Co-investing is one of the most efficient mechanisms for pooling resources and expertise in the world of venture capital. However, co-investing is not without challenge and, unfortunately, deal friction - both in terms of co-investors' sometimes clashing interests and negotiation approaches - can do a lot of harm to co-investments. This article explores the realities of co-investor negotiations and provides insights into opportunities to reduce friction and collaborate to achieve successful deal progression.
The Allure of Co-Investing
Co-investing has many advantages - risk sharing, pooled expertise and access to larger deals, to name some - but the negotiation process can be stressful and produce tension between co-investors. Investors often have different goals and different strategies and too frequently run into "deal friction" during negotiations. To tackle the friction, investors need to acknowledge when not all their interests align, and seem genuine when expressing it while being honest in feeling responsible for their investors' needs. Deal friction can drag out deal progression, add costs, and at worst, ruin an investment opportunity entirely.
Co-Investor Negotiations
Varying Goals: Co-investors may have different investment time frames, risk profiles, and exit strategies. For example, some co-investors may want a quick exit through a trade sale or structured exit, while others may want a long exit strategy and hold until an IPO for maximum valuation.
Lack of Trust: When investors and operators do not trust each other, there may be an inclination to micromanage or to be constantly looking over the operator's shoulder. This may not serve either party. Investors may feel that they have to be present in every negotiation and then would be demanding to be present in every negotiation, wasting time and efficiency.
Different Negotiation Styles: Some investors may negotiate aggressively, while some co-investors may prefer a collaborative way to negotiate. This may lead to confusion and disagreements.
Strategies to Reduce Deal Friction
Building Trust
Trust is the foundation of any co-investing effort. Investors need to invest in building long-term relationships founded on respect, trust, and transparency. Investors can build trust by communicating regularly and having clear agreements, and a history of trustworthy behavior. One investor had a great takeaway: "Drop the ego. Trust your GP is fighting for your interests." It is very valuable to know when not to push to dominate every discussion, especially one where you have others’ capital in play.
Clear Communication
Communication is key to eliminating ambiguity and miscommunication. Co-investors should be clear on goals, expectations, and issues at the beginning of the negotiations. Keeping the lines of communication open via regular check-ins and open sessions, as well as identifying potential issues or delays early, will create a partnership approach.
Collaborative Negotiation
We would take a collaborative negotiation approach to change the deal-making dynamic and open new doors. Techniques such as active listening, reframing the issue, and joint brainstorming can shift a contentious negotiation into an open partnership. For example, reframing the pricing impasse into considering larger goals of the partnership could change the game.
Understanding Investor Motivations
Investors are individuals that have different motivations and preferences for capital deployment. Grasping these investor motivations can facilitate negotiation strategy while increasing success. For example, if a negotiation identifies the investments that each investor has made previously, plus the nature of those investments' successes and failures, that is valuable information in their decision making.
Exit Strategies
The investors' exit strategy is the best way to minimize uncertainty and find a common interest in the investment. Co-investors should discuss potential exit paths for an investment decision, and as much as possible get the investors to agree on possible exit paths. Whether it's an IPO, trade sale, or secondary sale, a simple path to exiting will minimize risk, and streamline the deal process.
The Role of Evolve Venture Capital
At Evolve Venture Capital, we are acutely aware of the complexities and dynamics involved in co-investment relationships and diligence processes. As seasoned co-investors ourselves, we are experienced in the intricacies of negotiating document deals and have seen how essential trust is to codifying our relationships and decisions in the document process, especially when diligent co-investors have different goals and structures. We pride ourselves in creating collaboration and promoting stronger relationships, which we believe brings down friction by leveraging our depth of knowledge in an industry to align and align co-investor partners and make deliberate actions, which makes execution simpler. We provide a basis to induce and promote open and transparent communications in the document and negotiation process to encourage co-investors to close deals properly. This is how we make co-investing easier for our partners at Evolve Venture Capital.
In summary, mitigating deal friction in your negotiations with co-investors starts with a multifaceted approach. Trust is a must to get things done well. Clarity of communication. Collaboration. Understanding motivations. Planning the exit. We can help alleviate some of the challenges co-investing typically brings. Ultimately, we can let you alleviate some of the deal friction and provide a beneficial path to success for you.
