Goal #1 is not to lose money. Goal #2 is to generate an adequate return on capital. However, too often people seeking investments focus on Goal #2 and don't provide sufficient information to evaluate the risks of Goal #1. Anyone raising money needs to see things from the investor's perspective. An investor that is serious about a deal will want to know essentially everything and anything relevant to the transaction or business, preferably in an easily digestible format.
Often a potential partner will mention a report or document and say, “I don’t know if you would even be interested in that information.” Of course I would! If it’s relevant, I want it. Even if it's barely relevant, I still want it. This person has usually been in the industry for 10-30 years, and I have 10-30 days to get on his or her level... I need information.
Many investors say they need to "get comfortable” with a deal before moving forward. It’s an odd phrase, but completely accurate. Every detail needs to be understood to determine the risks of a deal going sour. I need to "get comfortable” with the people I’m partnering with, the strength of the underlying business, the value of the assets, the transaction structure, and the factors that could cause things to go sideways. I want to know how the business operates, how employees do their jobs, what customers want, what type of demand there is for the product, what the competition is like, what the challenges are, what type of character or track record my potential partners have… you get the point.
A while back I was speaking with the CEO of a company in which I was considering investing. We were in touch for several months and I considered myself thoroughly educated on his industry and business. I read industry materials, evaluated tangential businesses, spoke to other investors in the space and the CEO at length, and asked hundreds of questions about the business. Even though I learned something new every conversation, I still felt I had a pretty solid handle on the deal. Then, out of nowhere, in some obscure data I requested I found information indicating the company was essentially outsourcing a major function. This had never been mentioned and I was shocked. When I confronted the CEO he explained he did indeed outsource this part of the business and promptly explained why. His reasoning was perfectly logical and I didn’t see any drawback to outsourcing. Nevertheless, I was quite spooked. I had spent months learning about his company and industry, but somehow this piece of information slipped through the cracks. The CEO didn’t seem to think it was a big deal, and exhausted himself explaining why outsourcing made sense. He didn't understand my concern wasn’t why they outsourced, it was he never told me the outsourcing existed.
Enemy #1 of investors is uncertainty. You hear it all the time in the stock market- the press reporting prices dropping because of some event creating uncertainty. If you take away anything from this post I hope it is this: you have the power to eliminate uncertainty for investors. Provide them with information about everything and anything that impacts your business in any way, shape, or form (you'll have to put in the work to provide it in a format that isn't overwhelming). Investors can then take that comprehensive education and evaluate whether or not they can "get comfortable” with Goal #1.
