Picture the scene…
Your startup has started talking to a big client/customer. Okay, maybe they’re not Walmart big, but they’re big enough to either provide a proof point, revenue, free pie or some other extraordinary value to your company.
SuperBigCo, inc. loves your product. They talk about deploying it. Of course they have some feature requests, but that’s (probably) okay.
And then the gift is placed on the table. The gift looks like flowers, but it is, in fact, a giant poop nugget.
“We love what you’re doing. We might want to invest!”
You get excited. First of all: Money! Money is always good. Second of all: Strategic Investor! Market validation and money all in one package. That’s like good tasting low-fat pie (not found that so far, by the way) with a proverbial cherry on top.
Whenever a company tells you this, there is only one answer you should give:
“That would be amazeballs! We would love to have you as a strategic investor. Let’s get the first implementation up and running and then we’ll dig in.”
You don’t actually have to say “amazeballs”, but never ever ever give in to the temptation to combine a first product deal with a possible investment. Why? Because daisy-chaining deals across different parts of a company always ends badly.
The people who can sign off on an investment are totally different to the people who can sign off on a product. The process of doing an investment is totally different to the process of buying a product.
You are combining bacon with cat litter and expecting a sandwich. It will end badly.
If the company wants to buy your product, it probably solves a clear business need for them. The company can see a clear return on investment. The promise of a better world hinges on your product being deployed – your product either saves them money or makes them more money.
A clear return on investment means there is some pressure to get a deal done. Pressure to do a deal means you have a timeline. Deals with clear timelines get closed.
The investment folks have more abstract goals and the return on investment is intangible and hard to predict. As a first strategic deal for you, you are unlikely to offer a significant exclusive or any other carrot that provides a tangible advantage to the company e.g. blocking a competitor from working with you. For the investor, this deal is unlikely to make or break their company within the next few quarters.
If the company has done investment deals before, they may have a set number of deals they like to do in a year. Or not. If they’ve never done an investment deal before, you are in the stinky swamp of uncertainty. Finding the person who really has responsibility for the decision to invest will be like tracking down an absentee slumlord. They’ll be hard to find and will probably deny any involvement or responsibility until forced to do so.
All of these factors make the timeline fuzzy. Deals without a clear timeline don’t get closed.
Okay, so where’s the harm? You’ve still got two deals to chase, and that’s great, right?
It plays out like this:
- Product people get excited and want to roll out the product.
- Product people get investment people involved because your product is so cool.
- Product people are now distracted, explaining to investment people why they should invest.
- Investment people start talking to you.
- Some bright spark suggests that the product purchase and investment deal be tied together to maximize value for the company. This always happens.
- Product people now wait to hear feedback from investment people.
- Investment people are busy with lunch/dinner/golf/navel gazing.
- Product deal now cannot be closed until the investment decision has been made.
- Your timeline goes to hell in a handbasket.
- Investment discussions grind to a halt. Probably for no specific reason other than a lack of decision-making willpower on the part of the company.
- Lack of investment is seen as a negative endorsement of the company, and by extension, a negative endorsement of your product. Product people become nervous about doing the deal.
- Internal corporate politics and paranoia kick in. No-one wants to back a bad product. Your product deal now cannot be closed. And of course, since there’s no product deal being done, there’s no investment deal to be discussed.
The worst part of this is that the investment people don’t even need to say no. They just need to not say yes, and that is something investors are very very good at. Before you know it, your promising sales lead is dead and you’ve burned six months chasing an impossible deal that cannot be closed.
I have seen this play out hundreds of times, across many industries and many different companies. It always goes the same way.
The only solution is to stick to your guns and separate the deals. Get to a happy customer first.
If the deployment goes well, then you pursue investment discussions. Your product will have internal champions with real proof of your value proposition. That’s powerful stuff. You’ve transformed from a pan handler begging for spare change to the sexy girl/boy they want to take to dinner. And having that customer will open up new funding/revenue opportunities for you anyway.
Like an asteroid on a collision path with the Earth, a small deflection early enough will save your whole world. It is very very easy to separate investment from a product sale IF you tackle it the first time it is mentioned. And doing so will increase the odds of success on both fronts.
Bacon. Cat litter. Use each for its intended purpose!