Trust starts at 100% and goes down

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IT’S ALWAYS SUNNY IN PHILADELPHIA — “Hero or Hate Crime?” – Season 12, Episode 6 (Airs February 8, 10:00 pm e/p) Pictured: (l-r) Danny DeVito as Frank, Charlie Day as Charlie, Rob McElhenney as Mac, Kaitlin Olson as Dee, Glenn Howerton as Dennis. CR: Patrick McElhenney/FXX

Investors (especially those who have been in the game for a little bit) are jaded.  Winning over investors is not just about showing traction and progress (although that is a big component to getting investors onboard).  It’s also about trust.  Fundamentally, investors have to trust you in order to invest in you. Most investors will give entrepreneurs the benefit of the doubt…until they cannot.

So, their level of trust in you starts at 100% on first interaction and only goes down from there.  Your job is to make sure that you don’t screw that up. There are lots of ways to screw up and not even realize that you are doing so:

1. You name-drop and overstate your friendship with a bunch of famous people who don’t know you really well

I cannot tell you how many people tell me they are bffs with Dave McClure.  If you’ve hung out with someone a few times socially, that does not make you best friends with him/her, and name-dropping here does not help you build rapport.

If you really want to name-drop to build rapport, it’s much more effective to say how a particular person has affected you; for example: “Dave McClure’s no-BS blog has been a great resource for me in my startup journey, and it’s been fun being able to hang out with him once or twice.”

2. You mix up the definition of common software startup KPIs

This is unfortunate.  Often, I see entrepreneurs get the definition of common startup KPIs wrong, and it comes back to bite them even if it’s just an innocent mistake.  For example, a lot of entrepreneurs of, let’s say, marketplace businesses will say they are doing $1m per year in revenue.  But really, they mean GMV (in most cases).  This is a really important distinction — especially if your business is making money by taking small margins between transactions (such as in a marketplace).

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Originally posted by yabookscentral

3. You act cagey about information

Early stage investors understand that there is a lot of work to do in an early stage startup and that you may not have all the answers – or even most of the answers!  But that’s ok.

What looks really bad is when founders try to be evasive about their answers.  If you don’t know the answer to something, just own up to it!  But then, explain your plan to  figure it out.  At this point, a big reason why people will invest in your company is related to their trust in you and your competency.  How you think about solving problems or getting to answers is actually very telling about a founding team.  You could say that your ability to answer questions well when you have little-to-no information is actually an opportunity to prove yourself.

A lot of founders will act cagey, evade questions, or beat around the bush when faced with difficult questions.  This leads investors to believe that there is something either really wrong with your business or that you, as a founder, are not very sharp.

4. You get defensive

I think a lot of founders who get defensive don’t even realize they are doing so.  It’s actually really helpful to do mock investor meetings with other people before you start fundraising  (we do this in our program at 500 Startups).  Investors can sense defensive founders from a mile away — it’s not just about what you say and don’t say, but also about your body language.

You are going to get tough questions.  You may even get inappropriate or borderline inappropriate questions.  For example, what if an investor says to you, “You know I’ve only invested in founders with CS degrees from MIT, Stanford, or Cal, because if things don’t go well, I can always broker an acquihire.  Why should I invest in you?”  No joke; people ask stuff like this.  Investors will ask all kinds of things — if you and your co-founder are married, you will get questions about that.  If you didn’t go to a name school, people will ask about that.  If you are pregnant, people will ask you about how you will balance your job with your kid.  People will ask you about how your race may make it harder for you to fundraise and what you will do about that if you can’t raise.

Some of these questions may be so inappropriate that you may not want to take money from those investors.  Many other questions will be fair questions but tough to answer and will take you aback.

Practice mock investor meetings.  Ask a friend to ask you the most inappropriate questions possible.  Practice taking a deep breath before answering anything.  You just cannot get defensive.

5. You don’t or are unable to address discrepancies between your answers

If you have discrepancies in your answers, investors will ask you about them.  You definitely need to be able to address this well, otherwise it will, at best, confuse an investor and at worst, make him/her think you’re a liar.  For example, let’s say you tell me you have thousands of leads for your SaaS product that you cannot convert due to a lack of resources.  Later, you tell me that you need money to pour into lead generation.  If I then ask you, “Oh, why aren’t you focused on converting those existing leads?”, you need a really crisp answer.  Either your existing leads are junk and not qualified  (in which case, you should own up to it),  or you actually have tried to covert your leads into sale but there is something wrong with your conversion or on boarding process.   Whatever it is, something doesn’t add up, and you need to be able to address this.

There are a number of other reasons why trust decreases with more interactions over time, but these are the primary ones I’ve seen in my interactions with founders.

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