The Art of Earning Trust
Trust trumps all when it comes to fundraising
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This week’s article is probably my shortest one, but arguably has the most important insight for founders who are pitching investors - hope you enjoy!
Last week I hosted an AMA session with students from the University of Queensland.
One of the questions they asked was about how a VC ensures that a founder spends their capital wisely.
Beyond taking a board seat and setting measures to get board approval for spending above a certain threshold (which in some cases can just slow a company down), there really isn't a whole lot that a VC can do to stop a founder from just burning through their cash irresponsibly.
Early-stage investing is all about trust.
It’s not really a revolutionary thought, but one that I don’t think a lot of founders appreciate. It’s an unspoken truth about investing. When a founder pitches a VC, and gets asked about the product, the market size, or how they plan to hire, the hidden question behind each of these questions is effectively “Can I trust that you’ve thought about building product deeply?" or “Can I trust that you’ve actually sized this market appropriately” or “Can I trust that you are capable of hiring and managing a team?”
So realistically, as a founder, your answers need to reflect the hidden question that’s actually being asked. The style and rigour of questions that I ask are all directed towards figuring out whether I can trust that the founder will deploy the capital in a responsible manner and build a large business.
It's why most VCs hunt for well-credentialed founders with lots of prestigious logos on their resumes. There's a logical thought that if this person worked at Google/Meta/Canva then they’ll probably run their startup responsibly.
One of the first bits of advice that I was given when I started my graduate job was to take time and prepare slide decks and other client materials with care and extra focus on how they were formatted.
As a 21-year-old, I didn't really understand why text boxes had to be aligned, and the size of the text should be consistent. My thinking was that, if the information presented was correct and compelling, that's all that should matter.
However, if you look at it from the client’s perspective, their view is that "If you can't even take the time to align text boxes and ensure the formatting is consistent, then how can I believe that you've taken the time to present accurate information".
It took me a lot longer than I'd like to admit to ingest and understand that, but in my role as a VC, it absolutely makes sense.
The way in which you present information, either through a pitch deck or in a meeting matters.
Suppose a founder comes back with outlandish responses (i.e., we have no competition), or the numbers in their pitch deck clearly don't make sense (i.e., outrageous market sizing). In both instances, I'm probably not going to trust the other things that they say.
It's so easy to fall into the trap of overselling when pitching.
Founders get excited about the mission and vision and push the boundaries between what is fact and fiction.
In a fundraising context, trust is usually conferred in a few ways (non-exhaustive):
A strong pitch deck, and robust investor materials
Clarity on what hypotheses need to be tested, and what is still unclear
The ability to problem solve and think logically to questions - many founders have this ability, but get tripped up when answering questions they don't know the answer to. In these cases, founders who are upfront about their lack of thinking about something come across as more trustworthy.
The best founders have unbridled ambition, yet are hyper-realistic about the journey their business will take. I've spoken about the importance of being hyper-realistic a few times before here and here.
If you're a founder and have done a few meetings with investors, then analyse your past performance in the context of the above list. I'm fairly certain you'll be able to identify a few points of improvement. Let me know how you go in the comments below!
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Abhi
Thank you for your insights, Abhi. I enjoyed the read.
I'm curious; at what point does it stop being about the VC imparting their guidance, knowledge and expertise before they decide a founder hasn't 'thought about building a product deeply' enough? How long is that piece of string?
Trust is an immeasurably powerful paradigm across the entire spectrum of human to human interaction. I would argue, the vast majority of early-stage founders pitching for the first, second or even tenth time think they know 90% of what it takes to build a product, hire a team or size a market appropriately, but in actuality, they probably know 10%. Does that deem them untrustworthy?