When entrepreneurs and businesses seek capital, they often focus on presenting a compelling business case with clear investor returns. While returns matter, building lasting investor trust is essential to secure funding. Without trust, investors rarely invest, no matter how promising the opportunity appears. Entrepreneurs should aim to create five key levels of trust during discussions and negotiations. This will improve their chances of obtaining investment.
Trust in Company Information
The first level of trust relates to information that a company provides to an investor about the company itself. Most investors will conduct significant due diligence regarding a company before investing, but regardless of how thorough a due diligence process is, there will almost always be uncertainties regarding the accuracy and completeness of information.
Companies looking for investment capital should be sure to conduct conversations with investors in a way that investors come to feel that they can trust the information that has been provided to them about the company. In addition to confidence regarding basic facts about a company, such as its general corporate and financial information, this also includes creating a sense of trust regarding information about company business drivers that can be less susceptible to objective quantification, such as the level of motivation of key employees and the strength of client relationships.
Trust in Market Analysis
The second level of trust relates to information that a company provides to an investor regarding relevant market conditions. Many investors consider investment opportunities in markets where they do not have a direct presence and they are not thoroughly familiar with local operating realities. In these situations, investors will be concerned that companies have not clearly presented all relevant market factors or have not demonstrated how these factors in practice will impact a business model or investment opportunity.
For this reason, companies looking for capital should be careful to demonstrate to investors that they have brought to the investor’s attention all key market factors that may materially affect an investment, both good and bad, and discuss how the company will address those market factors. While it may seem as though “bad” market factors will always be a negative check mark in an investment review, the reality is that every business model faces negative market factors and the companies with the best investment proposals often are those that can demonstrate that they can face these factors better than their competitors or even turn those factors into an advantage.
Trust in Care of Investor Capital
The third level of trust relates to the care of the investor’s invested capital. Investors risk their funds not only for returns but also to ensure the company uses the capital as agreed. Companies should demonstrate proper cash monitoring, secure banking relationships, and procedures that guarantee agreed distributions. When raising capital, businesses must show they will maintain all necessary systems and relationships to protect investor trust throughout the investment period.
Trust in Care of Investor Reputation
The fourth level of trust is related to the investor’s reputation. In addition to its capital, a very important asset of an investor is its reputation in the market. Regardless of the oversight mechanisms that an investor includes in investment documentation, a company will always be able to take actions that can reflect negatively on an investor, including with respect to how a company it treats its employees, its relationship with third parties and its broader role in the community.
Given the importance of these issues, companies searching for capital should strive to demonstrate to investors that they are familiar with investor compliance and reputation concerns and that they will carry out their business activities at all times in a way that reflect positively on an investor.
Trust in Business Management
The fifth level of trust relates to how management will run a company after an investment is made. Regardless of an investor’s stake, the company must execute the business plan and keep investors informed of risks. During discussions, companies should show they proactively address material issues and handle them transparently, reinforcing investor trust.
A compelling business plan is vital when seeking investment capital, but soft factors often matter more in building investor trust. Groups seeking capital should conduct discussions in ways that create a strong foundation of investor trust. Doing so increases the likelihood of investment and reduces perceived risk, often resulting in better investment terms and conditions.
This article was written by Darin Bifani. The photo for this article was taken by Dan Schiumarini on Unsplash.