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How to negotiate with investors?

The first meeting with investors is key, since the development or stagnation of a project will depend on it.

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This article was translated from our Spanish edition. Opinions expressed by Entrepreneur contributors are their own.

Once a company begins to grow and consolidate, the next mandatory step is to seek capital. However, just as new entrepreneurs had to learn to start their business, they must also learn to negotiate with investors to obtain a favorable valuation.

Amy Hirschi vía Unsplash

However, many entrepreneurs are unclear on how to negotiate with investors , particularly when it comes to their first approach with mutual funds. However, the first meeting is key, since the development or stagnation of a project will depend on it.

According to Víctor Aguirre López, founding partner of the firm BlackBox Startup Law , the nature of these companies is to be in constant growth and bet on disruptive innovation, but they cannot do it alone, they require financing to achieve their objectives.

Data from the Mexican Association of Private Capital ( AMEXCAP ) indicate that the pandemic did not limit the injection of capital for Mexican startups; on the contrary, last year Venture Capital (VC) investments exceeded 10 million dollars, which means that they grew five times compared to the figures of the previous year.

Although this is a good omen, it does not neglect the importance of the role that entrepreneurs play with their argument or 'pitch', which can lead your company to success or oblivion in a matter of seconds.

According to BlackBox, these aspects are vital when negotiating a capital injection:

Clarity in the valuation of the company . The first thing that entrepreneurs should be clear about when negotiating is the valuation of their company. “Many times entrepreneurs do not know how much their company is worth or cannot justify the value of their assets. Without this knowledge, it will be difficult for them to determine the proportion of the amount they require and request. For example, if they ask for 10 or 20% of what your company is worth, the investor's perspective changes, "Aguirre added.

Justified proposal. At the time of requesting a certain amount, entrepreneurs must know how to justify this sum, for which many variables such as their experience, the growth of the company or market conditions influence.

“It is not just a proposal, there must be an analysis that supports it, in addition to certain elements of justification and verification that convince the investor that the company is worth what the entrepreneurs say and that it does need the amount they are asking for to reach a certain goal, "said the lawyer.

What are the most common mistakes?

However, it is common for many entrepreneurs to make mistakes, especially when facing their first round. According to BlackBox, one of the most common mistakes is not asking for enough money.

“I have come across entrepreneurs who had the possibility of raising more capital because their startup really has a scalable and disruptive model, but out of fear or mistrust they bet on low amounts that are not what their company needs. Having the perspective of asking for the least is inappropriate, the ideal is to ask for the largest amount possible and have the highest possible valuation, thus obtaining the greatest number of economic resources, "he said.

How to make a successful pitch?

The 'pitch' groups together a series of elements so that investors know in depth the startup that is requesting financing; what solution does it offer, how much is it growing, but above all, where do you want to go?

“Entrepreneurs must be extremely frank not only when talking about the progress of the project, but also to show the passion they have for it, because when an investor perceives that there is capacity, he decides to bet on it, but if he sees that they are trying to deceive, the probability of closing the negotiation is low ”, Aguirre concluded.