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Stay in touch with your investors.

Investors as a group have a common gripe – almost universal.  Information flows from the company irregularly, in fact most often when the company is urgently in need of more money.

Investment documents usually call for quarterly reporting by the company to the investors.  Less than a quarter of companies receiving early stage investment voluntarily fulfill this promise.  Usually, one or more of the investors is placed on the board as a requirement of the investment documentation.  The entrepreneur often expects that Raising moneyperson to keep fellow investors informed.  And sometimes the board member does perform the service.  But most often, the CEO or founder has a much better idea of the flow of quarterly activity than a board member meeting monthly or less often, and for a relatively short period of time.  More importantly, the investors want to hear directly from the CEO.

[Email readers, continue here…]  Many times, companies need another round of investment, and the first people approached are the same ones that invested the first time.  If they have not been kept informed about the progress of the company, and if they are surprised by the fact that the company has run out of money more quickly than planned, it is a much harder sell to obtain the next round than the last.

Rob Wiltbank, Ph.D., of Willamette University, is one of several academics who have followed multiple rounds of investment in a significant group of early stage companies.  The typical finding is that second round investments are not as profitable for the investor as the first round. So investors are more cautious as a result when approached for additional money if not kept in the loop between rounds.  If a company is meeting milestones and growing as projected, and if the CEO is diligent in keeping the investors informed, a second round is much more likely to be raised from the early investors.  But the studies include all second rounds, including those that were pulled from investors reluctantly to protect their first money in, skewing the curve away from more heavily weighting successful conclusions.

Keep your investors informed. Avoid late surprises. Plan financial needs early, and inform investors early of that plan.  Explain problems encountered and solutions undertaken.  You and they will benefit by this candor and communication.

  • Another insightful article on the nuances of early stage investing ! Having tried various ways to improve Founder / Investor communications, achieving results has a lot to with perception of value of stakeholders (ie: worth communicating to) – for CEOs serious about success. Or, nativity in the case of inexperienced or incompetent CEOs.

    This is an example of why learning fast and experience matter + the need for investors to add value (either as an individual or as a group).

  • Ray Parsons

    Great topic this week, Dave. This is an area that always ticked me off with my personal early stage investments and we vowed not to do it at Transcepta. I’m certain that a good our success with follow-on rounds came because we kept the investors up to date quarterly. Excellent advice for new entrepreneurs (as usual).

  • Adam

    This is especially true if your initial investors are friends and family. Active communication can drastically improve their comfort level and help stabilize the pre-existing support network that the entrepreneur had/has.

  • Thomas

    Communication works both ways, Investors can use the same phone system as the CEO does. Have a concern or question? Pick up the phone and call.

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