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Investors are the lifeblood of start-ups

16th Jul 19 12:22 pm

Even though publicly quoted companies first sought funding through stock exchanges in the 17th century, the concept of Investor Relations (IR) as a crucial part of this process, is a relatively modern discipline: the first actual IR department did not emerge until the 1950’s.

Today, the importance of investor relations cannot be overstated in Brazil, Egypt and Bulgaria, companies are mandated by law to have an IR function, and it is no coincidence that the most successful, global giants consistently lead the field in ‘best practice’ awards: the 2018 winner as voted for by the IR Society, was Easyjet. Morrisons and Tesco were also shortlisted.

There are five key reasons why maintaining good investor relations is critical to your success:

You’re going to seek follow-on investment

Companies tend to need multiple cash injections and therefore funding rounds, before they reach maturity. If somebody had enough faith to invest in your start-up, chances are they will continue to support you as you grow.  It is astonishing, however, that if you ask any business angel for their biggest gripe, they’ll tell you that it’s being treated as if they’re an ATM.  ‘The thing that companies forget’, says experienced business angel Michael Byrne, ‘is that if we only ever see them with the begging bowl out, the chances of us participating in follow-on rounds decreases significantly.  Likewise, the chances of us investing in a follow-on company (if the first company fails) decreases to zero if there has been no communication’.

Veteran non-exec director Penny Avis agrees.  ‘I am much more likely to invest in further rounds if I can see that management really understand how to keep their shareholders up to date. Short, timely, no flannel reporting is what I am looking for’.

The investment community is a small one

If you’ve neglected your original stakeholders and they’re now reticent to fund your next round, you’ll need new investors.  However, the investment community is like any society built on relationships and reputation.  If you’ve treated them badly, they’re going to talk about it; good IR is all about honest communication and it’s crucial to keep these ideals in mind to prevent you from damaging your brand and integrity.

It reflects on your brand

Many, investors, particularly ‘crowd’ investors, invest in companies because they identify with the brand and its ideology; they are not just investing, they are joining a brand that they care about. These kinds of investors are also your biggest cheerleaders. If you don’t keep them informed, they will quickly start to feel like they don’t matter to you and, day by day, your biggest champions will fall out of love with you.

They’ll be the first to help you

A 2018 British Business Bank survey stated that 39% of angels invest in a start-up to contribute their knowledge and experience in that sector.  Tony Goodwin, CEO of recruitment giant Antal International, says ‘I tend to only invest in recruitment start-ups, as it’s my sector and I really enjoy the mentoring side.  Business is about life, not just money, it’s almost like a marriage’.  If your business struggles, don’t hide it from them; chances are, they’ll be able to help.

It prepares your business for exit

Every investor is looking for the great windfall though, when the time comes to exit, the due diligence conducted by a potential buyer will be thorough on an unprecedented scale. However, the practice of providing regular updates to investors, via an IR tool will enable you all to be properly prepared. With everything about your business, from the ugly reports to the beautiful sales results- in one place, this process will be quicker and considerably less stressful.

These are the five key reasons to keep the communications channels, with your investors, active and open. And there is more you can do if you want to keep them happy and on your side. Here are the top three tips:

Go digital

The easiest way to look after your investors is to go digital; Envestry for Scale-ups, for example, offers everything you need to keep your investors happy, including a secure data room and a Q&A facility.  Even if you decide to go it alone, ensure that you have a dedicated IR section on your website which can be password protected, having all the relevant information in one place shows how much you value them.

Be upfront, honest and consistent

Steven M Bragg, author of the Investor Relations Guidebook, says ‘The worst way to release bad news is to bury it in the footnotes, in the hope that no one will see it. A diligent investor always reads them and won’t appreciate having to dig deep to uncover potentially critical information.’

Fintech app Revolut, for example, has faced off accusations of fabricating data, money laundering and most recently misplacing a £70,000 money transfer.  Pity their investors, however, as they had to read about it in the press.  Had they regularly and scrupulously shared everything with them, they might find themselves facing a less uncertain future.  Quite simply, investors need regular updates.

It’s easy to make the Shareholder’s Report particularly if it’s not as healthy as you’d like, less of a blow if you add a personal touch: if you make t shirts, send them a t shirt.  If you’re a tech company, give them a discount or advance notice on new developments, anything to keep them happy to be on your team. Chocolate company Ombar often sends their investors a few bars alongside their Shareholders’ Report it’s a small gesture that can make a big difference.

Reach out to your investors

Good IR enables your investors to help when things are tough, the same goes for the good news: communication enables them to identify possible growth opportunities, partnerships or new business angles.  Whether it’s angels or crowdfunders if they’ve given you money, they care and it’s your duty as part owners of your business to keep the dialogue ongoing and mutual, so that when you need advice, an opinion, an introduction to new investors or simply to help promote a new product, you just have to ask.

By understanding the five whys, and taking action on the three hows, you will build a great relationship with your investors and keep them on your side and rooting for you through the tough times and the good times.

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