What Investors Want

Communicating With Investors

The relationship between investor and entrepreneur is rewarding, but can be anxiety-inducing. You’re both investing significant resources—capital for the former, labor for the latter, and time for both—in a plan that you both hope succeeds over time.

The Conundrum: A fundamental challenge is in the inherent asymmetric nature of the contract—capital is required first and then the founder has an obligation to fulfill her end of the deal over time. This setup creates dynamics in the relationship that if handled well make the journey deeply fulfilling.

As an early-stage investor, we are mostly investing in pre-equity instruments and our deals do not come with customary shareholder rights. We are especially vulnerable to this reality of asymmetries.

While founders technically owe investors nothing—except best efforts to deliver on their return obligations—I highly recommend that they establish a culture of clear communication. Exploring best practices around communication can help founders develop great operational discipline and build alliances with investors that will serve them well into the future. But what do investors expect?

The Philosophy

The first decision founders must make is the level of transparency they will bring to investor relationships. I am an advocate for radical transparency with clear frameworks (that are discussed clearly up front) to safeguard sensitive information. I have learned that outside of certain trade secrets or proprietary competitive information, most output data (e.g. financial information) are generally not as sensitive as feared.

Challenging market environments in particular present fertile ground for building transparent relationships because investors place a premium on information, peace of mind, and desire/ability to help.

Option value: Private investors are insider traders. The more valuable information they have about a business the more likely they are to participate in actions that preserve the option for upside, e.g. investing in bridge rounds or follow-on rounds. These actions benefit founders tremendously.

Peace of mind: Investors are buying into a future return, but in between they are buying into efficiency of time, relationships, and peace of mind. Candid, vulnerable communication saves them time, builds trust, and frees up valuable mindshare to show up in other areas of their life such as their families.

From contracts to alliances: Transparency invites investors into a smoother pattern of problem solving as they feel ownership of the problem and a command of the facts to opine. A sense of ownership for investors is important because it feeds the psychology of being an accomplice vs. an adversary.

The Medium

Once founders have decided what to share, they should carefully consider how they will disseminate this information. Will they open up easily accessible and more casual avenues, such as text or WhatsApp, or will they opt instead for more formal methods of communication like notes or emails?

Approach: Most of the founders we work with have an excellent hybrid approach. Text message is used for spontaneous/quick asks and also to set up/schedule formal engagement. Informal communication builds familiarity, builds trust, and strengthens “team” bonds. Formal communication helps to demonstrate command, foster deep inquiry, and prepare teams for the demanding information requirements of larger investors in the future.

Decorum: I always encourage founders to meet in-person with their investors wherever possible, and to use video and voice in that order when restricted by geography. Text is great for quick exchanges after you establish that level of friendly comfort.

The Mechanics

Perhaps the most critical piece of communication is consistency. Consistency is a function of cadence and also threshold of materiality.

Cadence: Startups are living, evolving organizations, and any cadence beyond a month seems too long in the early stages. Updates can be short, but with a consistent format. I have found this Y-Combinator template to be comprehensive.

Materiality: Founders should create guidelines of what constitutes important events in their business and these should be shared promptly with investors. For example, investors won’t appreciate hearing of the departure of an important executive via LinkedIn. A rule of thumb is that when investors receive any written communication, they should not be surprised to hear from you or by the contents of the letter. And most importantly, they should feel like they now understand something more deeply about you and/or your business.

A great mentor recently gave me good advice: A savior mindset where all success depends on our own ability to solve all our problems is driven by fear and is not conducive to success. Problems and chaos are more prevalent than wins in business, and in life. The fundamental philosophy of the capital/labor contract is solid. Candid communication fuels this relationship into a strong alliance and makes investors steadfast accomplices of founders and their vision. And, there is no time like the present market environment to practice this philosophy!

I encourage founders to remember that despite the challenges we face, we can navigate a tough market not from a position of defeat but of positivity.

Our industry has the privilege of building outside of the noise of the markets. We also have the flexibility to adapt our businesses to different macroeconomic conditions while preserving the ability to generate value over the long term. The daunting prospect of fundraising can make us apprehensive, but this market is an incredible opportunity. It’s a chance for closer collaboration and a tightening of the belt to improve the capital efficiency and output of our asset class.