Expert opinions, STARTUPS

Five mistakes startups make when negotiating with investors

According to statistics, around 90% of startups fail. One reason is poor communication with investors. Aspiring entrepreneurs often underrate or, on the contrary, overrate the cost of their efforts, set wrong investment goals and make other mistakes.

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1. Wrong investment goals

One of the most common mistakes startups make when negotiating with investors is misunderstanding their own investment goals. It may seem obvious but many emerging businesspeople assume that all investors are looking for the same thing, which is fast profit. However, it is not always the case. Some investors stake on long-term success. It is important to grasp the goals of each potential financial partner before entering into talks. A good starting point can be learning what investors expect from your company when they fund its development. It will be helpful for adapting your startup presentation and talk strategy to each particular person.

2. Inaccurate company evaluation

Another common mistake among startups is inability to properly evaluate the company. Many founders assume that their business is worth more than it actually is, which may cause problems in the future. Investors usually expect to see returns three to five times more than their initial investment. So, it is important to make sure that your evaluation meets these expectations.

Overrating a startup may complicate a fair deal and even prompt investors to drop it. It is important to have a realistic view of your company’s worth and have a clear pitching plan. This is how you get leverage in talks and secure the best price.

3. Unrealistic proposals

When it is finally time to talk to investors, startups often make unrealistic proposals. Investors look for companies who have a clear idea of their businesses and can explain how funding will be spent and how soon it will bring returns. Before proposing a deal to an investor, researching the market thoroughly is of crucial importance for any proposal. Evaluate your competitors and understand how full your selected niche is. Also, learn about competitors and their production methods if they produce a similar product, study any research and reports on your business area that is publicly available online.

You also need to know what the investor is looking for and what they are willing to give you. One way to do this is to look at other investments they made in the past, providing a glimpse into their preferences and investment capacity. Also, don’t stop at just one candidate. Engage in negotiations with multiple potential financial partners simultaneously to expand your options. Additionally, be ready to negotiate and have an alternative offer on standby if the situation demands it.

4. Ignoring consultations

Seek advice from professionals. Often, founders are so focused on closing the deal that they don’t take the time to consult with seasoned experts who can help them through the process. Neglecting this step can result in detrimental outcomes as founders might overlook crucial clauses in the investment agreement that could negatively affect the company. Also, sharing experience can, for example, prevent the acceptance of investments from the initial partner who expresses interest. While securing funding quickly is crucial, the terms of the investment are of equal importance. If they prove to be unfavorable, it might be better to continue looking for other companies to partner with.

5. Lack of sincerity

Finally, it is worth noting the importance of honesty in dealings with potential investors. The establishment of trust and loyalty with your financial partners hinges on your openness and sincerity. If, at the negotiation stage, you are caught concealing some important details, any prospect of continued collaboration may be jeopardized. So, even if your startup has small problems, be honest about them, but also explain the situation and share the strategies you use to address it.  

Launching a startup is a complex process, and it is often impossible to do without investors. Limited experience in entrepreneurship can negatively affect the success of the company. However, steering clear of these mistakes affords you the opportunity to quickly negotiate favorable terms with investors and successfully develop your business.

By Mark Stramousov, serial IT entrepreneur, investor, creator of Profinance Group ecosystem

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