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Every week we speak to entrepreneurs who are eagerly seeking financing for their start-ups. Despite the start-up moniker, many have been struggling for months and even years. They have probably passed up jobs, ended significant relationships, faced the ridicule of family and friends, and lost sleep over bills and bank accounts. They are, in a word, desperate.

It’s important for investors to recognize this. Look past the calm exterior, the confident pitch face, the exaggerated success claims, and the impressive resumes. More often than not, entrepreneurs are highly intelligent, wholeheartedly passionate, and despairingly insecure people who desperately need approval. We say this with the utmost respect for the entrepreneurs. It takes a tremendous amount of courage to walk into the lion’s den, especially with a preexisting defeated and desperate mindset. Nevertheless, investors should not coddle and string along every entrepreneur that pitches to them. On the contrary, these entrepreneurs need a healthy dose of reality that an investor has the power, and responsibility, to provide. They’ll thank you for it later.

In some circles, ID has developed a reputation as being “straightforward” (to use a pleasant euphemism) and maybe even a little harsh. That wasn’t always the case. In the beginning, like many other impact investors, we were quickly enamored with entrepreneurs’ “narratives” in pitch sessions. Therefore, our hearts didn’t let our mouths utter what our minds were thinking. We let the entrepreneurs leave meetings with a glimmer of hope that we would be following up with an investment, even when we knew that we wouldn’t. However, this does no good for the worn-out entrepreneur, who could be compared to a starving artist. Over time, we have discovered that a firm “NO” coupled with actionable advice for moving forward helps an entrepreneur much more than false hope. We have learned our lesson and we hope that other investors will follow suit.

As investors, we have a responsibility to be upfront and honest (call it harsh if you like). With all due respect to the entrepreneur, investors should follow a simple set of rules to manage mutual expectations:

1. Know your own investment criteria: If you really don’t invest until they have trailing revenue, don’t “diligence” the kids that just won the MIT $100K. If you only invest in financial inclusion, don’t chat up solar energy start-ups (even if their founder did just speak at TEDx). 
2. Speak your mind: If the business model fails to impress you, tell them why. If the entrepreneur fails to instill confidence, let them know. It will probably be uncomfortable, but shouldn’t be confrontational. 
3. Limit letters of commitment: LOIs are an easy way to buy time for your investment committee to continue to deliberate, but they set expectations for entrepreneurs that are often not met. If you’re going to invest, just do it. If not, just say it. 
4. Just say “No”: It’s not only a bastion of Reagan era drug policy, it’s also a great way to keep expectations in check. Don’t waste time if you’ve already made your decision. Offer a referral, constructive criticism, and a genuine smile, but don’t waiver, don’t defer, and don’t let the entrepreneur wedge the door back open if you really aren’t going to follow through. 

Last week, our Weekly Review highlighted articles that spoke to the great sense of responsibility that rests with impact investors and social entrepreneurs. An investor’s responsibility begins with the entrepreneur. However, in addition to being responsible to entrepreneurs, impact investors must be mindful of the future impact of their investments on the environment, local communities, and individuals. It’s not an easy task and it’s one that the investor and entrepreneur tackle together. To manage their responsibilities effectively, the pair needs to have a strong relationship made possible with honesty and trust from the start. This means clearly communicating interests and expectations and that starts with intent to invest (or not).