idea and plan to potential investors is a critical step. But it doesn’t stop with a successful pitch.
For those lucky enough to reach the later stage of actually negotiating a deal, understanding what works and what doesn’t with seasoned investors who’ve been through it before is even more important.
Joel Klein is a long-time angel investor and business coach who has advised numerous startups. And as Founder and Producer of BizTank – a SharkTank style TV show where entrepreneurs present to investors – he’s heard hundreds of pitches.
Klein offers these six tips for negotiating successfully with investors:
1. Determine the closure from the beginning.
Always know what your end goals are, and determine what you believe to be a favorable outcome. Envision what it would mean for you and your business if a deal were to happen, and distinguish what the deal breakers are before entering negotiations with potential investors.
At the same time, try to understand what the investors’ end goals are likely to be, and capitalize on this by painting a picture that aligns with their objectives. Successful negotiators always look at the situation from the other side's perspective. Emphasize how the deal will benefit them, and help them connect the dots on how you’re going to build a game-changing business.
2. Don’t be afraid to go for the “no.”
The best negotiators are focused and determined individuals who understand each side’s motivations. Don't be afraid to communicate exactly what you want, and don’t be discouraged if you hear “no” from time to time. That’s inevitable. But in negotiating situations, “no” doesn’t always mean, well, “no.”
In fact, the more “no’s” you get, the closer you are to hearing a yes. What’s more, determination is a quality that investors admire and look for in a startup entrepreneur. So even if money isn’t offered the first time around, the determination and ambition that you express may attract investors to come back to you another time.
3. Less is more.
Narrow down your options as best you can before you begin negotiating. Many entrepreneurs enter negotiations with numerous financing and investment alternatives.
Select the two or three best options, and be sure you understand and can articulate the unique benefits of each one. Keep things simple, and make sure that your messaging across different options is consistent. Avoid sounding uncertain about the best path to follow. Investors may have other ideas, and you’ll want to maintain some flexibility. But showing confidence is critical.
4. Focus on the forest, not the trees.
Consider the bigger picture, and don't get mired in arcane details. Trust your instincts, and if you feel that the deal is good, don't let minor items stand in the way.
It helps to try and separate yourself from the deal and not let ego or emotions get in the way. All too often negotiations fail because personal issues unrelated to the deal at hand sidetrack one or both of the parties.
5. Press forward gradually.
Don’t be hasty or seem over eager. Just because the pitch went well and an investor is willing to keep talking doesn't mean the deal is done. Ask for the next step, and make sure you fully understand any offer, as well as the inevitable conditions that come with it. Sure, momentum is important. But make sure the deal points are clearly understood before making any decisions.
6. Provide a way out.
Providing investors with the outlines of a realistic exit strategy may also be critical. In short, they’ll want to know how and when they will realize a return on their investment.
They may love your idea, but if they don’t think they’ll make significant money from it within a reasonable time period, they’ll probably look elsewhere.
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