When running your own business or start-up, aiming for a long-term relationship with your venture capitalist is imperative so that you don’t have to worry about facing a cash crunch. But before you build that relationship, you need to find the right partner and negotiate the right investment deal; one that satisfies both sides.
You must remember, investors have walked these steps before you and are seasoned professionals in their field of expertise. Nevertheless, with a little preparation, you should be able to negotiate a good investment deal. Here are a few crucial points to keep in mind when approaching and shortlisting VCs for your funding.
Find The Right Investors
You need to feel confident with the investor, yes. What matters more is to find someone who is as interested in your business as you are. Look for someone who has previously invested in an organization like yours, or has a keen understanding of your industry.
This kind of investor understands the market and knows how your business is likely to develop. However, take care not to divulge too much information right in the beginning if he is already working closely with your competitor.
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Time Your Bidding Process Correctly
Do not try and look for investments when you are low on funds. Time your bidding process to coincide with the end of a good business quarter. Call 4-5 investors who have prior experience in your industry and make your pitch to them. Allow them a week to ten days to study your offer and business, but make sure you close the funding within six weeks of the start of the process.
Observe The Investors
Observe and understand what the investor is looking for, and negotiate your terms accordingly. Does the investor’s term sheet include liquidation preference or participation? Is the VC more focussed on board seats, voting rights and gaining control? Neither of the scenarios is wrong, but it will give you a sense of what the investor foresees. You can ask better questions, negotiate a better deal and at the end of the day rest assured that you have chosen the right partner.
What Is Your End Goal?
Right from the start of the negotiation process keep the closure in mind. It’s alright to change the approach a little and to make minor sacrifices, but know your deal breakers before you step into the meeting.
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Lose The Battle To Win The War
The investor assumes that you will ask for a better deal. They know you are scouting around for other options to compare and that you will use all possible leverage to get the best deal. However, don’t get bogged down by smaller details. You can always work them out as you go along. Keep your eyes on the bigger picture and don’t let the lesser issues derail the negotiation.
Be Eager, Not Over-Eager
Seasoned investors know how to make founders sweat it. Don’t be over-eager to please. Be confident and convincing. Let your pitch do the selling.
Are You Ready For A ‘No’?
Even if you make the right pitch, have your numbers in place and are ready with the right answers to all questions, you should be prepared for a ‘no’.
The bidding process could go either way and your potential investor might not be as keen as you’d hoped she was. Do not lose heart. And most definitely do not change your offer. Stick to your guns. Investors admire people who are confident and not willing to compromise as they will bring the same traits to their business.
If the investor recognizes your confidence and determination, a ‘no’ today could turn into a ‘yes’ later.
As with any negotiation, leave room for compromises and make minor adjustments on the go. Look beyond the value of the deal and consider the intangible benefits that the investor could bring. Closing the deal is just the beginning of a long successful journey.