Negotiation involves a lot of strategy planning and negotiation theory has spawned valuable concepts such as the Best Alternative to a Negotiated Agreement (BATNA) for creating win-win negotiations.
Negotiation Skills for Entrepreneurs & Investors
Indeed, SWOT and BATNA are two processes used in a negotiation. Yet, entrepreneurs find it difficult to accept, that venture capitalists, private equity funds, angel investors and other business investors are even capable of creating win-win negotiations and using the right negotiation skills when they are seeking equity funding and raising startup capital.
A common misunderstanding amongst entrepreneurs when seeking equity funding is that negotiations with business investors are at a different level and that the naïve entrepreneur is somewhat “begging” for their equity funding. Thus, it cannot be stressed enough, that entrepreneurs have to employ the right negotiation skills with investors and talk confidently to the investors at the same level and has to firmly believe that each side has something equally valuable to bring to the table when it comes to equity funding.
Understanding the Venture Capitalists and Private Equity Funds
When seeking equity funding, it helps to gain an understanding of the dynamics between entrepreneurs and investors such as venture capitalists, private equity funds and angel investors because only then will entrepreneurs know that while the other side is parting with their hard-earned equity funding from which they understandably seek an optimal return, he is parting with a valuable portion of his business that he’s built up painstakingly but sees a promising future in.
This should set a good foundation for a win-win venture capital negotiation to take place through the negotiations. Having said that, it is also vital for the entrepreneurs to use the right tools during the negotiation process in order to maintain his/her confidence and the high-level partnership climate on conceptual issues during the entire negotiation for business financing.
The Right Tools for Effective Negotiation with Business Investors
“AOSTA” is a good template to adopt when entrepreneurs is planning his/her negotiation strategy.
- Assignment (Task)
- Objective (What to obtain)
- Strategy (Overall approach)
- Tactics (How you should do it)
- Action (How do we proceed)
AOSTA can be catered specifically to the nature of the other side – the investor when seeking equity funding and raising startup capital. For example, when planning tactics, entrepreneurs should clearly define what he/she is selling and start out with a forceful initial benefit promise (IBP) that gives a reason for the busy business investor to be interested in the first place.
This is similar to using SWOT analysis in negotiation by straightening out the strengths available. Entrepreneurs should also ask the business investors key questions such as “Do you share the opinion that…” to ensure his/her understanding of the subject matter and to reduce the occurrence of misunderstandings.
Using a problem-solving approach and asking questions such as “what would make you accept…” allows entrepreneurs to find out the business investor’s needs and re-iterate his/her value.
Three-Stage Approach to Investor Negotiation
The AOSTA uses a three stage approach to investor negotiation and provides a template for setting out negotiating strategy. In this approach, entrepreneurs have to decide which level to aim for when seeking equity funding, use a step-by-step approach, get agreement at each step of equity funding, obtain as much information as he/she can before the meeting, use empathy and projection, use an IBP, involve participants at all times, visualize well and often, summarize at the end and give a feeling of achievement.
- Create a positive impact
- Achieve general agreement on a proposal
- Get definite commitment for equity funding
Upon using AOSTA for goal orientation, entrepreneurs can use the objective setting model to come up with main, secondary and retreat objectives. The objective setting model utilizes transactional analysis in negotiation and considers what he/she wants to achieve with the prospective client, what tasks has she/he taken, what results he/she wants to achieve, consider if stage objectives need to be set, determine maximum results aiming for, note “deal breakers” and conditions that can be relinquished. Entrepreneurs can also use the all-too-familiar SWOT analysis in negotiation by analyzing the opportunities available, allowing him/her to see perspectives from both sides.
Negotiation Skills and Characteristics of Negotiators
Finally, entrepreneurs should take into account some typical negotiation partners’ characteristics when seeking equity funding. There are three basic wavelengths called Parent, Adult and Child, which can be seen in Wayne Dyer’s books and entrepreneurs can definitely apply them to negotiations with business investors. Transactional analysis can come in very handy indeed in such equity funding negotiations. Firstly, it is important to know thyself.
Secondly, it is also important to spot the other party’s wavelength because different people will use different negotiating tactics when they’re in different ego states. For example, a Child is likely to use a strategy defined by manipulation and employs tactics such as undermining and pretended inadequacy. If there is one major point to emerge from watching good and bad negotiators, it is that the best of them use the full range; the less good are stuck with two or three of them.
Entrepreneurs should be able to choose which to use for raising startup capital, and also to defend themselves better when the three strategies are being used against them.