Investor Updates During Tough Times
The importance of sending regular investor updates cannot be overstated. These updates are a critical communication channel, serving as a bridge between the founders and their backers through the highs and lows of the startup journey. A well-crafted update can bolster investor confidence, encourage further support, and make them feel closer to your company (Seedrs). However, the road to mastering this form of communication is fraught with potential missteps. While providing these updates is essential to maintain transparency and trust, many founders struggle to balance openness and optimism, mainly when the news isn’t good.
By examining common mistakes, outlining best practices and integrating key insights and recommendations from industry experts, we aim to guide founders in effectively engaging with their investors during challenging times.
Investor Updates: A Crucial Practice
Investor updates are more than mere formalities; they’re essential in maintaining a healthy relationship with those with a stake in your venture. Regular, thoughtful updates can turn your investors into advocates and advisors, providing support when needed. Whether monthly or quarterly, the cadence of these updates can significantly impact your startup’s trajectory, directly correlating with the business’s ability to navigate growth and adversity.
As entrepreneurs, you must switch from “What do I want to say?” to “What do they need to know?” (source). Such discipline in communication directly correlates with a startup’s success. According to NFX, “Sending world-class investor updates is one of the highest-value rituals you can learn.” These updates serve as vital touchpoints, keeping investors informed and engaged with the startup’s journey, including the hurdles it faces.
Startups that provide regular investor updates are 3x more likely to receive follow-on funding.
Visible Data Set & Investor Survey
60% of investors don’t hear from their portfolio companies quarterly
If you don’t write regular updates, your investors won’t want to help you. It’s hard to help a company and put your own social capital on the line with your network when you have no idea what is happening in your own portfolio company.
If your investors think about you positively and frequently, they’ll not only help you with specific requests but point serendipitous opportunities your way. That’s one way you can “manufacture” luck.
Example of Investor Updates
Let’s take a hypothetical example of an effective investor update from a startup facing significant challenges:
Subject: Monthly Update: Navigating Rough Waters Together
Company X does Y and Z. [Your investors likely receive dozens of such emails per month. It is helpful to remind them who your company is in one or two sentences.]
Dear [Investor’s Name],
This month, we’ve encountered significant challenges, including slower market penetration due to increased competition and higher-than-expected customer acquisition costs. Despite these hurdles, we successfully launched our beta product, attracting over 1,000 sign-ups in the first week — a testament to our team’s resilience and the potential of our product.
Key Metrics:
- User Growth: 15% month-over-month, below our target of 20%.
- Cash Flow: Six months of runway remaining due to unforeseen expenses.
Challenges:
- Market Penetration and Product Development Delays have set us back, but we’re taking decisive action to navigate these challenges.
Next Steps:
- Implementing cost-cutting measures to extend our runway.
- Seeking strategic partnerships to enhance market position.
Ask:
We value your expertise and connections in the [industry] space and welcome any introductions or advice you can provide to help us optimise our strategy.
Looking Forward:
We’re committed to navigating these rough waters with resilience and determination. Your continued support and insights are invaluable as we work together towards our shared vision.
Shout-outs/Thanks:
Always include shout-outs for folks who have helped us in the previous month.
Thank you for your trust and partnership.
Best,
[Your Name]
Here is a comprehensive library of examples of investor updates. You should choose a template and stick to it month by month. Always try to be as quantitative as possible and keep things to the point — think about your audience.
Handling Bad News
Addressing the “lowlight” or “challenges” section is vital and is too often overlooked. It’s here that the true test of transparency and trust-building lies. Acknowledging and sharing setbacks openly not only demonstrates integrity but also opens up opportunities for assistance from your investor network. Being upfront about the hurdles your startup faces encourages a collaborative approach to problem-solving and reinforces investor confidence in your leadership.
The shock of receiving bad news without any warning can severely damage trust between founders and investors. It’s crucial to:
- Avoid Surprises: Sudden negative updates can leave investors feeling blindsided and may diminish their willingness to offer support.
- Empathize with Your Investors: Consider the impact of potential insolvency or failure on them. While the financial implications might be limited in jurisdictions like the UK, the relational and reputational impacts can be significant.
Being upfront about the challenges your startup is facing is essential. Never sit on bad news or sugarcoat or omit uncomfortable truths.
Communicate swiftly and honestly, especially when something bad happens. You don’t need to send an update every day, but in times of uncertainty, be extra responsible, available, calm, clear, and data-driven.
Regular, transparent updates that articulate the reasons for any downturn — whether due to market conditions, operational challenges, or strategic missteps — help investors grasp the situation’s context. This approach not only preserves trust but also bolsters credibility during tough times.
Navigating Towards a Shutdown
When a shutdown becomes a real possibility, the way you communicate with your investors becomes even more crucial. Consistent, proactive communication is essential, detailing the steps to mitigate the situation. This includes any restructuring, cost-cutting, or strategic pivots. During such discussions, empathy is crucial; recognising investor concerns and addressing specific questions can demonstrate respect for their support and partnership. Even when facing a shutdown, consistent updates keep investors informed and engaged, fostering a collaborative atmosphere even in tough times, as emphasised by practices recommended by Toptal.
- Increase Communication Frequency: As the situation grows more dire, updates should become more frequent. This doesn’t mean weekly updates full of fluff but meaningful, timely communication about significant developments.
- Personal Meetings: Whenever possible, meet with investors individually or hold small group calls to discuss the situation. Personal touches matter when delivering tough news.
- Outline the Wind-Down Process: Clearly explain how the startup plans to wind down operations responsibly. This includes how remaining assets will be handled, any plans for employee transitions, and how customer commitments will be honoured.
Mistakes to Avoid
In the spirit of fostering a healthy investor-founder relationship during challenging periods, there are several pitfalls to avoid:
- Lack of honesty and transparency: Misleading statements or failing to disclose the full extent of challenges can irreparably damage investor trust.
- Inconsistent updates: Communication should not fluctuate with the startup’s fortunes; regular updates are crucial, especially during downturns.
- Failing to provide context: Without a clear explanation of the underlying reasons for the startup’s struggles, investors are left in the dark, undermining their trust and the founder’s credibility.
- Neglecting to outline a clear plan forward: Investors need to know there’s a strategy for navigating out of the current situation, even if that plan includes winding down operations.
- Underestimating the Closure Process: If shutting down, not planning or communicating the process thoroughly can complicate the situation further, affecting everyone involved
- Going “dark”: Only reaching out when in need, rather than maintaining a regular update schedule, can lead to a breakdown in communication and trust.
By avoiding these mistakes, as detailed by Faster Capital, and embracing a comprehensive, candid approach to investor communications, founders can foster stronger relationships, navigate challenges more effectively, and lay the groundwork for future endeavours, regardless of the current venture’s outcome.
Conclusion
Communicating with investors during challenging times is as much about preserving relationships as it is about addressing the current crisis. By approaching these updates with honesty, empathy, and a clear plan, you can maintain trust and lay the groundwork for future ventures. The journey of a startup is fraught with ups and downs, and how you communicate during the downs can define your character as a founder and the legacy of your startup. Remember, the end of one chapter could be the beginning of another, and handling closures gracefully can open doors to new opportunities and enduring relationships with your investors.
This is why we created UNWIND — to support entrepreneurs through difficult times. From our platform, you can manage the full process, including communication, updates, and document signature, in one place. Your investors can have complete visibility of how things are going and your different options.
