PBL10: Investor relations

Problem: How to manage investor relations?

Learning objectives

1. How to communicate with investors?

First, you can’t go wrong with formal communications devices like written monthly reports. Monthly reports containing P&L information are a great way to inform investors about the status of your company and where funds are being allocated. This is especially helpful in entrepreneurial endeavors because investors can recommend course corrections if they see any “red flags” in the P&L report. They also might be able to suggest connections that can help your venture. This type of insight and guidance is invaluable when starting a company. One last thing to note regarding monthly reports is that they don’t need to be but so comprehensive. As I will discuss later, monthly reports should give a detailed snapshot of your company at that time. There are more effective ways to provide a holistic view of the status of a company.

A second strategy that I have used is monthly conference call updates with investors. Some of the investors that I have worked with in the past prefer having the ability to ask questions about the report. I still provide written documents containing financial information but instead of just sending documents to read at their leisure, I review the report on a conference call. This approach adds a personal touch to the process. It shows engagement and the willingness to answer any tough questions from investors. I also have found that starting a conversation with investors can be great for brainstorming ideas. We can share ideas and advice more freely than on email. Although I have used conference call updates frequently, one tactic that helps make the calls worthwhile is to create a script before so that I hit every point that I want to touch on.
A third strategy is in-person quarterly or annual meetings. This is probably the most effective communication strategy. Investors often expect that companies provide time for them to share their knowledge and provide advice because that is one of their responsibilities as an investor. When they have the opportunity to meet with you face-to-face and to see the operational side of the company, they have a better understanding of where improvements can be made or where successes are being had. I can recall a number of great experiences during in-person, collaborative meetings with investors because we have been able to brainstorm ideas and identify growth opportunities.

2. How to build trust between a company and investors?

The relationship between an entrepreneur and their angel investors is much like a marriage in which open communication is crucial for its success. This bond is first established when the entrepreneur finds an angel investor to fund their business endeavors. Entrepreneurs should propose a solid business plan, including marketing and financial projections, amongst other things, to their potential investors. Angels also like to look at an entrepreneur’s business experience and management skills, which is very influential in their decision to invest. Once angels gain interest and confidence in a particular business proposal, it is possible that entrepreneurs can obtain angel dollars to finance their business.

Just as entrepreneurs should always choose their angel investors wisely and target only those who have experience in their industry, angels should actively practice due diligence to properly assess and validate the entrepreneur and their business plans. Due diligence is probably the single most effective way that angels can avoid bad investments. Likewise, entrepreneurs should be flexible in structuring their business deal in order to meet their investor’s needs. In addition, an exit strategy should be made, documenting the investor’s plan to sell or merge their investments after their time frame within the company expires.

It is apparent that the relationship between the investor and entrepreneur does not end once the requested capital is granted. This financial transaction is only the beginning of a dynamic investor-entrepreneur relationship that is built on honesty, trust, and open communication among both parties. How well an angel investor and entrepreneur are able to communicate with each other often reflects the open terms made prior to entering their business deal. Angels often do not want control of the whole company. They usually seek an active day-to-day role in their investments and give advice based on their knowledge and experience on how to improve the net worth of the company to ensure its chances for success.

Effective communications between the entrepreneurs and angels are vital in achieving a successful relationship. This should be established by both parties before and after the financial negotiations are made. According to Bob Roy, Head of Venture Capital, within the first 90 days following an investment, the investor and entrepreneur must “build trust and work hard to keep it.” He also states that the first board meeting should set a high standard, where the “agendas should be realistic, include financial updates, send board materials in advance, and establish committees for audit, compensation, and governance.” Roy strongly believes that every member of the meeting should be encouraged to participate, including the management staff, and communicate their ideals openly so that no misunderstandings or discrepancies exist.

In order for investors to remain current on their company’s status and growth, entrepreneurs should provide weekly calls with honest updates on the company’s performance. This effective means of communication will allow angels to stay abreast of any financial and operational issues regarding their investments. Entrepreneurs can also request appropriate support from their investors, who can properly mentor them and provide novel, strategic ways in improving their business. An angels’ advice and expertise in the field serves as an useful tool for the successful growth of a new company. Angels can offer assistance in other areas where appropriate and may even be able to provide additional funding if needed.

Entrepreneurs and investors should discuss and mutually agree upon the desired level of investor involvement. It is crucial for both parties to have a working chemistry with each other. They need to equally understand each of their roles in the investment and be compatible with each others’ principles. An angel investment is not simply a sale where all parties walk away after closing a deal. Instead, this is only the start to what will hopefully be a beautiful, professional partnership.

3. How do stakeholders/shareholders influence corporate strategy?

Shareholders are the owners of a corporation. Companies sell shares of stock, or partial ownership in the business, in exchange for equity investment to operate the business. Shareholders typically affect company operations and decisions differently than other stakeholders concerned with the business.

Profit Objectives

Companies with shareholders have historically had a single primary objective of maximizing profit. While many companies try to balance shareholder interests with those of other stakeholders, profit objectives are typically still in focus with shareholders. A sole proprietor or partners in a business firm often have greater flexibility in setting goals aside from earning profit. Profitability also is important in attracting and retaining stockholders and having a solid stock value.

Short-Term Orientation

Closely related to profit objectives is the short-term orientation prevalent in shareholder-owned businesses. Stockholders typically have short memories and a desire for immediate gratification. Leaders of public companies usually feel greater pressure to generate revenue and create profit quickly. This is a key deterrent for entrepreneurs who have long-term visions and don’t want to feel pressured to sacrifice long-term development to create immediate cash.

Votes

Shareholders also have direct influence on a business because they have voting rights on major corporate decisions. Shareholders vote, for instance, on elections of company board members. If company leaders want to split the company’s stock or spin off a separate business unit, shareholders usually have a right to vote on the move. Additionally, companies hold annual, and sometimes quarterly, meetings where shareholders can voice concerns and feedback. Activist shareholders who own large amounts of stock may also voice concerns publicly in an effort to sway company decisions.

Strategic Planning

Shareholders impact the approach companies take to other stakeholders, including employees, customers, business partners and environmental groups. In some cases, company leaders neglect philanthropic pursuits to appease shareholder financial goals. Other times, shareholders purchase stock because of both the financial benefits and the company’s social and environmental responsibility. Some companies may overly emphasize cost control with labor to minimize business costs as well.

4. Examples of investor relations communication?

The number of publicly-listed companies using microblogging tool Twitter as a communication channel to investors and the financial community is on the rise, with more than 150 such companies announcing their financial results and tweeting highlights from their earnings calls on Twitter, according to IR Web Report.

References

http://www.forbes.com/sites/patrickhull/2013/10/16/choosing-the-right-strategy-when-communicating-with-investors/

http://www.bothsidesofthetable.com/2010/05/01/how-should-you-communicate-with-your-investors-between-board-meetings/

http://www.mckinsey.com/insights/corporate_finance/communicating_with_the_right_investors

http://www.go4funding.com/Articles/Angel-Investors/Relationship-Between-Angel-Investor-And-Entrepreneur.aspx

http://www.nevillehobson.com/2010/08/09/best-practice-examples-of-twitter-and-investor-relations/

http://smallbusiness.chron.com/shareholders-affect-business-65880.html

http://catalog.flatworldknowledge.com/bookhub/5?e=carpenter-ch04_s04

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: