Post-Investment: Don’t Make This Common Mistake
By Megan Maltby
So you have managed to raise angel capital for your growing startup. Now what? Well, if you’re like most startups, there is still a long road to go before your company reaches prosperity, or manages to have a successful exit. Good angel investors can help on this road.
Entrepreneurs are becoming more and more knowledgeable regarding the concept of “smart money.” Unfortunately, many entrepreneurs fail to remember that, to garner post-investment shareholder support, they must work to maintain good investor relations. Yes, I am talking about post-investment communication, the process of providing regular updates to those individuals who invested their hard earned money in your fledgling company.
Post-investment communication is extremely important to all companies that receive investment. In fact, it is a subject that we have written about before. Maintaining good communications will:
Encourage mentorship: Angels who are informed will know when your company is facing an important strategic decision, trying to negotiate a partnership, nailing down IP, or having difficulties with cash flow. If the investors are aware, they can step in if they feel they have the expertise to help out.
Incite leads and networking introductions: Investors have massive networks. Many have been/are entrepreneurs themselves, and they have developed and nurtured numerous relationships as a result. For example, if they are aware that you are looking for leads in a particular market, they now have the opportunity to make the intro. These introductions can lead to sales/revenue opportunities, strategic partnerships, funding opportunities, and more.
Set the stage for follow-on funding: Building on the last point- most startups will need additional cash inflows following the initial seed round. I have seen many circumstances where entrepreneurs leave shareholders in the dark until they are looking to raise more money. Guess what? If you haven’t maintained good communications with your existing shareholders, they are probably not jumping at the chance to sink more cash into your company. Not only that- investors talk. Angels talk with other angels, angels talk with VCs, and angels often have connections with those in charge of non-dilutive funding options. Even if your current shareholders don’t implicitly share their thoughts with potential follow-on investors, the truth will come out during due diligence.
In spite of these benefits, entrepreneurs often go stale on shareholder updates. Common reasons include:
- “We have nothing new to report”: This is a fairly weak argument. A good standard is to provide a brief (1 page) shareholder update quarterly. If nothing has happened in the last three months, you have bigger issues on your hands. For a good idea of what to include in a shareholder update, Jason Calacanis provides a great breakdown.
- “I am too busy/I don’t have the time”: Welcome to startup life. It’s tough, it’s time-consuming, and you will always be juggling numerous balls at once. I can guarantee that making time for updates now, will save you time down the road when you encounter difficulties. At the end of the day, providing a shareholder update should only require 1-2 hours every three months. There are also many platforms available to simplify the process (See: Reportally, AngelSpan, Hockeystick).
- “We have no good news to share/We are in trouble”: News flash! This is the time when investor communication is of utmost importance. When things are riding high, investors get excited. They may provide you with introductions, referrals, or inject more cash. When things are going south- the outcome often remains the same. Investors will still do their best to make introductions, provide guidance, and will often even provide “rescue” money, because ultimately, they benefit from your company’s success.
At the end of the day, maintaining regular post-investment communication with shareholders is a small commitment that can yield big dividends. Keep it informative, consistent, and honest, and you will build a team of advocates who are willing to go to bat for you when the going gets tough. Keep investors in the dark, and you may find yourself alone in the trenches.