Aligning investment paths

Prelude

The inspiration behind this topic is to improve the chances for great companies to successfully connect with sophisticated investors in a simple process, avoiding emotionally driven, tangled paths. Human behavior is essentially unique to each person and is influenced by their history, life events, personalities, and social influences, among other factors. As investment deals are people-driven, aligning people to people is as important as aligning investment objectives and terms. In the following lines, I share common emotional states of mind while crossing paths with private business owners during investment deals. As deal makers, we empathize with and interact with such emotions in a private, immersive setting with business owners to positively align the interests of their companies and their wealth with future investment partners.

Investment deals are people-driven

Takeaways

The key takeaways are very simple and similar to a typical journey in our everyday lives.

• Avoid solo paths
• Open up progressively to investment partners
• Actively engage with investment deal partners
• Avoid resisting the investment process

• Identify your location: the stage of your company and your wealth
• Identify your target destination: where you want to take your company and your wealth
• Observe paths that similar successful companies have taken; learn from paths that lead to failures
• Seek advice from people who have taken a successful path before

As rational as these steps may seem, when it comes to raising investments for private companies, people's emotions can cause companies to divert paths and lose alignment with investment partners. Diverted paths are spaghetti-shaped, open-ended, sporadic, never reach a desirable destination, and overburden businesses over time with incredible sunk costs.

Trust the process

Below are common patterns that occur during investment deals, along with advice on how to align the investment paths. Some owners may experience some of these patterns, and it is always easier to break away from them than to keep repeating them.

#1: Going Solo

The company owner decides to learn as they go and lead the investment-raising process themselves, relying on self-acquired knowledge. Some owners unnecessarily put time and resources into these activities:

• Studying investment terms and conducting extensive research to compress the full investment dealmaking know-how in a short period of time
• Hiring investment teams to learn from them rather than use their advice
• Lots of trial-and-error attempts in document preparation and pitching to investors
• Traveling extensively to meet investors

Unfortunately, some private company owners have taken this path for years despite repetitive rejections, rising costs, and time wasted. Common behavioral patterns are noted:

• People who like to take sole credit for achievements
• Alpha energy
• Eagerness to boast skills
• Poor communication with others
• Sporadic and quick decision-making
• Lack of consistency in decisions (spaghetti paths)

It is worth highlighting that sophisticated investment teams can realize from the first few minutes the level of knowledge and experience a business owner has and are both capable and willing to cooperate with business owners through an organized and simple process.

#2: Being overly protective when sharing information

Such owners decide not to fully engage in information exchange. No person can make an investment decision without reviewing key information and engaging in a transparent exchange of information. This state of mind prevents investors from taking serious steps with owners. Despite how obvious this may seem, many owners and especially family businesses carry this over protective behavior for reasons that are worth considering. To engage such owners, it is worth building a close and immersive relationship to gain their trust, pay attention to their points of interest and concerns, and align on the best way to open up to the investment process.

Some reasons why owners are overprotective include:

• Lack of trust in how external parties use such information, especially for family businesses that have maintained private communication for decades
• The presence of negative information that might drive away investors or negatively affect deal terms

Blocking information flow leaves potential investment opportunities isolated; a gradual and progressive exchange of information allows great businesses to cross paths with potential investors.

#3: Passive engagement

Under this state of mind, we would hear phrases like "I won't get involved until the funds are transferred". Rational behavior guides people to think that when one desires to acquire something important, one gives it time, attention, and resources. This also applies to private investment deals that give companies access to large sources of external funds. Yet, some owners choose not to actively participate and wait to see how things evolve. Some common patterns are noted:

• Some owners are just curious to see how an investment deal goes and have many open questions regarding investment deals; they are not in position to make any decision
• Some have not identified their location; they are fully unaware of the current stage of their company and wealth
• Some have not taken a serious commitment to what they want (the destination)
• Some do not like to take risks and venture into the unknown; they feel safe in their comfort zone. Why go through the effort to change that?

Based on many interactions with owners, many appear passive but seriously want to consider new investment partnerships. By dedicating time during our relationship with them, listening to their concerns, educating them about the process, and not placing any pressure on them, some do decide to break emotional barriers and pro-actively engage with investors.

#4: Resisting the investment process

Here, some owners choose to take a resisting position to try to challenge the investment process. It's a path of high resistance as sophisticated funds have investment mandates, committees, policies, and disciplined structures, let alone decades of cumulative experience in private markets. It would seem more rational to align interests and positively engage with investment teams. This does not necessarily mean accepting any investment partnership that does not align with key interests, as one can always find numerous investors that share common paths.

Some patterns are noted below:

• Attempts to convince and change how sophisticated funds work, their investment criteria and process; for instance, owners may get into long arguments and continuously edit the information presented
• Exaggerated reactions and displays of high ego and over confidence in communications
• An unannounced fear of being rejected as the owner realizes they are not well prepared to meet investment acceptance criteria
• Envy towards investment teams that are gaining access to the same industry
• Frustration from repetitive failures in attempting to raise funds

Some owners might have never crossed these emotional paths, and some might recognize they are currently tangled in them. In all cases, it is easy to break away and let go of such diversions. As long as owners focus on their main journey and draw paths between their current location and future destination, it becomes easier to align with future investment partners.

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