A lawyer recently told me the one and only piece of advice he gives his clients before they are deposed – just tell the truth. This same piece of advice applies when approaching potential outside investors.

You probably already know that angel investors and venture capitalists will be evaluating your business plan to determine if you have all the pieces of the business puzzle to succeed which in their world means they can expect at least a 50% per annum return. They will evaluate your ideas, technology, management team, marketing plan, intellectual property, financial statements and the assumptions you have made underlying these factors.

What you may not realize is that during the evaluation process, the potential investor is also evaluating the soft skills and character traits of you and your team. You can have the cure for cancer and the most highly pedigreed team in your pocket, but if something smells fishy, investors cut bait.

Confidence and optimism in your business is required in order to draw the attention of the investment community in the beginning. Don’t let your confidence, which served you so well up until this point, undermine you during the investment review process. Resist the temptation to spin your story, overstate your assumptions or engineer your financial statements. Such actions may undermine your credibility.

Expect potential investors to identify your weaknesses, question your assumptions and believe you’ve underestimated business risks. Resist the natural reaction to be defensive. Instead, think of it as free consulting and use their criticism as constructive criticism. Make use of the process to take action and plug holes in your business.

In a nutshell, it’s easy to avoid the biggest mistake you can make with potential investors. Tell the truth, the whole truth and nothing but the truth.

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