When Investors Don't Believe You, Do This

How much weight will a customer Letter of Intent hold with seed investors?

My answer: Either a little, or a lot. It all depends.

Here’s the truth though of why most founders don’t raise:

No matter how much you want them to, investors just don’t believe you.

Even if customers love you, potential investors have tons of reasons not to trust you:

• They’re investing their own money, and can’t make a mistake
• They’re investing other people’s money, and definitely can’t make a mistake
• They haven’t seen you perform in the very recent past

But don’t worry, we’ll get over this trust hurdle, and a Customer Letter of Intent (LOI) is going to help get us there.

Here's the rundown:

What needs to go in an LOI?

Think of a customer letter of intent like a vote of confidence: it basically just says “we like this person / business”

Fundamentally, an LOI should include:

• What your company does
• How your product / service will help your customer. Examples of ROI, specific benefits etc.
• Current status of your product or what will be developed
• Customer commitmentTimeframe for consideration (e.g. 1 month from when product is ready)Summary financial terms
• Non-binding language, e.g.This letter of intent does not create or constitute any legally binding or enforceable obligations or liabilities between the partiesMay be subject in the future to further amendment or modification

But if it’s all bla-bla, it’s just a Letter of Support… unless you get specific.

If I’m getting an LOI, I want it to be worthwhile. The customer is onboard - so how do I go from Good to Great?

Make it real.

Get as close to actual commitment / contingent as you can - generally that means specificity on price & terms.

How much would they be buying (roughly)? At what price? What would be the payment terms?

The other major supercharge:

Ask if they’d be willing to provide 3rd party reference.

Having the ability to offer a potential customer as a reference for your business case can do wonders for proving out what you claim to investors re: demand.

Just make sure, as with all references, that it’s REAL!

Investors better not be calling up this customer and get the response, “Oh yeah, Evan told me about this, I remember it vaguely, yeah seems kinda cool…”

If an investor rings, that customer better be gushing for you!

The size of the company issuing the LOI does NOT matter - what matters is what they’ll say once an investor picks up the phone & calls.

What’s the best approach to securing an LOI?

Prospective customers understand that businesses need help growing - and if you’re not asking for THEIR money, generally they’re pretty happy to see you succeed.

So long as you have a good relationship, here’s the key phrases to use when you have that magic chat with your customer:

• We’re gearing up for a capital raise…
• We’ve discussed working together…
• I’m happy to put together a draft, so it’s super easy for you…
• It’ll be totally non-binding, but would be a great vote of confidence

You write the draft. Make sure there are big bold letters about how it’s non-binding, indicative only, subject to change etc.

Caveat it like crazy!

Then you let them amend it, however they want.

Just ask if they’ll sign it on their letterhead.

It’s only weird if you make it weird

Take my word for it - it is NOT weird to ask for a Letter of Intent, especially when it’ll help you massively.

Companies both big and small are happy to support you - especially if they’re gung-ho for working with you (potentially!).

Let them do your part to prove to your investors, that you’re legit.

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P.S. - Today’s post stems from a great question one founder dropped in the comments. Do you have a question? Leave a comment on my LinkedIn newsletter, and maybe we’ll cover it in a future issue!