Communicating With Investors: Best Practices for Startups

When facing the pressures of funding and growing a new business, startup founders may neglect stakeholder management, but it’s a critical component of success. Learning how and when to communicate with investors can enhance accountability, encourage ongoing feedback, and attract additional investments.

Communication may be difficult to measure, but its effect can be significant. Consider Tesla founder Elon Musk’s 2018 tweet about taking the company private: A message consisting of fewer than 280 characters cost Musk and Tesla $20 million each in fines and a shareholder lawsuit that could amount to billions in damages.

Founders of young startups, however, often take the opposite approach: Instead of oversharing, they undershare. That can be a costly error in its own way. By not engaging regularly and effectively with their investors, founders could lose opportunities to capitalize on the backers’ experience and knowledge.

Honesty, openness, and timely conversation must be central to every good relationship, and this one is no exception. Investors generally aren’t looking for anything more elaborate than routine updates coupled with periodic conversationsabout future plans, so leaders don’t need to be professional communicators to do it effectively.

And the benefits are numerous: Regular contact with investors helps young startups enhance their networks, strengthen their businesses, and prepare for the challenges of growth. We interviewed three Toptal investor relations consultants and distilled their best advice into simple guidelines that can help you establish and maintain this connection.

Make Time to Connect

Why don’t young companies communicate more effectively with their investors? One reason is time, says Brendan Fitzgerald, a serial entrepreneur in Toptal’s freelance network with more than 25 years of experience. He has worked with hundreds of investors, frequently taking a role as the point person on investor relations.

The chief reason founders don’t prioritize communication is because they think their time would be more profitably spent on other pressing tasks, he says.

But nurturing that relationship is a critical task, Fitzgerald says. “You don’t want them to think that you only call when you need more money.” A useful way to always keep backers in the loop is through periodic reports. Most investors are happy with a concise monthly or quarterly performance report about how the company is doing. And it doesn’t take as much time as founders might fear—once you’ve put the first report together, he says, the subsequent ones generally shouldn’t take more than half an hour to prepare.

Establish a Rhythm

The most common mistake that founders of young businesses make is thinking that investors are doing them a favor, according to Toptal expert Greg Barasia, who has executed more than $20 billion in transactions from seed-stage venture investments to large corporate buyouts. That thought makes them afraid that they are being annoying by sending investors frequent information about the company or asking for guidance.

However, Barasia says, these investors aren’t patrons, but business partners. “They want to see how their investment is doing, and many are willing to offer any help they can. It’s not that you’re bugging them; it’s actually putting them in a position where they know what’s happening with their money,” he says.

The US Securities and Exchange Commission (SEC) requires that public companies file an annual report (Form 10-K) and quarterly reports (Form 10-Q) containing detailed financial and operating information, including income, cash flow, net sales, growth, and obligations. Although startups may not be required to follow SEC disclosure guidelines, these rules can serve as a helpful general template for leaders to develop their own information-sharing framework.

Young businesses don’t necessarily need to follow these forms precisely, but they serve as a handy starting point. A secondary benefit is that, if the company ever goes public, being in the habit of gathering and presenting this information to investors will simplify the transition to presenting it to stockholders.

But disclosing certain events shouldn’t wait until the next report. Again, SEC rules are a useful guide: Public companies are obliged to disclose changes such as the appointment of new directors or new leadership, as well as the acquisition or disposition of assets, among other significant events. “If you launch a major new version of your product, if you acquired your competitor, or if you received an acquisition offer yourself and want advice, you should consult your investors,” says Erik Stettler, Chief Economist of Toptal and a former venture capitalist...

Read the full article here: https://www.toptal.com/finance/investor-relations-consultants/communicating-with-investors