Be The Entrepreneur They Trust – The Master Funding Equation
Last week I introduced you to my Master Funding Equation (MFE). In case you missed it, the MFE looks like this:
- A Viral Vision Statement/Elevator Pitch +
- A Powerful Pitch Method +
- The Correct Pitch Content +
- A Winning Business Strategy +
- A Trustworthy CEO +
- A Balanced Team +
- Understanding the Mind of the Investor
If you’ve been reading this blog for the past year or so you will have noticed that we have covered every element of the MFE. They’re all important to a successful funding. But in my experience, one variable in the MFE stands above the others, because without that variable most investors will never get far enough into considering your offer to bring the other variables into play.
Look at the MFE above. What factor do you think stands above the others in importance?
By way of answering that question let me re-order the MFE and play this most important factor first:
- a Trustworthy CEO +
- a Viral Vision Statement/Elevator Pitch +
- a Powerful Pitch Method +
- the Correct Pitch Content +
- a Winning Business Strategy +
- a Balanced Team +
- Understanding the Mind of the Investor
There you have it. Trust is the most important factor. Without trust, nothing else is relevant.
Recall that I wrote extensively about trust in this space some months ago. I urge you to review each article in that series. Here is the link.
In the entrepreneur-investor relationship context trust has two components:
- Establishing trust at the outset of the relationship
- Maintaining trust through the investment process and beyond
At the outset of every investor encounter (aside from long-time family and friends perhaps), you would be wise to assume that trust is not present. They don’t know you well. They haven’t typically worked with you before. They don’t know the qualities present, or missing, in your character. They’ve lost money frequently in previous investments, so they begin cynical All that matters deeply because if they choose to invest in your company they’re putting their money, time and reputation at risk.
So they don’t trust you at the beginning. Without trust, would they put their hard-earned money, their valuable time or their precious reputation at stake?
No, of course not. So the establishment of trust early on is absolutely critical to a positive investor outcome.
But if you DO establish trust, then maintain trust, great results often follow. Remember that a very common thing investors who back you do is refer you to other investors with whom they have relationships. That is pure gold in the funding game.
Think of yourself as an alchemist. Your job is to turn lead into gold by establishing and maintaining trust with investors. The first step is establishing a level of trust that motivates an investor to extend the relationship to successive meetings, deeper engagements and eventually a check.
In an earlier post, I provided a roadmap for establishing trust at the outset. Again, if you simply recognize that you are starting from a place of no trust you will be miles ahead of other people vying for investment dollars. Because most entrepreneurs think investors will be wowed by their ideas, their team, the market potential. They fail to understand that those things demonstrate competency, not trust. They’re all a part of the MFE, but they do not help establish trust.
Trust lives within a relationship. You’re building a relationship with your investor. Trust grows as the relationship grows. Here are four key ways to establish trust early on by building a relationship with an investor (reprinted from the blog post linked in the paragraph above):
- If possible, get a warm introduction from someone the investor knows personally, preferably from a CEO of a company he or she has successfully invested in (of course, that’s going to likely require that you’ve developed trust with that person!)
- Be revealing. The relationship involves being revealing, revealing some aspects of yourself that you generally don’t want others to see, and this is very difficult for highly competitive people to do.
- Don’t hide your flaws. Investors interpret your showing flaws (mistakes made, missing skills, unproductive patterns), as a sign of strength of character, IF you also present how you compensate for them. The last caveat is key; remember it.
- Don’t confuse vulnerability with emotional issues. It is generally not appropriate to outwardly express negative emotions such as fear, grief, sadness, and anger when initially creating a relationship with an investor.
I can summarize numbers 2-4 from the list above in two words: Be Real
Your flaws and weaknesses are going to be revealed at some point anyway. Everyone has them. Hiding them, acting like a Super Hero or trying to appear as perfect actually creates a barrier to trust. I understand that being vulnerable probably feels like a risky tactic. It may be something you practice NOT being in life. You may perceive it as a weakness, a flaw in others. Most likely that’s because you (like countless others) confuse vulnerability with emotional outbursts or confessions. Being vulnerable is NOT the same as being emotional! Be revealing not emotional.
Yell and sob? No, no, no. That’s not the kind of vulnerability I am speaking about. You’re in an investor meeting, not a soap opera. Vulnerability in this context leads to the showing of other key qualities most investors value: your coachability, your listening skills, your pragmatic realism. Each is important factors in maintaining trust over time. Vulnerability is a key part of establishing trust at the outset.
Here are three guidelines for being vulnerable in a productive way with investors:
- Reveal a flaw unemotionally, as a matter-of-fact
- Describe how you compensate for that flaw
- Hold the context that because of your ability to compensate for your flaws, you may be the best candidate they can imagine.
Money is a common place for this kind of vulnerability to be expressed. After all, the investor realizes that your company needs money or you wouldn’t be talking. Don’t waste his or her time pretending you don’t need the money. If cash flow is tight, if you’re not consistently meeting your monthly nut or if you underestimated the time and cost of getting to market, reveal that. Do it unemotionally. Do it unapologetically. Report it like Sergeant Joe Friday in Drag Net: Just the facts.
Then describe how you are currently responding to the shortfall. What actions are you taking, what strategies are you employing? By the way, this is an excellent time to ask the investor for their wisdom on the issue. Investors LOVE it when you ask for their hard-won wisdom. It shows that you may be coachable and it gives them a Bully Pulpit from which to demonstrate their experience.
In the end, all you have done is reveal the truth of the situation, plus what you are doing to compensate for the flaw. The proverbial elephant in the room is revealed. It can be discussed, dissected, perhaps even solved. The conversation becomes real, not theoretical. Real relationships can begin to develop under such conditions. Trust can blossom.
Consider that if money is an issue but you simply avoid it, all you have done is miss out on the opportunity to establish trust, develop a real relationship, get valuable assistance from someone with more experience than you.
In my next post, I’ll review the art of maintaining trust once it has been established. Master these two aspects of trust as a powerful one-two punch for your Master Funding Equation.
Key takeaway: One powerful way to establish trust quickly is to admit a flaw and then explain what you do to compensate for that flaw. You have to compensate for your flaws to earn trust. Do this in the context of “I am the best candidate you can imagine.”