Startup founders may overlook stakeholder management when juggling the demands of raising capital and expanding a new company, but it’s an essential element of success. Understanding when and how to interact with investors can improve accountability, promote continual feedback, and draw in more funding.
Despite being hard to quantify, communication can have a big impact. Elon Musk, the founder of Tesla, tweeted about going private in 2018: Musk and Tesla were fined $20 million each for a message with fewer than 280 characters, and a shareholder lawsuit with potentially billion-dollar damages was filed against them.
Young startup founders, however, frequently choose the polar opposite strategy: they under share rather than overshare. That in and of itself could be a costly mistake. Founders risk missing out on opportunities to benefit from their investors’ expertise and knowledge by failing to communicate with them on a frequent basis and effectively.
Every successful relationship, including this one, must be built on honesty, transparency, and regular communication. Leaders don’t need to be expert communicators to execute it well because investors often aren’t looking for anything more elaborate than weekly reports mixed with periodic conversations about future goals.
The advantages are numerous as well:
- Young entrepreneurs benefit from regular communication with investors since it helps them build their networks
- grow their companies
- get ready for growth-related issues.
We spoke with three Toptal investor relations professionals, and we condensed their finest recommendations into clear rules that might assist you in creating and maintaining this connection.
Spend Time Connecting
Why don’t fledgling businesses engage their investors more effectively? Brendan Fitzgerald, a serial entrepreneur with more than 25 years of experience and a member of Toptal’s freelance network, cites time as one factor. In his work with hundreds of investors, he frequently served as the investor relations point man.
According to him, the main reason founders don’t place a high priority on communication is because they believe their time would be better utilized on more urgent duties.
Fitzgerald notes that maintaining that bond is a crucial endeavor. They shouldn’t assume that you just call when you need more money, you say. Periodic reports are a good approach to always keep backers informed. The majority of investors are content with a brief monthly or quarterly performance report on the business. And it doesn’t take as long as entrepreneurs may anticipate; according to him, after you’ve put the first report together, the others typically shouldn’t take longer than 30 minutes to create.
Create a Rhythm
Greg Barasia, a Toptal expert who has completed more than $20 billion in transactions ranging from seed-stage venture investments to significant corporate buyouts, claims that the most typical error new company founders make is believing that investors are doing them a favor. They worry that by incessantly informing investors about the business or requesting advice, they are bothering them.
But according to Barasia, these investors are business partners rather than patrons. “They want to monitor the performance of their investment, and many are eager to assist in any way they can. It’s not that you’re pestering them; rather, you’re placing them in a position where they can monitor the use of their funds, the man claims.
Public firms must submit annual reports (Form 10-K) and quarterly reports (Form 10-Q) to the US Securities and Exchange Commission (SEC) that include comprehensive financial and operational data, including income, cash flow, net sales, growth, and obligations. The SEC’s disclosure requirements may not be mandatory for startups, but they can nonetheless be used as a basic framework by executives to create their own information-sharing policies.
Although these documents are a useful place to start, new firms are not required to adhere to them exactly. The habit of gathering and providing this information to investors will make the transition to presenting it to stockholders easier if the company ever goes public, which is a secondary benefit.
However, some incidents need not be kept a secret until the next report. Once more, SEC regulations are a helpful guide: Public corporations are required to disclose major events, such as the appointment of new directors or leadership, the purchase or sale of assets, and other changes. According to Erik Stettler, chief economist of Toptal and a former venture capitalist, “you should engage your investors whenever you introduce a major new version of your product, if you purchased your competition, or if you received an acquisition offer yourself and seek advice.”
Keep It Brief
Founders can be tempted to provide their investors in-depth studies and presentations filled with all the data they can find. They ought not. According to Stettler, tech investors are not recognized for having long attention spans. When they receive an update, they search for specific facts and bits of information. Are you, first and foremost, financially sound? Do you require additional funding? What is your most pressing issue?
Your key performance indicators (KPIs), such as growth, active user counts, transaction volumes, and customer retention, should always be included in the report. Include milestones like closing a significant sale or accomplishing a professional objective.
Barasia asserts that there are further issues that require discussion. What have you been up to since our last conversation? What is the company’s current state generally? What has changed recently? What plans do you have for the near future? A young company must provide an investor with the information, he claims. There shouldn’t be more than two pages in this report.
Investors will find it simpler tto compare different periods, comprehend the startup’s progress, and provide greater insights if the status reports are brief and consistent. As a result, accountability and cooperation are strengthened.
Even if investors don’t read every report, the disciplined approach taken in creating the reports ensures that current responses to frequently asked issues are frequently available, which may save everyone a tonne of time. “You say, ‘Hey!’ if [your investors] call with a problem or a query. Please email the status from last month. You’ve already completed the task, says Fitzgerald.
Request Assistance If You Need It
It makes sense that founders would want to present themselves as strong and trustworthy, and they would believe that doing so would be compromised by soliciting counsel. Because doing so would suggest they aren’t ready to lead or keep their promises, they can be reluctant to ask for assistance from their investors. However, according to Stettler, investors are frequently delighted to take those calls because they want to see founders thrive.
As an entrepreneur, you should anticipate added value from your investors, he argues. “They shouldn’t be becoming too involved and complicating your life, but they should be accessible for advice and to open doors for the company. Asking for assistance does not make you appear weak.
Barasia concurs. He is one of the original investors in an AI-driven event management platform, whose executives deliver monthly updates to all of their investors with important information. He claims that by doing this, they’ve demonstrated that they’re open to discussion and direction without giving up control. “This business is currently seeking funds totaling roughly $3 million. The entrepreneur has been quite aggressive in asking the investors for their opinions and ideas. Because of the method in which ownership is set up, he ultimately has the final say, but we [the investors] can communicate with him and offer our input.”
Deliver Bad News Quickly
Early-stage startup founders may feel anxious about revealing that they are experiencing a crisis, but investors won’t be shocked. In the past, 20% to 50% of newly founded businesses have failed within their first year, according to statistics. Good investors are aware of this, thus the absence of any negative news may raise questions.
According to Barasia, creators must be ready for failure just as seasoned investors are not unfamiliar with it. Young firms should be proactive in communicating the difficulties they may encounter.
According to Stettler, the only time he has ever become truly enraged with a company was when it went for a very lengthy period of time without communicating. “When they finally got in touch with me, it was to let me know that they only had one month of runway remaining and needed to rapidly come up with a solution.” Not the crisis itself, but the startup’s tardy notification of it made him angry, not the crisis itself. He claims that by then, it’s frequently too late to take action.
It’s crucial that you provide bad news to your investors first. You don’t want investors to learn that your business is struggling on social media, according to Fitzgerald. “You must maintain constant communication, and the logical extension of that is that you must always be reachable, within reason. If your investors have comments, questions, or concerns, they must be able to call you.”
Why Startups Should Update Investors Frequently
The explanations given are:
- to improve commercial partnerships.
- to encourage accountability both inside and outside.
- to make certain that important metrics are current.
- to strengthen assistance and feedback mechanisms.
- to widen windows for fresh possibilities. to get ready to go public.
Create a Full Picture
While it may be tempting to only present the most optimistic vision of the future in order to encourage others to support your efforts, transparent communication is crucial for preserving investor confidence.
This implies more than just being truthful. Entrepreneurs, according to Barasia, “are quite optimistic by nature,” but founders must be careful not to let optimism develop into hyperbole. “I get it: You created a business and have all these ideals, but you need to be very clear about the reality. Sometimes a startup CEO may email everyone to appear as though the firm has made progress in discussions for a new relationship, but it was only a preliminary conversation, the expert claims. Such exaggerations are unacceptable to him.
Fitzgerald continues, “Don’t oversell your skills.” The worst thing you can do when accepting money, according to him, is not be honest about what you can achieve and set the bar too high. “You lose credibility if you tell an investor that your business can get to Point C in 10 months but you don’t even come close to getting there. Investors invest in people they can rely on. The goal of all your communications should be to maintain this confidence.
Fitzgerald points out that creating a network of investors for future initiatives can be accomplished by setting reasonable goals and communicating frequently and honestly. His network of investors has backed several of his ventures, some of which have failed. But because of their good relationship with him, they kept funding his subsequent ventures. “Some people invested in a company that lost money, but they later did so in a startup that succeeded. It’s essential for entrepreneurs to have this network of reliable investors, according to him. Stettler concurs. “Failing is a natural part of this journey, so I have invested more than once in the same founder.”
People can face even the worst case scenario with minimum conflict when they interact with one another, communicate well, and have a clear understanding of the potential consequences. This could pave the way for future success. According to Stettler, “the best way to deal with [bad news] is to do it promptly while outlining the essential lessons that [you] are going to implement next time.”
Investor communication need not be challenging, but it must be deliberate. The kind of partnership that starts with your first pitch deck and continues well after your investors have left is one that is nurtured through effective communication.