How To Deliver Bad News To Your Investors
The young founder in whose company I had invested 2 years ago didn’t have a good day. Out of the blue, he sent an email to his 4 investors, telling them he would run out of money in less than 2 weeks. “Who can help out, preferably with a loan?”
“Is this guy fucking kidding?”, I thought. The email was how the founder started the official fundraising process. “We need a solution in 10 days or the lights are out.” Great timing, bro.
Thank god, I’m still in Bali, land of yoga and meditation, all zen’d-out. So I took the email as my daily portion of comedy.
“Don’t focus on the negative too much”, I thought. The blue Buddha head with its rainbow hair on the wall of my new favourite hipster café nods gently in agreement, while the waitress performs a blessing ritual on my breakfast burrito using incense sticks. Bali is a fascinating place. But now back to business.
When I scaled my company RegioHelden from 0 to 300 employees, things went wrong all the time. I painfully built up experience on delivering bad news. Over time, I (sadly) became pretty good at it. When I see such things in my current role as investor, I wonder: How can an otherwise very talented founder, whose company was going well, communicate in the worst way possible? The email felt like the communication equivalent of a plane crash, and it was not the first time that I saw a good founder sabotage himself using bad communication with investors.
The trust battery
Before we dive into the rules, let’s look at a useful mental model I learned from Tobi, the founder of Shopify, on the Farnam Street Podcast (great listen!): Think of the trust between you and your investors as a battery. When they first invest in your company you might start at 60% charge. They have some basic trust in you (otherwise they wouldn’t have invested) but still don’t know how it is to work with you. The battery is therefore not full.
Your battery will slowly charge up on honest, predictable and reliable communication and collaboration. It will very quickly drain if communication is handled poorly. The more charged the battery, the easier it will be to work together and the less communication will be required. When your investors start to ask a lot of questions it’s a strong indication that your battery is running low.
So how can you talk about the bad stuff in a good way and keep your trust battery charged?
Rule #1: No surprises
The worst way to start a board meeting would be to deliver some bad news, that nobody has heard before. The mood in the room will change instantly. People don’t know how to react. Everybody will watch each other. Bad news is not good, but unexpected bad news is way worse. Surprises create uncertainty, and uncertainty creates fear. That’s the last thing you want among your investors.
I made sure that none of my investors were surprised by anything I said. Especially with groups of investors in calls or board meetings, I took the time to talk with them one-on-one on each negative issue beforehand. That way, I could get an idea about their views and not end up surprised myself.
Take-away: Trust is this hard to describe feeling of safeness and reliability. So don’t waste the energy of your trust battery with unnecessary surprises.
Rule #2: Timely but thought-out
“Why didn’t you tell me before? I might have been able to help.”
If that’s what your investor thinks, your trust battery is bleeding energy. Address issues as fast as you can, but never panic and deliver half-baked news. Take the time to think it through. Analyse the situation and have the relevant answers ready.
Founder: “We missed the sales goals for July by 28%.”
Investor: “Okay, what happened?”
Founder: “We don’t really know — the sales people tell us it’s because of the summer break. We hope it will get better in August.”
That’s not thought-out all at! That’s not even an accurate description of a problem. Take the time to assess the situation and gather data before communicating anything.
Founder: “We missed the sales goals for July by 28%.”
Investor: “Okay, what happened?”
Founder: “We looked into the data. It turns out the sales funnel conversion rates mostly stayed the same, even increased on average. The problem seems to be, that our lead generation team was not able to provide enough raw leads to the increased number of sales reps because we lost a major lead data partner.”
See, that’s much better.
Take-away: Make sure you 1) know everything relevant about the situation and then 2) deliver the news as fast as possible.
Rule #3: Keep your monkeys
There is a monkey forest here in Bali. Monkeys are everywhere! They’re running around in the streets, fighting, grooming, screaming, stealing from tourists and acting like monkeys act. It’s a chaotic and hairy carnival to watch!
You probably know the story your employee bringing their problems to your office. Every problem is a little monkey their shoulder. When they come into your office one of two things can happen.
- You help them deal with the monkey and they take them back with them.
- They find a way to somehow sneak the monkey into your office and leave you with it. You know what happens when you keep letting this happen? Your office is going to look far worse than my monkey forest. It will be a mess. Don’t let it happen.
It’s the same with you and your investors. Your problem is your own monkey.
You’re the CEO sitting in the driver seat. Your investors are passengers. They can sometimes help and usually want to be informed (especially if you’re about to crash the car). Never try to hand the monkey or the steering wheel over to your investors.
Take-away: Make sure to always communicate your forward looking plan. Ask investors for input, their opinions and any way they can help, but never make your problem theirs.
Rule #4: Balance, but don’t fool yourself (or others)
A founder I invested in once told me: “Great news! We managed to hire many more people ahead of our business plan”. That was his remarkably eloquent way of telling me his burn-rate was through the roof and he needed more money. Whenever one of his key employees quit (which happened a lot), the ‘good news’ was that “another low-performer left the company, which is a great opportunity to improve”.
At first, I actually believed him, because our trust battery still had juice. But once that happened a couple of times and I looked into it, I realised the guy was fooling himself and the people around him. There is a limit of how much good a reality distortion field can do.
After our December board meeting in 2013, one of my investors pulled me to the side. Between our meeting and the pasta at the lowkey Italian place we went to after, he asked me: “Why do you communicate so negatively? You had a good year! I see that some things need improvement, but come on. Present it a little more positively next time”. Touché. It seemed that I was on the other end of the spectrum of reality distortion and focussed too much on the negative.
The lesson here is to balance the news. My blue Bali Buddha friend would probably say: “Things are never positive or negative. They just are”.
Take-away: Things are usually not just one way. Find out on which side of the positivity/negativity spectrum you fall and try to balance your communication.
Rule #5: Choose the right medium
Just don’t do it over email, alright? There is just way too much room for misinterpretations, no good way to ask questions or have a meaningful conversation.
In a perfect world, the best way to communicate bad news would be in a personal one-on-one talk supported by data/slides. Of course that’s not always possible, but just remember that anything else that is a trade-off.
My hierarchy of communication channels would be:
1. Personal > 2. Video Call > 3. Phone Call > 4. Voice Message > 5. Instant Messaging > 6. Email
Remember that a one-on-one talk is usually much better than a group conversation. It enables you to understand different viewpoints and reactions before they could potentially clash and escalate in a group discussion.
Take-away: Rather talk than write.
Bonus rule: Relax
Chance are very high that your investors have received worse news than yours this month. It’s their job to keep up with this kind of thing. Just focus on what you can influence. Panic or fear on either side of the table will just blur your vision and not do any good.
Blue Buddha head says: “The mind is like water. When it’s turbulent it’s difficult to see. When it’s calm everything becomes clear.”. The guy most have done something right. Buddhism, his latest startup, has scaled to 500m users and been around over 25 centuries. Now go and beat that.
“The mind is like water. When it’s turbulent it’s difficult to see. When it’s calm everything becomes clear.”
— Rainbow Buddha head
If you 1. avoid surprises, communicate in a 2. timely yet thought-out manner and present a 3. forward looking plan you’re already very far. Build on that by keeping your communication 4. balanced, chose the 5. right medium and relax. If you do all this, chances are very high that the news will be well received and constructively dealt with.