Startup Fundraising is All About Trust

Some startup founders approach fundraising as a series of transactions. This rarely works. Think of fundraising as relationship-building — and remember that the foundation of a good relationship is TRUST. 

Why would a sophisticated investor invest in your startup?

• They trust the problem you are seeking to solve is significant.
• They trust your planned solution has the potential to solve that problem in a meaningful way.
• They trust your business has the chance of being a financially successful investment.

More important than all of the above, however, they must trust YOU can execute on realizing the vision of your startup using their money.  And that is a question of trust.

Investing in a startup company is an incredible leap of faith for an investor.  When I am fundraising, I always try to keep this in the back of my mind. Underneath all the questions and back-and-forth conversation is a more fundamental question that never gets asked explicitly, but which underlies all the other requests: “Can I trust you to do good things with my money?” 

Investors can never know every detail of your plans (which will change dynamically as you build), nor can they ever know all the problems that will need to be solved along the journey. The reason “management” is often cited as the most critical X-factor in high-potential startup investing is because it is the capability of the startup team to tackle the challenges and come up with good solutions on-the-fly that are the building blocks of startup success. Therefore, an investment decision is fundamentally about whether the investor believes that you and your team have the talent, insight, experience, and character to do the right things when the decisive moments arise. 

So how do you build a potential investor’s trust?

Remember that all those questions they are asking are ultimately trying to conclude whether they can trust your decisions in building the business.

• Are you ethical? [aka character]
• Are you committed to doing whatever it takes? [aka motivation]
• Do you know how to build a fast-growing, profitable business? [aka financial model]
• Can you recruit the diverse skills you need to build an excellent team to execute? [aka demonstrated leadership skills]
• Do you understand the pitfalls and opportunities?  [aka relevant experience]
• And so on.

As you answer round after round of questions, make sure you are showcasing your motivation, professionalism, skills, and team so that the potential investor can form an impression about the overall capability of the organization you are creating. For example:

• Respond quickly and thoroughly to questions.  Recognize that every response is a chance to reveal how you think about problems and how you will interact with potential partners and
• At the right time, make sure that the investor has a chance to meet your key team members.  Meeting the team answers some of the unspoken questions about how good you are at recruiting, how strong your team’s interpersonal dynamics are, and how diverse and relevant the skillsets already assembled are.
• Realize that the respect and professionalism you show to the investor during the fundraising process will be as important as the details of your marketing plan or product pilot in forming a relationship where they feel comfortable giving you a big check. 
• Remember, as you interact with others in your ecosystem that how you treat potential partners, employees, other investors, and service providers creates your reputation. Your reputation in the entrepreneurial community can play a significant role in building investor confidence in how you build businesses, or it can undermine your credibility.

Using the fundraising process to build a potential investor’s trust in you as a founder will go a long way to enabling them to demonstrate that trust by making a leap of faith.  Then your job shifts to nurturing that relationship.