Last week’s post at VentureHacks on negotiating terms in a capital raising effort provided an excellent context for evaluating the decision later in the week by Washington Nationals manager, Jim Riggleman, to retire.
The post by VentureHacks talks about utlizing leverage when negotiating with potential investors. Their first point is to create an auction market as well as you can. Getting one investor to take notice of you and begin some extended conversation can be difficult. However, TechonomicMan says that you need to do a few things right so that you can use the interest as leverage when one does get interested. Most important, keep investors updated. If an investor has asked you for a meeting, but does not invest because you are “too early”, be sure to send an email to that investor every couple of months with a BRIEF update on progress you’ve made. They’ll be particularly interested in revenue increases, new distributors signed up and other partnerships you’ve developed. Keeping them updated in a friendly, disciplined way will keep them warm for when an investor steps up and offers a term sheet. You can then, with a straight face, say that some others are looking and you want to go back to them…possibly to participate in a round.
You’ve now created an auction in an effort to leverage the interest of an investor. Contrast this with Mr. Riggleman. The Nationals are his fourth big league managing gig. He’s never had a winning record with any team he’s managed in the 12 seasons he’s managed. The Nationals got on a roll in June and were winners of 11 of 12 games over the past two weeks. Following a victory last Wednesday night, Riggleman abruptly quit. He had a press conference in which he claimed to be tired of trying to get upper management to negotiate a new contract with him. If we assume for a minute that there aren’t some physical or mental health issues behind the scenes, we have to ask…did Mr. Riggleman leverage his position with his “investors”?
The VentureHacks advice piece goes on to say “positive leverage should improve your psychology during the negotiation. You’ve gone from a situation where you want something from the investor to a situation where you both want something from each other. ” A nice winning streak like he put together, even if the investor-owners had been ignoring Riggleman’s request for a new contract, should have given him positive leverage. The owners certainly wanted something from him…um, to keep winning. They know that the Nationals have not exactly experienced much of that. He had finally gained some leverage and proceeded to basically put it in a shredder, light the remains on fire and flush the ashes down the toilet.
TechonomicMan has seen several of his clients react the same way. After months and months of seeking investment, an investor is interested and goes to the trouble of putting a term sheet together. It’s a crappy term sheet with dozens of aggressive terms that need to change. The deal is, Mr. Riggleman/Mr. Entrepreneur, as soon as the investor puts a term sheet together, he is indicating he wants something from you. This is a major step up from the minute before when no one did. Do NOT ignore this term sheet. Do NOT assemble your own term sheet. Do NOT wait for 2 weeks to respond thinking you’ve really got them where you want them. Use their term sheet to negotiate from. If you believe this is a good investor to have on your side, humbly discuss objectionable terms. You are correct that you may never come to terms and it can be frustrating and annoying. But you now have an option. You now have a major uptick in leverage and the future of your venture depends on how you use it.
Herein is another lesson from VentureHacks: “[now that you're negotiating] you can now identify other things that your opponent wants and deliver them.” Make no mistake, the investor is not your friend…yet. However, a smart entrepreneur now has a chance to uncover other hopes and fears of the investor. Jim Riggleman no longer has that chance.
One final TechonomicMan observation. Investors do not NEED to do anything. They don’t need to act quickly. They don’t need to act at all. They, angels especially, have lots of other interests and hobbies on which to spend their money. Your urgency is NOT shared by them. Get used to that. Their reason for existence is NOT to invest in your company. You need to get them to want to. In order to create some urgency, you need to be ready to create an auction. Set a closing date for a round of financing that coincides with the start of a new phase of your business. Maybe you’re launching a new product in September? Announce a financing closing on July 31. Now this will only work for you if you’ve been keeping a bevy of investors updated and apprised so that they are already warmed up to your business and deal.
Speaking of warming up…Mr. Riggleman can now hit the showers. He’s been indignant that his investors-managers wouldn’t negotiate with him earlier. I’m sure that earning some leverage and then telling your boss to “shove it” probably felt damn good for 20 minutes! But Coach Riggleman historically only wins 4.5 games out of every 10 he manages. After the euphoria of sticking it to the man wears off, he may need another 12 years to earn such leverage again. If he even gets another one.