As the economy continues its uneasy path to recovery, many private businesses still face a tight lending environment. Venture capital, angel investment, and private equity remain attractive financing options for many private companies, especially for those businesses in a startup or growth phase. Despite the importance of raising capital from private sources, many companies mishandle a critical component of capital raises: investor relations. Broadly defined as any communication with investors, CEOs and executives of private companies must develop and maintain strong investor relations. Surprisingly, it’s rare to see consistent communication between companies and investors. In my own experience and in talking with other investors, we cannot identify many businesses that communicate effectively with us, which can be frustrating and detrimental. This article will discuss the importance of investor relations and provide tips on how executives can foster strong investor relations.
Investors are not disinterested pots of money. Rather, if we invest in a company, we want that company to succeed. Indeed, we have a vested interest in that company and its success. Treat investors as advocates and resources. We are members of your team and should be kept informed of developments. Too often, executives approach investors only when a company needs more money. Instead, you should establish consistent investor communications and build relationships with them.
Investor communications are best delivered in writing, either through mail or e-mail. Executives should send informal and brief updates to investors on a monthly basis. This monthly letter should only be a page or two and can include P&L information. A more substantial report should be issued to investors on a quarterly basis. This report can include detailed financial information and be longer than the monthly updates. Executives also should consider quarterly meetings or brainstorming sessions with investors, either in person or via conference call. A company’s investors would be delighted to give advice and pulling together a great deal of brainpower could lead to some exciting developments. At the very least, the company should host an annual meeting for investors.
When developing these relationships, businesses can benefit from the experience and contacts of investors. If your company is on an investor’s radar, he or she will be more likely to make connections with others who can help the business grow or provide additional resources. Investor communication also must provide an honest assessment of the business’ successes and challenges. In order to build a trusting relationship, which will benefit the investor and company, you have to share the good and the bad.
Consistent and thorough investor communications have a number of important advantages, including:
- Force accountability: Investor relations and communications, such as monthly and quarterly reports, will keep executives accountable to themselves and to investors.
- Encourage evaluation: The reporting components of investor communications ensure that executives are consistently evaluating themselves and the company.
- Leverage relationships: Strong investor relations make it more likely that an investor will be able to identify potential areas of growth, partnerships, or new business angles. Companies benefit when investors are active advocates for them and can use their relationships to help the company.
- Secure new investors: A record of strong investor relations and a documented history of the company’s performance, which are outlined in investor communications, will attract new investors.
- Build infrastructure: Act like a big business and you will become a big business. Investor relations and reporting are important infrastructure components for larger companies and you should start developing this infrastructure early.
Companies also should consider vendor relations. A business’ largest vendors have a vested interest in the business’ success as well. Close relationships can lead to more attractive deals, extensions on invoices, discounts, etc. Even though your approach will not be identical to investor relations, vendors are key stakeholders that can offer advice and advantages.
Honest communication is critical to investor relations. Letters, reports, and meetings should include frank discussions about the company’s success and challenges. Don’t gloss over bad news. Investors want a full picture and will respect honesty.
Investor relations and communications should be tailored to the particular needs of each company and that company’s specific investors. Even though the exact method may vary, all companies must develop and implement an investor relations program that focuses on consistent communication. When executed properly, executives will be able to grow their business and raise capital more effectively.