The Importance of Trust
Less than 1,490 words
In a previous post in this series, I described a founder's insights about how to pitch to capital allocators.
I also combined those insights with a quote from a Venture Capitalist (VC) who explained that the nature of the VC business is this:
Even if you describe your business perfectly, it does not mean you will automatically receive an investment.
These two observations are relevant because they reveal a communication gap between founders and capital allocators.
I believe that the communication gap consists of two parts:
The part that founders can close by honing their skills as communicators
The part that founders cannot close even if they hone their skills as communicators
The second part of the gap exists because founders are not privy to all of the reasons capital allocators pass on investing in their startups; however, publicly available information about founders' experiences raising money gives us some clues.
Trust is the basis for all investment decisions, so logically, one of the reasons capital allocators pass on investing in startups is likely because of a lack of trust.
To talk about trust, we first need to acknowledge that to be an entrepreneur is to be in a position of privilege.
When we talk about the privileged life entrepreneurs live and how trust influences investment decisions, we must identify the privilege we're talking about.
There is a difference between having the privilege of building a business and the privilege to build a business. I spoke about that here.
Not everyone has the privilege of building a business. Some people have to get full-time jobs to take care of their responsibilities. Of course, this is not to say that entrepreneurs don't have responsibilities, but rather, that they can:
Organize their life in a way that they have significantly fewer responsibilities or
They are afforded the opportunity to be flexible in how they satisfy those responsibilities while building their businesses.
The ability to raise money is the culmination of a founder's privilege to build a business. It is that culmination of privilege - and specifically how close founders stand in proximity to wealth - that determines whether or not they will be able to get access to funding.
This proximity is key, and whether founders want to acknowledge it or not, whether they can articulate it or not, it is the starting point of all their frustrations about the fundraising process.
Most agree that capital allocators want to establish trust before investing; however, there seems to be some confusion about whether the desire for trust - or certain types of trust - is a personal preference or a business requirement (e.g., "It's not personal; it's business").
Let's give capital allocators some grace here and assume that the desire for trust is not malicious.
We actually don't need to assume at all; there are several purely business-related reasons for why capital allocators need to trust founders.
For example, capital allocators must trust that founders understand the problem they are trying to solve and that the solution being built will lead to a big business.
But the lines get blurred when we acknowledge that capital allocators must trust the founder as a person, and it is nearly impossible to separate trust in the founder from trust in the business being built.
This is because the best founders start businesses around problems that they have experienced, and our experiences are inextricably linked with who we are. More on that in another post.
This gap manifests in many ways, all of which have to do with a barrier to productive collaboration between a founder and a capital allocator.
Can the two parties agree that there is a problem to be solved?
Can the two parties agree that this problem is venture scale?
Can founders get capital allocators to agree that they should allocate their resources to them?
Can the two parties agree on a valuation…etc.
And because these experiences are inextricably linked with who the founders are, the communication gap is not just business-related but personal as well. It’s cultural. It’s domain-based. And I argue that it is impossible to avoid that fact.
If we’re talking about two parties agreeing that a problem actually exists, there’s going to be a disconnect if there is no overlap between a capital allocator and a founder on different aspects of their background.1
So the hypothesis is that the wider the communication gap between a founder and a capital allocator, the more inorganic trust the founder needs to build in order to get access to the resources they need.
The more foreign a founder and their experiences are to the capital allocator, the more difficult it is to build organic trust and the harder it is to get access to resources.
The Speed of Trust
There is a report from Dropbox Docsend that is useful in understanding how trust influences the fundraising process. The report leverages surveys of over 200 startups to visualize statistics about their fundraising experiences.
For our purposes, I’d like to draw your attention to page 20/26 on the report that shows the average amount of money raised by startups and the average number of investor meetings that it took to raise that money by race/gender.
The graph on the top of page 20 of the report is phenomenal (I’ve recreated and reorganized it to make the explanation clearer); let’s put it into sentences to understand what’s happening here.
Teams made up solely of white males (all male/no minority) are raising a $660k pre-seed round in 42 meetings.
Teams made up solely of white females (all female/no minority) are raising the same amount as teams made up of solely white males ($660k), but it takes them 45 meetings.
Teams made up of a mix of genders but no minorities (all white) are raising significantly more money, $730k.2 Still, it is taking them the longest out of the demographical category containing no minorities. This means that they're getting better valuations; even though it's taking longer, indicating that they likely oversubscribe and possibly get more expressed interest.3
Teams made up of solely minority males (all male/minority) are raising $700k in their pre-seed rounds.
6% more than their white male counterparts. . .
However, it is taking them 33% longer to do so; 56 meetings as compared to their 42.
Teams made up solely of minority females (all female/minority) are raising $450k; 31% less money than their white female counterparts…
And it’s taking them 15% longer to do so; 52 meetings as compared to their 45.
Diverse race teams made up of a mix of genders (mixed/minority) are raising more money in their pre-seed rounds than any other demographic ($800k)…
But it is taking them the longest of all (60 meetings)…
The big takeaway is that diverse and mixed-gender teams are getting resources, often at higher valuations; it’s just taking them more meetings to do so. Perhaps they are getting more maybes. 4
Before I close the thread on how this relates to trust, I want to talk more about the statistics about the fundraising experiences of black women raising pre-seed rounds.
The frustrating thing is that female minorities should be the ones who get access to more fundraising opportunities - because they start the most businesses. However, they are likely raising at lower valuations, taking less capital, and still taking a relatively long amount of time to do so. 10 more meetings in comparison to white male teams, and female minorities are raising - on average - $210k less than them.
Now, to bring this all home, we need to look at this data from the perspective that investment decisions are based on trust.
Stephen Covey - author of "The 7 Habits of Highly Effective People" and a slightly lesser-known book called "The Speed of Trust" - explains how trust impacts business:
"Trust always affects two measurable outcomes: speed and cost. . .Where trust is low, everything takes longer and costs more."
Covey went so far as to call the additional time and costs that precipitate from low-trust environments a low-trust tax.
When you take into account the amount of time it takes all male/minority teams to raise slightly more than all male/no minority teams; it means they are likely getting a lot more maybes.
Ultimately, this report from Docsend alludes to the trust gap between founders and capital allocators, but it also implies how long it takes some founders to close this gap. 5
Now that we've set the stage for why trust is important, in the next article I will talk about how founders can build trust.
A special thank you to
for contributing to this article; sharing the Docusend report referenced in the section titled “The Speed of Trust”; assisting in generating graphics for this piece, as well as articulating foundational concepts, and reviewing early drafts.Background includes the elements of proximity discussed in this post (click here)
Mixed in this context means the makeup of the team is more than one gender
Valuations are correlated with the amount of money raised
The worst thing that a founder can get is a maybe. The best are the quick yes and quick no.
Anecdotally, meeting frequency is every other week. For added context, top-tier accelerators like Techstars arrange investor meetups for each cohort, where founders “speed-date” multiple VCs in 1-3 weeks.