The Search for Capital and Five Levels of Investor Trust

The Search for Capital and Five Levels of Investor Trust

When many entrepreneurs and businesses search for capital, they often understandably place the greatest emphasis on presenting a compelling business case to investors with a clear path to strong investment returns. While this is of course always very important, particularly when making investment pitches to investors that a company does not know well, a key factor in securing investment capital is creating a solid base for lasting investor trust. If investors lack trust in a company, they will rarely invest, regardless of how great the investment opportunity looks on paper. There are five key levels of trust that entrepreneurs and businesses should strive to create during discussions and negotiations with investors.

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. An investor takes a very large risk in leaving its capital in the hands of a company, not only with respect to the investment return that will be obtained, but also regarding the basic issues of ensuring that the capital that will be provided will be used by the company as agreed, that all business cash flows will be prudently monitored, that proper cash deposit and banking relationships will be in place and that all necessary procedures will be established so that distributions of capital to an investor will occur as agreed in investment documentation.

Because of this, companies that are raising capital should strive to demonstrate to investors that they will put in place all necessary procedures and maintain all necessary relationships to ensure that investor capital will be protected throughout the entire time that it will be under the company’s control.

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 what stake an investor has in a company, it will depend on the company to not only carry out the agreed business plan, but also to advise the investor of risks that may affect that business plan and discuss with the investor how those risks will be addressed. Accordingly, during the phase of discussions with investors, it is important to demonstrate that the company will be highly proactive in bringing material issues to the attention of investors and deal with them in a transparent manner.

A compelling business plan is vital in searching for investment capital but “soft factors” are often equally if not more important than the numbers in getting investors to invest significant amounts of funds. Because of this, groups looking for capital should strive to conduct the process of discussing investment proposals with investors in a way that creates a strong basis for future trust. This will not only increase the likelihood of investment but also reduce the perception of investment risk, which often results 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.

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