Quality Business Plans Build Trust

I recently watched a 2012 TEDx University of Waterloo talk entitled “Who can you trust?”  My friend and colleague, Andrew Maxwell, who is an Assistant Professor of Strategic Management at Temple University in Philadelphia, gave it and I highly recommended it. It can be found on YouTube at http://www.youtube.com/watch?v=1mAFFtVV5B4&feature=share&list=SPsRNoUx8w3rM27gSBuijVfTpFGKtGOhDD. In his talk, he present a diagram, redrawn here, that got me thinking about my days as a venture capitalist and how trust - or the lack of - influenced our investment selections.    

Key:

Trust:             Firm belief in the reliability, truth, ability, or strength of someone or something. No reason to take action to alter the process.

Suspicion:     Feeling or belief that something is wrong or someone is being dishonest but without enough evidence to take immediate action.

Mistrust:         Lack of or damaged trust or confidence that can take significant time to repair, often through the provision of additional information or assurances.

Distrust:          Regard as wrong or dishonest with a deliberate intention to deceive or violate trust resulting in immediate avoidance and exclusion.

Before hearing a pitch an opportunity or reviewing a plan, VC’s are neutral. As indicated by the arrow in the diagram, as we learn more we experience periods of suspicion and even bouts of mistrust but if we can work through these we can get to trust, make a deal/ investment and become partners moving forward. If too much mistrust builds up, the deal reaches a point of being too much trouble to bother with. On the other hand, if even the slightest bit of distrust develops the deal is dead.

A well constructed, detailed, written business plan can help build trust, allay suspicion, minimize mistrust, and prevent any deal-killing distrust from arising. It achieves this in two ways: The document itself demonstrates that the entrepreneurs have thought-through the opportunity and carried out enough supporting research. Of course, not every issue or contingency can be addressed, as this is the “fuzzy front end” of new product (or service) development. However, it is important to demonstrate that all the major issues and risks have been carefully considered and addressed as best as possible. Even more importantly, the document serves to keep the entrepreneurs on point. When faced with tough and penetrating questions from investors, ill-prepared entrepreneurs often try to bluff their way through. This usually leads to suspicions or mistrust, which frequently evolve into distrust and the end of any fruitful relationship. On the other hand, well-prepared entrepreneurs build trust by demonstrating they have considered the vast majority of the issues and can offer approaches to resolve them. Additionally, their preparation gives them the confidence to say, “We haven’t considered that, but will look into it and get back to you” when a novel question is posed, minimizing any further suspicion, mistrust or distrust.

New business opportunities require entrepreneurs and investors to come together as partners. These relationships require trust. Trust that the opportunity and risks are what the entrepreneurs say they are, trust that the entrepreneurs will execute the plans to the best of their ability, and trust that entrepreneurs will keep communications open. By making the extra effort to prepare a well constructed, detailed, written business plan, entrepreneurs can go a long way to building this critical trust.

© Duncan Jones 2013 All rights reserved