Entrepreneur and investor meet. Investor loves the company, further due diligence confirms original assessment. Investor wants to invest. Entrepreneur shops the company as she should – in my dreams all Fintech Entrepreneurs are female to counter the fact that all Fintech Investors are male unfortunately, sort of Pascal’s Supreme Court subliminal mandate – and talks to many other Investors. Most investors love the company resulting in multiple term sheets presented to the entrepreneur who has now a “hot” company in his hands. Entrepreneur chooses one term sheet resulting in one happy investor and many unhappy ones.
We Investors are adults and competition is the name of the game. We understand another Investor might end up “stealing” a company away from us. We also spend significant time and resources performing due diligence and lack of clarity during the process may lead to extreme frustration when the end result is unveiled.
Communications is key to avoid confusion and frustration with potential misunderstandings when working on a hot deal .
Here is what I usually insist on upfront with the Entrepreneur or CEO I deal with to ensure optimal communications:
1) Please define the type of Investor lead you want in your round
2) Please define the other Investors you would want included in the round
3) Tell me how many Investors you are going to ping. Only a few, what type? As many as possible?
4) Let’s agree on communicating as soon as you know any development on the funding side (interest, term sheet presented)
5) If you do not chose my term sheet, can I still participate in the round should there be space assuming I can still bring value to the syndicate? It is ok to tell me no, just manage my expectations.
6) Let’s mutually agree that neither of you or I will go dark during the process. Once I am engaged you and I will not play games. This means that once one of us commits to get back to the other at a certain date or with a certain item, then we stick to that commitment
7) Let’s mutually agree to sane rules of engagement, i.e. once we have agreed to the rules, we do not change them midstream
8) Let me know now if we have room to negotiate once I submit a term sheet. As long as I am treated in the same way as other Investors are, I am fine. I do not want to be treated as a stalking horse.
The objective here is to make sure both parties are on the same wavelength and will treat one another with equal respect. Easier said than done as investors are not automatically fully trusted by entrepreneurs. Still, communications and trust is essential post investment and the process to build both needs to happen in good faith prior to investing during the courting period pre signing a term sheet. Tensions are also exacerbated when a company raises money in a competitive environment. Investors compete fiercely, the process gets heated and entrepreneurs most times deal with their “baby” – the company they founded. Everyone is vested and emotional. Indeed, more communications is crucial – it always is even with a “normal” deal btw. Precisely because emotions may run wild, I always try to put myself in the shoes of the entrepreneur when working on a financing round. Empathy is always a powerful tool.
At R66 we have “lost” 4 “hot” deals in the last 2 years. I did not share the above rules with the entrepreneur on the first two hot deals we lost, my bad. The losses left me wondering if I had mismanaged the due diligence and negotiations plus I thought I had been “had” because of what I perceived as potential miscommunications during the process. I learned from my mistakes and starting being much more communicative upfront.
Entrepreneurs when dealing with Investors will also benefit from communicating their own expectations and rules of engagement. There is no downside.