“Do not trust everybody, only the trustworthy.” The ancient Greek philosopher Democritus uttered these words a long time ago, but they are today as valid as they were back then. When it comes to venture funding trust is essential for any investor to be confident in taking the risk of giving you their capital.
Why does trust matter, how do investors decide if you are trustworthy, how do you earn trust and how do you keep it? These questions we will answer in this article.
Defining Trust in VC
In the venture capital (VC) world, trust is a belief in the honesty, integrity, and reliability of the person or company seeking funding. It is about having confidence that they will deliver on their promises and that their business idea is sound. Trust is not simply about liking someone; it is about having a level of assurance that reduces the perceived risk associated with the investment.
Why Trust is So Important to Investors
Investors are essentially placing a bet on the future success of a business when they provide funding. The stakes are high, and the risks are significant. Trust plays a crucial role in reducing the perceived risk. If an investor trusts the entrepreneur, they are more likely to believe in the business’s potential success and be willing to provide funding. Trust also plays a role in the ongoing relationship between the investor and the entrepreneur. A relationship based on trust can lead to more effective communication, collaboration, and ultimately, a more successful business.
How to Build Trust with Investors
Building trust with investors starts with transparency. Be open and honest about your business, its strengths and weaknesses, how you deal with challenges, and your plans for the future. It is also important to demonstrate your competence and expertise. Show investors that you have a solid understanding of your industry and that you have a clear plan for how you will use their capital to grow your business.
This means you need to come prepared with your data, might it be your 5Ts or your data room. And these data points need to be kept up to date. If you haven’t yet, log into your DueDash account and update your data today. If you data doesn’t tell the investors the story they want to hear, they will have little incentive to believe you can succeed.
Consistency is another important factor in building trust. Be consistent in your actions and follow through on your commitments. You need to show investors you hold what you promise – if you promise KPIs, you will have to fulfill them, if you promised to send a document or make an intro in time, do it on time. Investors notice even the smallest details about your behavior, so be consistent.
Finally, be respectful and professional in all your interactions with investors. This is a professional business relationship, be friendly and clear in your interactions, don’t be arrogant, and don’t annoy or don’t try to fake your behavior in the hope it will get you money. Investors will see through the facade and the loss of potential funding will be the simple consequence.
Nurturing Relationships and Keeping Trust Over Time
Once you have built trust with investors, it is important to nurture those relationships and keep the trust over time. This involves maintaining open and transparent communication, being consistent in your actions, and continuing to demonstrate your competence and expertise. Do you send regular updates to investors? Both your shareholders as well as potential ones? Do you maintain the relationship or just hope things happen? Take time and effort to build trust over time. And one of the best ways to do that is by using your data.
Risks to Avoid – How to Make Sure Investors Will Be Wary of You
There are certain actions that can make investors wary and erode trust. These include making false or exaggerated claims about your business, failing to provide clear and transparent information, and being inconsistent in your actions. While founders want to highlight the greatness of their business and their growth, you cannot falsify information as well as mislead investors.
Another risk to avoid is being unprofessional or disrespectful in your interactions with investors. If you start bad-mouthing investors, being unfriendly, or hurling insults at their faces, you will receive an immediate backlash. Professional etiquette is important in any business relationship, especially with investors.
These actions can damage your reputation and make it more difficult to build trust with investors or block you from ever raising any capital again. Once your reputation is lost, it is almost impossible to recover it.
Measuring Trust: How Do I Know Investors Trust Me?
Measuring trust can be somewhat intangible, but there are several indicators that can help you gauge whether investors trust you. The first is their willingness to engage in dialogue and invest time in getting to know you and your business. If an investor is interested in learning more, this is a positive sign that they see potential value and are willing to invest their time.
Another indicator of trust is the questions investors ask. If they are asking detailed, probing questions, it shows that they are seriously considering your business and want to make an informed decision. On the other hand, if the questions are superficial or non-existent, it could be a sign that they don’t have a high level of trust.
Positive feedback and a willingness to provide funding are also clear indicators of trust. If an investor is willing to commit capital to your business, it shows that they believe in your ability to deliver on your promises and that they trust you will use the funds responsibly to grow the business.
Finally, the terms of the investment can also be an indicator of trust. If the terms are favorable and show a clear understanding of your business and its needs, it suggests that the investor has a high level of trust in you. Conversely, if the terms are overly restrictive or punitive, it could be a sign that the investor is trying to mitigate their risk due to a lack of trust.
By paying attention to these indicators, you can get a sense of whether investors trust you and what you can do to build and maintain that trust over time.
Trust – The Bedrock of Investor Relations
In conclusion, trust is a crucial factor in raising capital from investors. It reduces the perceived risk associated with the investment and lays the foundation for a successful partnership. Building trust starts with transparency, competence, and consistency, and it must be nurtured over time. By following these guidelines, you can increase your chances of successfully raising capital and building a successful business.
To enhance your understanding of crafting and managing thorough due diligence documents, reach out to the DueDash team.