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Investors' Brains Archives - Finance-Ability®

Want to Build Your Credibility with Investors? Just Do and Say.

By Blog, Where's the money?No Comments
In a previous post, I mentioned that credibility and building relationships are often the “it” factor in getting funded, since they both can reduce the perceptions of risk associated with your business. This is particularly true when dealing with banks and investors, who see plenty of requests each day, and need some way to choose among them.

You already understand intuitively why trust plays a role – you’re more likely to invest money with someone that you feel you can trust than with someone you’ve just met.

There are lots of articles about how to approach investors (find out their hobbies and claiming it as one of yours is a popular one lately), how to write the “perfect” business plan, and even what to wear when you meet them. While your business plan and how you present yourself have a role to play, I believe that following one simple rule will have a much bigger impact on building your credibility:

Do what you say, and say what you do.

It is definitely simple, but far from easy. Because it means that your word is your bond, that by agreeing to something, you are committing to follow through. And in a world where excuses abound and many public figures have made careers out of shading or even hiding the truth, this is a very difficult thing to do.

Why?

Well, for starters, there is the “before” and “after” aspect of this maxim. In order to be able to take the credit afterwards, you had to know (and say) what you were going to do beforehand. Which requires plenty of planning, forethought, and the ability to describe those plans and vision to someone else in a coherent way. And that doesn’t happen overnight, so there is also lots of hard work involved.

Don’t promise what you can’t deliver, and you’ll make your life a lot easier when it’s time to say what you did.

Secondly, you have to use this maxim in every situation, not just when it’s convenient. Delivering a project on time and on budget makes everyone happy, so it’s easy to talk about that.  But what about when you’ve missed a deadline, and don’t know how you’ll make it up. Or when you’ve unintentionally divulged confidential information. Or when you’ve decided not to pay a supplier because you’re out of cash. Or any of the other things that can (and do) go wrong when you’re running your own business.

When things go wrong, make it right. Do what you said you would.

But wait, you say – we’re talking about business here. Isn’t there supposed to be a certain amount of embellishment, to put things in a positive light? If I talk about my mistakes, won’t the other guy get the investment (or the client or whatever I’m competing for)? I can’t be all Pollyannaish when everyone else is spinning the truth like Run DMC!

It’s certainly possible that someone else with a better “story” will win today, but if your goal is to build a business that has real value, you not only have to develop excellent products and services, you have to develop a reputation for excellence – personally AND for your company. And using this approach will be a huge step towards developing that reputation.

Besides helping you obtain funding and maintain a great relationship with your investors, following this rule has other benefits for you and your company, including:

Better communication with clients = more opportunities for new business

Open, honest communication with clients will not only build credibility, it will make it easier for your clients to tell you about other problems that they are having, which in turn allows you to develop more solutions to those problems.

Better communication with employees = less turnover and more committed employees

Keeping your word with your employees creates a genuine relationship, so it’s easier to talk about what went right AND what went wrong. And when you give honest feedback, you also get honest feedback, which means that employees are more likely to tell you what they really want – it may be something besides a new office or free coffee in the break room!

Better communication in general = an “it” factor that makes you unique

Given the rarity of this attitude in today’s world, this simple factor can give you a very important competitive advantage – you’ll be one of the only companies doing it! And, as a method for getting business, or attracting the right employees, or developing a mutually beneficial relationship with your suppliers, this “it” factor is another way to stand out from the competition.

Do you already live by this (or a similar) maxim? Tell me why (or why not) this could be a game-changer for you in the comments – I’d love to hear your thoughts!

Is Finance Really a Four-Letter Word?

By Blog, The "F" WordNo Comments

Finance has its share of villains, both in fiction and in real life, who’ve created a distaste for finance that isn’t serving entrepreneurs well.

Because unless you’re independently wealthy (in which case, you’re probably not starting a business to make money), you’ll have to work with some finance types to get your business off the ground and keep it growing.

But (Gordon Gekko aside) finance types aren’t the culprits – in fact, once you understand financial principles, you can make them work for you without feeling slimy or selling your soul. But (and this is crucial in all aspects of your business), you need to take control of your own destiny.

First, you need to understand one of the fundamental principals of finance: the riskier something is, the more you’ll have to pay to get someone to invest in it.

This is referred to as the risk/reward tradeoff*, and it looks something like this:

Risk/Reward tradoff

 

In this illustration, the dark points indicate the general range for risk/reward, and show that depending upon WHO is borrowing (and how the person lending feels about them), the reward required for someone to make that investment increases. As an example, if I want to obtain a business credit line, I know that the bank will expect a potential loss of 35%, and will want a reward (in this case, an interest rate) of about 20%.

The ovals around the dark points show how perception can influence these risk/reward tradeoffs. Within each investment type, individuals and their perception of the risk will influence the rewards they will require to invest. So, continuing my example, if I’m able to develop a great relationship with my banker, and I have a well-thought out response to most of her questions, I should be able to reduce her perception of the risk of MY business, and reduce the reward (interest rate) that she’ll require.

With me so far?

Second, you need to understand that this is not rocket science – you already use this principle every day.

When someone wants to borrow money from you, for example. If you don’t know the person at all, you perceive the risk to be high; so high in fact, that you probably wouldn’t even make the loan. However, if it’s someone you know reasonably well, you’ll review several factors (such as how much they are asking for, whether they can pay you back, how much you think they need the loan, and whether you trust them and communicate openly with them) before you make a decision.

Sound like common sense? Then you’ve already got good insight into a bank/investor’s thought process when you approach them for an investment.

Since your relationship with the bank/investor may be on the newer or more superficial side, you’ll have a lot of work ahead to convince them to provide you with funding. It means that you need to clearly understand where the risks are in your business, and then work on decreasing their impact on your business.

It also means that you need to develop a relationship with your banker/potential investor, so that they get to know you and have a better idea of how trustworthy you are. Being able to answer the following questions will go a long way to building trust:

  • What is your business is capable of becoming and what it will take to get you there, in terms of time, money and personnel?
  • What will you be using the requested funds to do? If your answer is “pay my (or other founders’) salary”, you’re dead in the water. Would you loan someone money to pay themselves a salary?
  • What are the scenarios under which the funds can’t be returned? How likely are they, and how soon can more information about those probabilities be obtained?

When you talk about those risks and how you’ll address them, you’ll build credibility. Once you’ve established a genuine relationship and trust, banks and investors will be much more likely to want to work with you.

If you don’t have enough money to finance your company – which, let’s face it, is where most of us find ourselves – you’ll be looking to banks and/or investors to provide capital (cash, dough, greenbacks, you get the idea). To make the most of what the finance types can do for you, you’ll need to put yourself in their shoes and try to identify any other risks that they may perceive (perception is NOT reality, but in this game, it’s the perception that counts until you build a stronger relationship).

Your assignment: identify three risks in your business that you could improve on, and tell me about them in the comments. Let’s see which ones we have in common!