Contents

  • Summary
  • Introduction
  • Do lots of research
  • Keep communication clear
  • Ask lots of questions
  • Leverage your strengths
  • Establish trust
  • Don’t settle below your worth
  • Remain open to other funding options
  • Final thoughts
  • Frequently asked questions (FAQs)

Summary

Securing venture capital can be a life-changing moment for business owners. However, negotiating is an act that can make even the most capable entrepreneurs feel sweaty-palmed. If you've got a meeting looming, this guide contains seven effective tips to help your discussion go as smoothly as possible. By following this guidance, you can enter the negotiation room with all the confidence you'll need to succeed. We conclude by exploring alternate funding options answering some frequently asked questions.

Introduction

Well done, you've secured a deal with a potential investor. This means you're one step closer to receiving venture capital, invaluable business advice and potentially useful industry connections. You should pat yourself on the back for getting this far. However, the hard work is far from over. Before a deal is struck, you need to successfully negotiate with the other party—a proposition that leaves many business owners filled with dread.

There's no denying it; negotiating is an art form. Despite its intimidating reputation, however, parleying with investors doesn't have to be daunting. With the right attitude, preparation, and know-how, you'll be able to secure a deal that could have the power to transform the future of your business. If you're looking to negotiate like a pro, follow these seven steps below to secure the best deal possible for you and your small-to-medium-sized enterprise (SME).

1. Do lots of research

This probably won’t come as a surprise, but when it comes to a successful negotiation, preparation is everything. Before you step into the meeting room or fire up that Zoom call, you should have a clear understanding of the investor's professional background and motivations. This way, you can understand what drives them and use this knowledge to pitch your business in the best light possible.

Aside from recognising your investors' driving force, you should also have a clear grasp of their capital limits. If you haven’t researched their financial background and previous partnerships, you could risk making an offer far outside of their range. Not only will this make a deal harder to secure, but it could also insult the investor. This is the last thing you want to do during a negotiation, so it’s critical that you learn their financial portfolio inside out before agreeing on terms.

If you don’t know where to start, try asking yourself the following questions:

  • What do their previous deals look like?
  • What is their budget?
  • What motivates them?
  • What has attracted them to your company?
  • What may their future vision be for your company?

2. Keep communication clear

Miscommunication is the easiest way to stunt a negotiation. Even if both parties are in rapport, unclear communication can easily lead to unfortunate misunderstandings. Therefore, whether you're meeting the investor face-to-face or virtually, to avoid wires getting crossed, it's important that you communicate in the clearest way possible.

One way you can do this is by stating your goals off the bat. By explaining what you're looking to achieve early in the meeting, the investor can become informed, and any potential ambiguity can be dispelled. More frequently than not, this also encourages the other party to be more clear about their aims, which is a great way to make sure you're both on the same page.

Another way you can keep lines of communication clear is by listening actively. Active listening requires you to concentrate on what the investor is saying, as opposed to just listening passively. By giving them your full attention and reframing their thoughts, you can gain a deeper understanding of their needs, build trust, and keep tension to a minimum.

3. Ask lots of questions

Leading on from the last point, negotiating isn’t just about pitching your business. It’s also about establishing a back and forth where valuable information is able to be exchanged. With this in mind, by being assertive and asking the investor relevant, considered questions, you’ll be able to maximise your chances of landing a deal.

Not only do questions widen your understanding and clarify any potential queries you may have, but they also help you to come across better. By expressing curiosity and admitting that there are gaps in your knowledge, you won’t come across as overconfident. And far from making you look clueless, this can actually help you to look more competent in the eyes of the investor. What's more, since most negotiators don’t ask enough questions, this is an easy way for you to separate from your competition.

If you’re stuck on what questions to ask them, you could start off by inquiring about their funding limits, how willing they are to compromise, if they have any feedback on your proposal, or if there’s anything else they think you should know.

4. Leverage your strengths

When going into a negotiation, it’s natural to feel like an underdog—especially if your venture is dependent on funding to take its next steps. However, entering the meeting room doesn’t need to feel like a David vs Goliath situation. If entrepreneurs recognise their strengths and use them to their advantage, they’re much less likely to miss valuable opportunities.

Think of it this way; investors wouldn't agree to talk with you if you didn't have something to offer them. Whether it's a novel, exciting idea, a stake in a high growth business or a clear investment structure, there is something valuable about your venture that is drawing them to you. Moreover, if multiple investors are expressing interest in your business, you could also leverage these options to make a more attractive proposition to the investor.

5. Establish trust

When negotiating terms, trust is everything. Unlike with sales, if both parties aren't assured of each other's credibility, a deal isn't likely to be secured. Therefore, when entering a discussion with your potential investor, it's important to build trust by being open and honest with them from the get-go. By being transparent about your business's vulnerabilities, future risks can be minimised, and you'll be more likely to gain their respect.

While being truthful is important, trust goes both ways. This means that it’s equally important for you to trust your investor when arriving at a potential deal. If you’re lacking confidence in your lender, remember that both parties are rallying behind a common goal, the success of your business. This will make it easier to foster a healthy working relationship. That being said, if your potential investor has given you a clear reason to mistrust them, it’s best to drop them in favour of other venture capitalists with stronger reputations and track records.

6. Don’t settle below your worth

If your meeting goes according to plan, you might be lucky enough to get an offer—but don't be offended if it's a little under what you were expecting. In funding negotiations, low ball offers are extremely common. This is because they give investors a place to work from, and it maximises their chances of getting a good deal.

While you shouldn’t let lowball offers surprise you, however, you shouldn’t pounce on the first proposal that comes your way. Investors will intentionally try to strike a hard bargain, and the whole point of negotiations is for you both to land on a good deal. So, by remaining calm in the face of pressure and knowing when it’s the right time to fold, you can increase your chances of making a successful agreement.

By thanking the investor for their offer, declining it and presenting a more reasonable alternative, they may adjust their offering to one that's more in line with your preferences. This way, you’ll be able to move forwards with terms that don’t undercut your business’s worth.

7. Remain open to other funding options

For many entrepreneurs, securing private equity may seem like their only path to success. But while investors undoubtedly open up an abundance of opportunities for budding businesses, it’s not the only way you can springboard the growth of your SME.

Accessing venture capital can be a tedious, time-consuming process. And even if you’ve found a promising investor, you still need to give up a stake in your company and meet consistent targets. Therefore, if you’ve decided that venture capital might not be the right route for you, there’s no shame in exploring other options.

Whether you’re looking to get your startup off the ground or grow your existing business, there’s a spectrum of funding services that may be better suited to your needs. Lines of credit allow you to boost your cash flow whenever and wherever it suits you. Equipment loans help you purchase important assets that can grow your business long, and invoice financing helps you to spare up capital by accessing cash tied up in unpaid invoices.

If you're interested in pursuing alternative finance, MarketFinance could be able to help. We offer a range of cash flow solutions that have been designed to support the growth of small businesses. We don't believe in hidden fees, and we keep funding as simple and straightforward as possible—the way it should be.

If this is something you like the sound of, you can learn more about what we do here.

Final thoughts

Negotiating can be stressful. But before you begin discussing your terms, remember that you hold more power than you think. The investor wouldn't have agreed to meet with you if they weren't interested in you and your business model. So by remaining confident and following these seven steps above, you should be able to leave the meeting with the best outcome possible.

Frequently asked questions (FAQs)

How do you negotiate with potential investors?

When heading into the meeting room, there are a number of techniques you can use to create a more favourable outcome. For instance, if you communicate in the clearest way possible, listen actively, ask lots of questions, establish trust and leverage your strengths to your advantage, you’ll increase your chances of success.

What's more, before you even enter the discussion, you should research the investor extensively so you feel as prepared as possible.

How can you improve communication during a negotiation?

One powerful way you can improve communication when talking to an investor is by listening actively. Active listening requires you to concentrate on what the investor is saying, as opposed to just listening passively. By giving them your full attention and reframing their thoughts, you can gain a deeper understanding of their needs, build trust, and keep tension to a minimum.

Why should you ask questions during negotiations?

Asking questions during negotiations is essential. They clarify any potential queries you may have and help you to come across better. By expressing curiosity and admitting that there are gaps in your knowledge, there’s a good chance you will come across as more competent in the eyes of the investor.

What questions could I ask potential investors?

If you’re stuck on what questions to ask them, you could start off by inquiring about their funding limits, how willing they are to compromise, if they have any feedback on your proposal, or if there’s anything else they think you should know.

How do you deal with low ball offers in negotiations?

If you’re faced with an offer that is considerably lower than your asking price, you shouldn’t agree straight away. Investors will intentionally try to strike a hard bargain, and the whole point of negotiations is for you both to land on a good deal. So, by remaining calm in the face of pressure and knowing when it’s the right time to fold, you can increase your chances of making a successful agreement.