Why is an Exchange Mindset Recommended for Investing?
An exchange mindset has fairness at its heart and sets the stage for a more successful investment relationship. There will be fewer hard feelings, any feelings of unfairness will be less likely, and no one will try to gain an advantage and cheat the other person later on.
The exchange mindset in investing means both investor and entrepreneur are getting their needs met. Perhaps both have to compromise in some way for an agreement to be reached, but because the investment relationship is rooted in the belief that the investor is getting something in exchange for something else and the entrepreneur is gaining, also in exchange, the foundation is set for a relationship based on trust, open communication, and mutual success for both parties.
How to Develop an Exchange Mindset
To develop an exchange mindset, start with the abundance mindset and trust that there are enough resources to go around to meet your interests and to serve others. Don’t just ask yourself, “What’s in it for me?” Also ask, “What’s in it for them?” Head into an investment relationship with the belief that the relationship holds value for both of you.
Keep in mind that, more often than not, it is not a like-for-like exchange. Know what is of value to you and what is of value to the entrepreneur and their business, and work toward a give-and-take exchange.
Keep the following in mind:
As an investor, if I take something from you, the entrepreneur, it is fair for me to give you something in exchange.
As an investor, if I give something to you, the entrepreneur, it is fair to receive something in exchange.
Relationship and Transaction
I’m lucky to be working in a field where all the investment activities I’ve been involved in have included direct communication with the entrepreneurs and business leaders who owned the companies in which I was considering investing. In my career, I’ve exclusively worked in what is called the alternative investment field, which means I make private investments, be it in equity, debt, or impact venture capital. The approach that my colleagues and I have taken in the field of impact investing is to treat our interactions with entrepreneurs and their companies as investment relationships, not just as financial transactions.
The efficient packaging up of investment opportunities into investment products has become more opaque over time. People understand their investments less and as a result, have become less engaged and less involved in the direction of their investment activities and decisions. People are becoming disgruntled and dissatisfied with the financial advisors that manage their investments for them, or unhappy about the companies in which their money is being invested. Companies seem to be less accountable for their actions, and as investors, we increasingly feel there is little we can do to change things. But we can change things with a relationship mindset.
A relationship mindset is about connection between people, and it implies something longer-term and enduring. Adopting a relationship mindset about investing reminds you that it is about people—it humanizes the investing experience. This approach makes investing less about transacting and takes some of the emphasis off money. There is a close connection between the relationship mindset and the exchange mindset. Many of the underlying principles are the same; they both encourage and rely upon on trust, transparency, and open communication.
A transaction mindset, on the other hand, focuses on the buying and selling of a product or service. It turns investing into a product and encourages you to focus on the exchange of money. The transaction mindset implies something short-term and fleeting.
A transaction mindset dehumanizes our interactions in investing because it places emphasis on an exchange of goods or services and money. It is because of this mindset that investing has become increasingly impersonal over the years.
If you can embrace the idea that investing is, at the end of the day, all about people by developing a relationship mindset, you will find yourself investing in a different way, and will experience a greater sense of success.
Relationship Mindset Transaction Mindset
Focus on people Focus on products
Build over time, long Immediacy, fleeting
Requires high trust Characterized by low trust
Focus on connection and fit Focus on buying and selling
Experiential Process
Investing in a private venture is about the entrepreneur, their team, and the relationship they have with you, the investor. The people involved in a venture are critical to the success of your investment. This can sometimes be taken for granted with a transaction mindset. If you approach venture investing with only a transaction mindset, you will end up missing information and nuances about the entrepreneur and the venture, and that can contribute to the investment’s failure. A relationship mindset reminds you to engage with and evaluate an investment opportunity as you would engage with and evaluate people in a relationship context. Skills and qualities that we associate with relationships—trust, empathy, and communication, for example—will be useful to you in your investment decision making. A relationship mindset reminds you to take time to get to know the venture and the people involved.
Why a Relationship Mindset is Important to Investing
A relationship mindset is useful in investing because it helps you focus on forming a good relationship with the CEO s and management teams in which you are investing. Good relationships encourage CEO s and management teams to have greater transparency with their investors, and to engage in better governance.
It sets the stage for healthier, more productive conversations between investors and management teams, in particular in times of trouble or if they are facing a challenge. Conversely, a relationship mindset is also important when things are going smoothly, as it creates an environment for open dialogue and communication, which can lead to the creation of more opportunities. It helps investors and management teams be less confrontational and adversarial, and more successful.
How to Get into a Relationship Mindset
Developing a relationship mindset starts with a focus on people. At the end of the day, when we speak of the potential of a company, we primarily mean that of the leadership team and staff—their potential to work together to achieve something great.
To develop a future potential mindset, practice the following:
Focus on people.
Focus on mutual trust and respect.
Contemplate transparency and open communication.
Think of your investment activities as interpersonal and about connection.
Care about who you are interacting with—is this someone you want to go through good and bad times with?
Mindsets Matter: Moving Forward with Micro-Business Lending
Joy Anderson, President of Criterion Institute and one of my advisors, was working with senior leaders of a church congregation. They were discussing establishing a micro-business loan fund within the church to fund members who were planning to start new businesses. The subject was a $ 500 starter loan. “What if they steal the money?” one of the church leaders asked. Joy highlighted that the church leaders would have the opportunity to establish relationships with members who borrowed the money that would be based on trust and mutual benefit. “You mean, we can actually talk to our members?” they asked with delight.
This, to me, is an illustration of an opportunity to engage mindsets of curiosity, abundance, and relationship. A curiosity mindset enables the church leaders to be open to the possibilities and be curious about how a micro-business loan could benefit her congregation. An abundance mindset would encourage them to believe that there were enough resources to go around and that lending money to a congregation member could actually reap more through the growth of a new small business. The most critical shift in mindset, however, is to one of relationship. A micro-business loan is more than just the transfer and transaction of money. It is an extension of the existing relationships they have with their congregation memb
ers, creating a sense of accountability deeply rooted in mutual trust and benefit. Although becoming micro-lenders was new territory for the church leaders, their skill, experience, and strength in relationship-building with their congregation was a solid foundation on which to build lending relationships.
Future Potential and Past Performance
I first took notice of this mindset when I was working in the impact investing team of a large financial institution. I was evaluating an opportunity to provide a loan to a company and assessing its ability to meet the obligations of the loan in the future. There was so much uncertainty and potential for change associated with the company that it was more like an investment opportunity than a lending opportunity. My boss at the time asked me for financial ratios and wanted more analysis of the company’s past performance. I felt agitated by the request, which is a bit strange considering my accounting and banking background. I felt that the financial ratios and analysis of the company’s past performance wasn’t going to tell me what I needed to know about the company’s potential.
Conventional investment methodologies use past performance to try to predict the future, assuming that past patterns and trends will continue, but that’s where our assumptions can fail us. Faced with uncertainty and change, there is a big chance that old patterns and trends won’t continue. As much as we might think it is, past performance is no indicator of the future performance or potential of a company.
On this job I realized I did not have the right investment methodology to make a satisfactory impact investing decision and appease my boss. I realized that I needed to adopt a future potential mindset as opposed to a past performance mindset.
Investing outcomes are future-oriented. Investors spend a lot of time analyzing the past performance of the entrepreneur, the sector or industry, or the venture they are considering investing in if they have some operating history. Past performance tells you important information about where the entrepreneur and venture have come from and what their journey has been. However, this limits your scope, as it doesn’t tell you what you need to know about the future.
Looking at past performance doesn’t make it any easier to know what will happen in the future. A venture could continue performing the way it always has, or it could perform well for a while and then run into trouble. Our objectives for ventures more likely center around them growing and doing something different—perhaps expanding into new markets or launching new products and services. Repeating the past, even if past performance was good, is not what we’re looking for as venture investors. Past performance is no guarantee of future performance, and certainly isn’t an indicator of future potential.
A future potential mindset focuses more on what could be with an investment opportunity than on what has already been done. It goes hand in hand with the curiosity mindset, and shares the same elements of discovery and exploration. Future potential evokes the unlocking of abilities of the entrepreneur and venture opportunities that were not previously visible.
Future Potential Mindset Past Performance Mindset
What could be What has been
Looking forward Looking back
Financial projections Historical financial statements
Guesswork, hypothesis, assumptions Knowledge, facts, data
Intuition Analysis
Focus on people, team, and communication Focus on metrics, accounting, and the amongst them company’s financial results
How to Apply Future Potential Mindset to Investing
Investing is inherently a future-oriented activity. A future potential mindset helps you broaden your mind and focus on outcomes. It enables you to focus on an entrepreneur’s vision and the future market opportunity of a venture. Giving an entrepreneur and their venture a chance by believing in and investing in their potential is the beginning of what could be a self-fulfilling prophecy.
In evaluating an entrepreneur’s potential, look at how they handle feedback and change. Are they responsive to change, or do they ignore it? Do they demonstrate judgment and balance in adopting feedback or standing their ground at different times?
How they’ve dealt with past situations, not their performance in them, can give some indication of future potential. In other words, an entrepreneur’s vision and how the entrepreneur makes decisions is a better indication of their potential than past performance ever could be.
The future potential mindset can also be applied to your evaluation of market opportunities. With it, you could consider how potential customers of the company you are evaluating might make decisions to purchase products and services down the line.
How to Develop a Future Potential Mindset
Similar to a relationship mindset, developing a future potential mindset starts with a focus on people. At the end of the day, when we speak of future potential of a company, we primarily mean that of the leadership team and the staff, and how they will interact and relate to each other to achieve something great together.
Practice the following to develop a future potential mindset:
Focus on a person’s strengths rather than their weaknesses (in particular, the potential strengths in a person that may require further support and development).
Give people the benefit of the doubt where possible.
Ask people about their dreams and vision of the future to help you develop a future-orientation; do they have vision, determination, drive, a propensity to learn, and a propensity for risk and change?
Imagine what is possible.
Take the limits off.
Embrace “what if.”
Engage your intuition.
Develop your future-orientation by reading future-oriented science fiction and social fiction.
Resources and Money
Just the other day, a relative asked me why the world revolves around money. This question prompted a conversation about the purpose of money, and other family members chimed in. We talked about the power that money represents, and another relative noted that what we were really talking about were values and what we actually need to sustain ourselves.
Money’s primary role is as a means of exchange. Yet the prevailing money mindset would have us believe that it is the be all and end all or that it sustains us. But that isn’t true. We can’t eat money if we’re hungry, or drink it if we’re thirsty. Money won’t keep us warm and protect us from the elements. We can only exchange it for the essential resources we need to sustain ourselves.
Money is a concept that was created so that we could more easily exchange our time spent and the resources we owned for other things we needed. So money is a means, not an end. But when we adopt a money mindset, we make it the end goal.
Some people use money as an essential resource of expression, as if the numbers on their paychecks or bank accounts actually tell other people something meaningful about them. Here again, the money mindset disconnects us from the essential resources we need.
As investment bankers, my colleagues and I worked with a lot of money every day. We were also paid handsomely; on personal levels we all had access to quite a lot of money. But we were always seeking something more. Some boasted about the extravagant holidays or new homes their money could afford. Some of us talked about working in investment banking for a couple of years, just until we earned enough money to quit and do what we really wanted to do. In both cases, we were all engaged in a chase for more money. This mindset distracts many of us from what is really important to us, what we actually want and need.
The financial crisis and credit crunch in 2007 and 2008 demonstrated that money is not all it was cracked up to be. It is fleeting. Banks, governments, and people made decisions with money irresponsibly. This caused me to rethink the money mindset. I began to focus more on the people I wanted to spend time with, the things I wanted to spend more time doing, and the resources I actually wanted and needed. I traveled and stayed with faraway friends who were not part of the investment banking industry. I reconnected with ways of life tha
t were not as caught up in the money mindset as I had been in investment banking. I spent time with my family. I took up new hobbies and reacquainted myself with old ones. I was creative with my resources. All of this was leading me to develop a new mindset.
A resources mindset connects us to the things we actually need to sustain ourselves in life, thrive, and be happy.
Resources Mindset Money Mindset
What we really need are essential resources for sustenance, expression, connection, managing change, making decisions, and as a means of exchange Money sustains us
Money as a means of exchange Money as an end goal
Focus on multiple stakeholders, including shareholders, customers, employees, partners, suppliers, the planet, and the community Focus on shareholders
Focus on optimizing essential resources for stakeholders Focus on maximizing profits for shareholders
Why a Resources Mindset Is Important to Investing
A resources mindset in investing helps integrated investors focus on a set of returns and outcomes that are broader than just a focus on profits and money. It makes investing about more than just money. Investing becomes about ensuring people get access to the essential resources they need.
Whereas a money mindset is associated with the outdated and incomplete idea of maximizing profits for shareholders, a resources mindset concentrates investors’ efforts on optimizing essential resources for all stakeholders impacted by a business. By “stakeholders,” I mean shareholders, customers, employees, partners, suppliers, communities, and the planet.
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