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Successful Entrepreneurs Must Learn To Negotiate
If you can’t negotiate, you can’t be a successful entrepreneur.
My new online class at MIT is designed to help both new and experienced entrepreneurs
improve their negotiation skills. This includes learning how to handle the four
unique features of entrepreneurial negotiation.
Harvard Business School Professor Howard Stevenson had it
right when he said that entrepreneurship is “the pursuit of opportunity beyond
resources controlled.” That means that no matter what the sector, entrepreneurship
requires convincing others—start-up co-founders, angel investors, venture
capitalists, employees, and potential business partners —to commit their
knowledge, time, reputation, expertise, and money to your idea. You’ve got to
convince them it’s in their interest to do what you want, when you want, the
way you want. And, you also have to be able to listen and improvise so you can refine,
or even overhaul, your ideas in light of others’ needs and contributions.
These are learnable skills. Studies and experience show that
people can get better at negotiation, no matter what their underlying style or background.
Self-confidence has nothing to do with it, either. Empirically, confidence is a
terrible predictor of one’s negotiation ability. So, if you think you can’t negotiate,
don’t be discouraged. And if you think you’re a negotiation genius, don’t be so
sure.
My new online MIT Professional Education course, Entrepreneurial
Negotiation: The MIT Way, is designed to teach dealmaking skills to people
working in start-ups or other entrepreneurial settings. It focuses on the unique
features of entrepreneurial deal-making: the importance of ego and emotion; technical
complexity; uncertainty; and the
need to build and maintain relationships.
Most simple buy/sell negotiations don’t always these factors; most
entrepreneurial endeavors do.
My online negotiation course is like no other. It teaches
negotiation through the use of role-play simulations developed by the Program
on Negotiation at Harvard Law School (which I co-founded, and where I have
taught executives and students for many years). These sims allow participants
to practice the skills they’re learning, and discuss what worked and what they
could have done differently. The course also includes video of real people
negotiating, and shows me giving them coaching advice using video-recorded
highlights of their efforts. The course provides opportunities for students to
put their learning into action by writing short (two-page) response papers that
other students in the class read and grade using an assigned template.
It is not possible to learn negotiation skills without
practicing. And, it is best to practice with someone you can talk to
afterwards. So, everyone who registers is urged to have a buddy register with
them, so that they can complete four face-to-face practice negotiations.
For those who can’t co-register with a
buddy, we have other ways to help you practice.
The course focuses on the four unique features of
entrepreneurial negotiations:
(1) Ego and Emotion
Anyone who invents or creates something tends to become
attached to it—maybe even a little protective or defensive about it. After all,
they’re proud of what they produced—which they understand better than anyone—and
have their own ideas about the best way to proceed. They are likely to get
upset if someone else even appears to downplay its value. Entrepreneurial negotiations,
therefore, almost always involve some degree of defensiveness on the part of
the proposer or creator. On the other side, negotiation counterparts, such an
investors, tend to have a healthy skepticism about the claims any inventor is
making. After all, a large percentage of all new businesses and new ideas fail.
Put these two together, and talks are likely to be delicate, perhaps even
escalating into increasingly bold claims and deeper skepticism. Such
interactions can lead to bruised egos.
Why does this happen? Psychologist Lee Ross at UCLA has identified
an important cognitive bias that applies in these situations—reactive devaluation. It causes all of
us to automatically question the legitimacy of anything proposed by a negotiating
partner. An inventor is inclined to mistrust the statements made by the other
side about his or her invention. While investors or business partners almost
always start out skeptical about the claims made by an inventor.
There are a number of strategies and techniques that can be
used to counteract important emotional and cognitive dynamics like reactive
devaluation. Entrepreneurial Negotiation: The MIT Way gives budding entrepreneurs
a chance to learn and practice these deal-saving techniques.
(2) Technical Complexity
Many start-ups are built around a technical insight or
design. These may involve innovative hardware or software, or a complicated new
application of old tools to solve a tricky problem, or capture an untapped
market segment. Despite plenty of exceptions, potential investors or business partners
rarely have the same specialized expertise as the inventors with whom they are
negotiating. That’s why investors often rely on experts of their own to test
and vet whatever is being proposed. Asymmetries in technical understanding and
the involvement of skeptical experts working for the other side can create difficulties.
For example, experts selected by an investor or potential business
partner may represent a particular school of thought on a technical matter that
causes them to be skeptical of what is being proposed. When this happens, the
inventor has to work especially hard to win over the other side’s expert. Moreover,
even in the face of a great idea, an investor’s technical expert might remain
skeptical, just to prove his or her worth, reflecting more of a bias than an objective
evaluation of whatever is being proposed. In such situations, the entrepreneur
will end up negotiating not only with the investor but also, indirectly, with what we call the investor’s or
partner’s “back table.”
To negotiate with a back table (even indirectly), entrepreneurs
have to find a way to make sure claims about their product or service, based on
technical or scientific tests they have done themselves, are convincing. They
know the strengths and weaknesses of the tests inside and out. Unfortunately,
given typical negotiation dynamics, their results may fail to persuade a back
table for the reasons mentioned above. Entrepreneurial
Negotiation: The MIT Way teaches “joint fact-finding” – a technique for overcoming
this problem.
(3) Uncertainty
Entrepreneurship turns on innovation, and innovation is ripe
with uncertainty. The usual argument in favor of something innovative is that
no one has ever tried it before. The argument against it is also that no one
has ever tried it before. All this uncertainty creates both risk and
opportunity. Both are magnified by technical complexity in fast-changing markets
and shifting business environments.
Especially at a start-up, reasonable minds can disagree
about how to manage uncertainty. Experimentation and creativity help, of
course. But in negotiations, investors and entrepreneurs sometimes turn to
another tool to resolve their different estimates of what is likely to happen. Instead of trying to negotiate agreements based
on whose forecast is more likely to be correct—e.g., how fast the user base
will grow, how soon the company will become profitable, when the next round of
funding might arrive, how fast the company can scale up its presence or
production—the parties can use “contingent agreements.” These bridge competing forecasts
by spelling out what both sides agree should happen regardless of which scenario
is correct. In Entrepreneurial Negotiation: The MIT Way, I examine the best ways
of using contingent agreements as a hedge against uncertainty.
(4) Relationships
At the conclusion of many buy-sell negotiations, the parties
are glad they never have to see each other again. Entrepreneurial negotiations,
on the other hand, often require ongoing relationships. Managers need to keep
talking to their board of directors; founders need to talk to venture
capitalists more than just once. Once they have worked together for a while, they
may part company; until then, though, they are best off behaving as if they
will have to continue to work together.
There are several ways negotiators should and should not behave
when they anticipate the possibility of long-term interactions with their
negotiating partners. First, long-term working relationships hinge on trust,
and trust depends on truthfulness. My course explores the differences between the
kind of bluffing that’s seen as appropriate in many negotiating contexts, and
the kind of deceit that sours relationships. Second, when relationships matter,
negotiators should avoid win-lose deals that eventually leave one side realizing
they didn’t get a fair shake. The alternative is a win-win outcome that
benefits everyone, at least one that leaves all parties better off than they
would be with any other available deal. This is more if both sides commit to creating
enough value to go around. Entrepreneurial Negotiation: The MIT Way
explains how to create value through win-win trades that build trust and sustain
relationships.
The MIT Way
To be a good negotiator, you need more than mere tactics and
technique. You need a theory, one that explains why you should do some things
and not others. MIT’s motto (“Mens et manus”) is Latin for mind and hand—theory
and practice, why and how. Any good entrepreneurial negotiator must know what
to do and how to do it. Without adequate theory, you won’t know how to
improvise or apply what you know in new situations. Without adequate technique, you won’t be able
to pull it off. The MIT way is to learn the theory of negotiation (that has
developed in academic and business settings over the past several decades) try
it out, and then formulate a personal approach to entrepreneurial negotiation
that integrates both the why and the how.
The text for the MIT course is Good For You, Great for Me: Finding the Trading Zone and Winning at Win-Win Negotiation. Those who enroll get a free
electronic copy.