The Entrepreneur Insiders network is an online community where the most thoughtful and influential people in America’s startup scene contribute answers to timely questions about entrepreneurship and careers. Today’s answer to the question, “What’s the worst thing you can say to a potential investor?” is written by James Green, CEO of Magnetic.
Nearly 20 years ago during the first tech boom, I was faced with a tough predicament. Steve Jobs had fired me from Pixar, my immigration visa was going to expire, and my money was gone. I was fortunate to know a couple of Australian lads who were starting an ad-serving business, and I wanted in. To become a founding member of the business, I would have to invest what little money I had left, bring on three clients, and raise $1 million in funding. So, I got to work and ended up founding my first company.
Two decades later, I’ve run four startups prior to my current company, which I’m still raising money for. And when I think back on what has been integral in pitching potential investors, it’s remembering that these are people I’m dealing with. As author John Green puts it in Paper Towns, “What a treacherous thing to believe that a person is more than a person.”
The worst thing you could say to a potential investor isn't related to any particular subject, concept, or moral imperative. You can always find an investor who will be okay with extreme positions that I would personally object to, such as, "I don't believe in profitability," or, "I've got an idea that will keep X people out of the country." What you should never say to a potential investor is, "Things just got worse."
In your first meeting with an investor, you should do two things: Most obviously, get them excited about your idea, and then, as you are explaining your idea, make sure that any big "gotchas"—like fudging sales numbers or touting a high-profile team that hasn’t even been hired yet—are out in the open in this first meeting.
Here’s how all investors evaluate opportunities: The more I learn or find out, does the opportunity look more-or-less the same? For this reason, I try to be transparent about any setbacks during the first meeting. Then, as the investor digs deeper, they won't discover anything that hasn't already been disclosed.
A great example, and probably the most common error first-time entrepreneurs make with new investors, is giving sales numbers that they’re not certain are correct. There is almost nothing worse than negotiating an equity investment and then sheepishly explaining that the numbers you shared at the beginning are worse now. And even if you artificially inflate the numbers and are able to hang on long enough to get the investment and then revise down your forecast as soon as the money is in the bank, you’re going to poison your relationship. It's a terrible way to start.
And this isn't just about the beginning of an investor relationship. It's always best to deliver bad news as quickly as humanly possible so that an investor never discovers these things by themselves, or discovers that the situation has been bad for a while but you never told them.
Investor relationships are just like any other kind of relationship. They are built on trust. At the risk of being cliché, in a trusting relationship, you should be free to speak your mind and tell the whole truth all the time, no matter how painful. Holding that back, hiding it, delaying, or in any way prevaricating communicating the tough stuff to investors is what you should never, ever do.