What do you do when you only have one investor interested in your startup company?
The same thing you should always do:
be prepared to walk away
Any time you’re not prepared to walk away from a deal you are in trouble. I don’t care how late into the negotiations you are, if you not prepared to walk away you are severely compromised in your ability to negotiate a good deal for your startup.
This is a problem that I have seen numerous times. Some founders get pretty excited that they’re able to attract the attention of an investor into looking at their company. That’s great. The problem is that they’ve only really flirted with one investor, or worse yet, they are only able to attract that one investor.
Unfortunately, some times this happens. Some times your startup is only able to talk to that one investor or there’s only one option in how to proceed forward. That’s okay—there are things you can do to work on that and here they are:
1. Improve the startup company
This is step 1 and it’s always step 1.
If you’re only attracting one investor that means that your startup is not at the level that it needs to be in order to really compete in the market. You should use it as a signboard that you need to work on improving the company. In fact it’s a signboard to do all of the following: improving your product, improving your operations, improving your cashflow, your operations, everything related to the company that you possibly can.
The two best things to do in order to demonstrate a growing company is to generate a positive cashflow and/or a larger user base. The reason for this is that often these factors are a result and a consequence of doing other things right within your company.
2. Search for startup investors outside Houston or Dallas or your home city
Whenever there’s an attraction problem—and if you’re only attracting one investor, then there’s definitely an attraction problem, increase what and where you’re looking. There are a lot of investors out there—a lot more than you think, actually. Furthermore, investors tend to know other investors. See what other opportunities the one you are engaging with can offer. They often can and should be able to offer your company something beyond money—introductions to different product or marketing channels, consumer networks, even other investors.
In Texas we see investments from all over the country and all over the world. Startup financing is definitely a global game these days. Cast your net further. If you have to travel to find that investor, so be it.
As I’ve said before think of it like dating. If you’re having trouble finding a partner you can improve yourself (i.e. improve your company), lower your expectations (I'll talk about this later), or increase your search efforts. Here we are talking about that last one: increase your search efforts—widen them, and you will find what you want.
3. Understand the startup financing terms
When there’s only one investor involved that means that you need to proceed more diligently and carefully.
(a) Understand reasonableness
Use the sidebar on the left to get yourself educated about the different terms that are involved in a deal. In particular, check out the table of terms for both convertible debt and a priced round financing. You need to (1) Understand what’s important and what’s not so important; and (2) understand the range of what is reasonable and what is unreasonable. The more homework you do, the better of a situation you will be in.
When you’re in a needy position, and you are if you’re able to only attract one investor, you will need to compromise on certain terms. The important thing is to know which ones you can compromise on and what you can’t compromise on. For example, liquidation preference is not something you can compromise.
(b) Consider deal structure
Additionally, you may have to structure the deal differently. When there’s only one investor involved then you may have to change what type of deal you want.
Is a different type of deal structure more appropriate? Should you use convertible equity or convertible debt instead? How about the numbers in the deal? Should you shoot for something else?
Understand deal structures by studying the articles on this site. It may be best to use a different deal structure than what you’re contemplating.
(c) Get data points
Get as many data points as possible as far as the value of your company goes, what investors want, etc. Ironically and unfortunately, if you had more investors, then you would have more data points and the task would be easier.
The less investors you have interested in your company, the less options you have. That means that you won’t get a well-rounded understanding of the kinds of values that your company is commanding. You’re going to have to get a better understanding of the value of your company somehow or other. You do this by really understanding the numbers that your startup is generating. Better pull out those spreadsheets and study them more carefully.
The irony is that the better company you have, the less you have to do the homework, because a lot of it will be done for you when it comes to knowing the value of your company.
4. Signal that you’re able to walk away from a deal during a negotiation
You have to be able to demonstrate to the investor that you are able to walk away. If your counterpart knows that you cannot walk away from the negotiating table then that’s a real problem. If the other side knows you can’t walk away, then that changes your negotiation position substantially.
Signaling walk away ability is what you do externally. It does not mean to be an asshole and threaten to leave every minute. You can do it extremely subtlety; and with class and elegance. It doesn’t mean to lie or to do anything unethical. It just means to demonstrate, someway, or somehow that you are fine not doing the deal. You can do this with body language or with subtle clues or just flat out saying it.
You have to be able to demonstrate this—this one’s important.
5. Actually be prepared to walk away from a deal during a negotiation
This is what happens internally. The moment you’re unable to walk away, you have lost all negotiating leverage and power.
It requires a lot of confidence within yourself. I’ve noticed that when there’s only one investor involved, when there’s just one option on the table, that this walk away potential just evaporates emotionally within the founder.
Always, always, always be prepared to walk away. I don’t care if you’re negotiating with the greatest investing team or if you’re buying a pithy thing.
Note that I did NOT say that you need to walk away. Being prepared to walk away and actually walking away are two different things.
SUMMARY
Always be prepared to walk away.