Understanding investor speak – it’s important
David Pattison, chairman, mentor, investor and author, lifts the lid on what investors are really saying during a negotiation.
Investors tend to fall into two categories: the ‘emotional’ and the ‘rational’.
The emotional are usually individuals investing their own money with their heart, and the rational are usually investment houses (PE or VC) investing someone else’s money with their head.
The one thing that unites all investors is that in the end they only care about one thing and that is their money (or their investor’s money). Because that is how they will judge themselves or how they will be judged by their clients.
It is important to understand the difference, mainly because when you are taking an investment you must listen very hard to what the potential investor is really saying. Different investors say, and mean, different things.
The emotional investor – what do you need to listen out for?
For the emotional investor, there tend to be more ‘watch-outs’ than double talk. Here is a couple:
‘I really want to get involved in your business’
Beware, this can often be towards the end of a career when someone is looking for something to do. They could get in the way trying to do your job and can bring outdated thinking to your business.
‘I am going to put all my savings into your business’
Again beware, they tend to be small investors and want you to make them very wealthy. But investors should only invest if they can afford to lose the money. These investors usually cant and will be constantly fretting about value and will end up being a distracting and time-wasting shareholders.
The rational investor – what do you need to listen out for?
If dealing with the institutional, rational investor then here are a few things that they might say and need to be approached with care:
1. ‘We would like to invest the money in stages’
Nothing wrong with this except if the later stage money doesn’t arrive. Make sure that they have raised the money and it is allocated to you and be wary of extra performance criteria being introduced.
2. ‘We will handle all the legals’
Never ever do a deal without having your own lawyer. It might look like a big cost but see it as an investment.
3. ‘Can we meet for a quick coffee’
The whole investment process is a massive interview for you and the team. There is no such thing as an off-the-record conversation. Even the quick informal meeting will be scrutinised and noted.
4. ‘Our due diligence is taking longer than planned, we need to extend the exclusivity period’
Sometimes this is absolutely the case, but it can be a way of getting you closer to running out of cash and therefore vulnerable to a late renegotiation of terms. Do not extend exclusivity unless you have a good cash runway.
5. ‘Our due diligence is always light touch’
Due diligence is never light touch. It is an exhausting, distracting process and needs to be taken seriously. Often investors hope that it leads to deal fatigue and that they can then improve their deal late in the process. Stay engaged and keep asking questions. Or get your lawyer to do both.
6. ‘We have a very strict process’
They might well have but it doesn’t mean that you can’t question it and push back on ridiculous requests. Institutional investors can be lazy and just ask for everything, you don’t have to provide it all.
7. ‘We have done a bit of a tidy up of the legals’
Be careful and get your lawyer to check what the tidy up really means. Some investors can’t help themselves when the finishing line is in sight.
8. ‘We really want to help the business strategically’
Every institutional investor says this and very few deliver it. Ask where it’s coming from and what does it look like? Ask for an example or speak to another business they have invested in and claim to have helped.
The investment process always takes longer than it should and you are often dealing with people and organisations you don’t know. Tread carefully, you and your advisers should question everything that is unclear and listen very hard to what they are really saying.
It might make a very big difference.
With over three decades of scaling, funding and exiting businesses, David Pattison works as a chair, mentor or adviser for a variety of businesses and CEOs. His book, The Money Train: 10 Things young businesses need to know about investors, won the Startup/Scaleup Book of the Year at The 2022 Business Book Awards.