How to manage your relationship with investors
This blog is a translation of Plug and Play Japan’s Executive Advisor Zak Murase’s blog「Startup School #4 | 投資家との付き合い方」published on June 15th, 2021. Check out the original here (JP).
Previously, I wrote about how to choose investors, but this time I will talk about how to build your relationship with investors after successfully raising funds.
Once you accept external funding, the company no longer belongs exclusively to the founders. External investors will become your partners and share in the company’s destiny. The founders have a responsibility to get along with investors. Aside from achieving a minimum level of accountability, the CEO should actively communicate with investors in order to maximize investor partnership beyond monetary value. It should not be left to the CFO and those in charge of finance.
The most important opportunity to communicate with investors is the board of directors (or the general meeting of shareholders if no board of directors is established.) The board of directors usually consists of lead investors and, in some cases, other major investors and observers. The board of directors is not only for deciding important matters, but also an important event in terms of communication with investors, from day-to-day updates to discussions on future strategies.
Board meetings should be held at least once a month. It is better to create opportunities to regularly explain your business progress to other investors who are not on the board. Updating investors other than the board of directors can be done by email. However, it would be much more effective to create an environment where you can receive direct feedback so that they are able to support your company with a sense of ownership.
The key point here is the effectiveness of your communication with investors. If you’ve worked for a major corporation and imagined something like an in-house reporting meeting, forget about that first. It’s definitely not like using well-crafted slides, plainly reporting prior adjustments, and ending with not muchQ&A session. “Effective” in this context, means that startups and investors each maximize their effectiveness in the least amount of time. This isn’t easy, but here are some things that should help.
Looking at the business objectively
Given that CEOs have a million things on their to-do list, taking time to prepare for communicating with investors may not seem like an effective way to spend time. This couldn’t be further from the truth. When you are devoted to product development, recruiting, acquiring customers, etc., there is a tendency to lose sight of the forest because of the trees. Preparation before communicating with investors is a great opportunity for you to calmly think through what is important and what is best to do from an investor’s point of view.
It is also important to prepare and set the milestones for achieving the next round of financing. You should discuss what you can do to prepare for your next round as well as checking the funding feasibility with your investors rather than procrastinating these things.
Prepare preliminary materials that cover what you need but keep it simple
If you’ve already launched your product, make sure that your KPIs are clearly shown in a consistent format. If you can create anything visible with your in-house tool, you can use that too. The important thing here is to deeply analyze and be able to explain the causal relationships behind the KPI numbers.
In addition to KPIs, the basic financial situation is important for discussion with investors. Cash balances and burn rates, high-cost events, recruitment plans, and more. This is where investors apply their knowledge and wisdom from their experience with portfolio companies, such as when, where, and how to spend in order to get the maximum return. It is important to be prepared for the discussion.
It is not necessary for you to spend time crafting beautiful slides or materials. You just need a concise summary of the numbers and the agenda that covers the important discussion points.
Make the most of your time with investors
As the CEO of the company, your business is everything. However, for your investors, it may be one of many companies in their portfolio.
Some investors have an active portfolio of more than 10 or 20 companies, so let’s make the most out of the time they spend on your startup. When reporting on the progress, try to share necessary information in advance and focus on discussing important management issues during the meeting. In particular, it is best to ask questions in advance about where you would like to get feedback from investors and where you would like to consult so that you can have a deeper discussion during the meeting. Good investors will use the information they receive and bring resources and necessary information to the table. Of course, investors are also busy, so they might not have time to prepare every time, but, as an entrepreneur, you should do what you can in advance to make the most of the investor’s time at the board meeting.
Solid Follow-ups
At the board meeting, it is necessary to take meeting minutes of decided matters.Be sure to take note of discussions, important feedback, homework, etc. so that you will be able to follow up on them. At the meeting, the CEO should be able to concentrate on explanations and discussions, so it would be better to have the CFO or the COO to be present to take detailed notes. In particular, do your homework and be able to report them at the next board meeting, or in some cases follow up on investors before the next meeting.
Final thoughts
There are many situations where communication with investors is important outside of board meetings.
Most startups share the news with investors right away when they’ve got good news such as winning a large-scale customer or reaching big milestones. Of course, investors are happy to hear such good news and want to share it. However, what investors really want to know as soon as possible is the bad news. Bad news tends to be more damaging over time. Especially when it is leaked to the public, it can be irreversible once the bad news spreads. The more experienced investors are, the more likely they have seen various startup failures and mishandlings. Rather than trying to deal with it yourself, talk to investors right away. I often hear from investors that things might have been different if they were in touch with them sooner.
It is not easy to talk about bad news, but open communication is integral to managing relationships with investors.
Fundamentally, investors want to help startups. It is often assumed that investors are only in it for the returns but it is also the reputation within their own startup community that they care about. Nowadays, VCs add far more value than just financial support to startups. Word of mouth goes a long way. If you have a positive experience with a particular investor, be sure to share it with the ecosystem via social media and blogs. They’d be happy to help you further.
