My hand hovered on my cell phone. I nervously pulled up my address book to make a very scary phone call.
My palms were sweating with anxiety.
We had simultaneously received the term sheet we have been fighting for many months at SwipeSense for our Series A (an $8M raise!), and received a cancellation notice from our largest hospital customer within a 24 hour period.
I didn’t know what to do. Make the call to our investor and let him know that our sales numbers going in the model were off and risk the investment. Don’t make the call and have a VERY awkward first board meeting afterwards. The choice was simple. The call was hard.
I nervously dialed his number and broke the news. How it happened. What we are doing about it. It was direct and embarrassing. I ended with a very simple message. “If this news changes your view on the viability of this investment, we understand and will respect your decision to not invest in this round, no questions asked.”
His answer shocked me. “Mert - we are investing in YOU and your team as a founder, customers will come and go. It’s how you deal with them that is what we are buying into. We’re in.” I’ll never forget that answer. Over the years, we had our ups and downs, but we always valued our ability to be straight with our shareholders, before or after they invested in SwipeSense. It was at that moment we started to truly trust each other. It was at that moment, we went from investor/founder to partners in the journey ahead.
Our partner at MATH, Dana, wrote about this in her post titled Extreme Transparency. As your future partners, we want the following in our communication with you:
The Truth: No outright lies
The Whole Truth: No facts/circumstances conveniently left out
Nothing but the Truth: No B.S. thrown in to make it look better or worse than it is
As a founder, if all you talk about is the good stuff during fundraising, you’re missing out on an opportunity to build trust with your future investors. We are impressed and excited with your progress and growth, but we ultimately build conviction with how you deal with problems in your startup.
We get it: Fundraising is a song and dance to create FOMO amongst investors so you can maximize your valuation and time to close. I have given and received this feedback as an operator myself for many years, you want to ensure the energy is high in your fundraising meetings and the momentum keeps building towards a close. It is a sales meeting at its core, you are selling shares in your startup and the fund is selling why you should take their investment over others.
However, at some point in getting to know a fund, you should talk about the bad and the ugly along with the good. Practically speaking, no later than the second or third meeting with a fund, you should discuss the ugly things about your business. The soft underbelly. The costs that are higher than expected. The customer that canceled their contract. Anything that’s not going according to plan, and most importantly, what you are doing about it.
Here’s the deal: we know every startup has challenges. The goal of these discussions isn’t to go into the confession booth - it is to complete the picture of you as an operator. The best founders aren’t the ones without challenges, the best founders are the ones that know how to deal with their problems.
For instance, if your financial model assumes a $20 customer acquisition cost, and your average today is $35, this is a problem. However, this is an entirely different conversation if you highlight that discrepancy and your plan to get to $20 before we point it out in your financial model. If we are uncovering problems that you haven’t discussed with us first, we immediately worry about other problems that you are keeping. This is a bad impression.
On the contrary, talking about these issues and your plans increases our conviction in you - it allows us to build trust with you. And there is no greater way to build trust than to show vulnerability. It lets us build a mental model of someone who is going to keep a steady hand as challenges arise, and will be transparent with us as shareholders in the process. Your behavior today is the predictor of how you will behave tomorrow.
Finally, this goes both ways. Before you take an investors’ money, ask about difficult times with their portfolio. Ask to connect with founders who had to shut their doors or exited with small multiples. When things are going great, it’s easy to be an investor. The real work is when things aren’t going according to plan. You should diligence your investors with just as much scrutiny, you are picking a long-term partner who hopefully will share this adventure with you for many years to come.
Founders - do you find yourself only talking about the positives during fundraising? What are other ways to build trust with funds?
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