Getting an idea or innovation off the ground as an entrepreneur takes strong negotiation skills.
Yet, in their new book Entrepreneurial Negotiation: Understanding and Managing the Relationships that Determine Your Entrepreneurial Success (Palgrave/Macmillan, 2018), Program on Negotiationinstructor Samuel Dinnar and MIT professor Lawrence Susskind write that many entrepreneurs are falling short. Here, Susskind explains what often goes wrong and how entrepreneurs can do better.
Negotiation Briefings: As you write in your book, most start-ups fail, and entrepreneurs’ negotiation mistakes contribute to these failures. What are a few of the most common mistakes that entrepreneurs make in negotiation?
Lawrence Susskind: In our interviews with entrepreneurs, we found that many don’t realize that the only way to move their ideas and inventions into the world is to engage in a series of internal and external negotiations. We identify the eight most common mistakes that entrepreneurs make: (1) They’re self- centered; (2) they’re overly optimistic and overconfident; (3) they feel a need to win, now; (4) they’re too quick to compromise; (5) they work alone; (6) they haggle; (7) they rely too heavily on their intuition; and (8) they tend to deny their emotions.
NB: What particular mistakes do entrepreneurs tend to make when pitching their ideas to investors and negotiating for funding?
LS: They get so caught up in their own inventions or ideas that they fail to focus sufficiently on the interests of investors. And as we know from a negotiation standpoint, failing to connect with your counterpart’s interests is a recipe for disaster. In addition, many entrepreneurs are overly defensive when potential investors raise doubts about their ideas. There’s so much ego involved in fostering a new idea that entrepreneurs tend to react emotionally to questions they view as being critical. Finally, entrepreneurs often don’t focus sufficiently on value creation—that is, finding ways to capitalize on an investor’s knowledge to do something potentially even more effective than what the entrepreneur had in mind.
NB: How can they do better?
LS: First, entrepreneurs need to devote time and energy to trying to understand and address the interests of investors while still meeting their own needs. Second, they need to do everything they can to build trust, especially by not exaggerating or shading the truth. Third, they should agree to engage
in independent fact finding when an investor raises doubts about their claims. Fourth, they need to negotiate very clear written agreements (that can be modified regularly) with all their partners and investors so there are no misunderstandings about roles and responsibilities. Fifth, they should ask for help at every step and work on absorbing negative feedback rather than immediately dismissing it. Finally, they need to make a serious effort to learn from their mistakes by reflecting carefully on their negotiations.
NB: Entrepreneurship requires a certain amount of risk. How can entrepreneurs better manage risk in negotiation?
LS: Entrepreneurs are, by definition, proposing to do new things in new ways, and it’s hard to know whether plans will unfold smoothly. Entrepreneurial negotiators need to incorporate ways of hedging risks and bridging differences in the “risk/reward” ratios acceptable to entrepreneurs and investors. Since there is often no way to reduce the uncertainty involved, the next best thing is to figure out how to manage it. Most notably, they can add contingent terms to most investment agreements. Agreements can specify different financial and managerial arrangements that will kick in depending on which version of the future materializes, as specified in a single provisional agreement. When the unexpected happens, the terms related to that scenario automatically kick in. This avoids conflict that can undermine trust.
NB: Research shows that women are far less likely than men to receive funding for their ideas and innovations. What’s holding them back?
LS: Implicit and explicit biases often put women, as well as racial minorities, at a disadvantage in an entrepreneurial context. Investors may expect less of them or think they can take advantage. It would be great if gender biases in the entrepreneurial world just faded away, but until they do, women need to negotiate in ways that take these factors into account. As unfair as it may seem, women need to prepare more carefully and rely more heavily on objective evidence to make their points than men do. Women entrepreneurs also do better in negotiations with investors if they bring trusted male back-table members with them, even if the women do all the talking. Finally, women are more likely to be successful when they frame their pitch in reference to benefits to others rather than themselves.