Startup Investor Relations

Mechanism

A startup has few formal reporting duties to its investors beyond what its agreements require, so the quality of communication is a choice. Investors who receive honest, regular updates make introductions, answer questions and often lead or join the next round. Investors who hear nothing for months assume the worst, and a company that surfaces only to ask for money has spent its goodwill. Good startup investor relations therefore works like a habit, not a campaign.

Three channels carry most of the work.

• The regular update: a short written message, usually monthly or quarterly, sent to all investors at once so that none has an information advantage.
• The board and information rights: formal meetings and the financial statements the investment agreements promise. The terms are explained in seed funding rounds and Series A funding requirements.
• Targeted asks: specific requests for introductions, hires or advice, directed to the investor best placed to help.

Treat all investors fairly. Share material information with everyone on the same schedule, and keep private conversations from creating different understandings of the company's position.

Worked Example

A good monthly update fits on one page and follows a fixed skeleton, so readers know where to look. The numbers below are for a hypothetical company.

Runway equals cash divided by net monthly burn: $1,240,000 ÷ $96,000 = 12.9 months. Reporting it every month matters because the number drives the timing of the next financing. A company that tells investors at 12.9 months that it will begin a financing process in two months gives them time to prepare and help. A company that reports the same figure at 4 months leaves little room. Including the problems section is the habit that builds credibility: investors know every company has difficulties, and a founder who names them early gets help while it can still change the outcome. A company's metrics should also tie out to the financial statements delivered under its information rights, since a mismatch between the update and the books damages trust faster than a bad month.

Practicing Startup Investor Relations Through a Financing

Before a round, update the existing investors first. They see the company most closely, and their willingness to participate is itself a signal to new investors. Ask them for introductions and for a candid view of the plan, and tell them what the company intends to ask of them. During a round, give existing investors the same material information that new investors receive. After closing, send a note welcoming the new investors and summarizing the use of funds. Keep records of what was shared and when. The sequence of a financing process appears in how to raise venture capital, and the work of managing a company's investor base is related to the portfolio view in venture capital portfolio management.

What It Means for a Limited Partner

A limited partner depends on the same information chain one level up. The manager's reporting to its investors is only as good as the reporting it receives from portfolio companies. A manager with a consistent system for collecting company updates, reconciling them with financial statements and valuing holdings can report accurately to its own investors. A limited partner can ask how often portfolio companies report, what happens when a company is late, how the manager checks the figures and how it communicates bad news. The standards for reporting and valuation appear in the questionnaire discussed in Due Diligence Questionnaire (DDQ). A manager that communicates well with its companies usually communicates well with its limited partners, and the reverse is also true.

In Life Sciences and Healthcare

Investor updates in life sciences and healthcare have their own content. Clinical and regulatory timelines move in months, so updates should state where each program stands, what the next decision point is and what could delay it. Report enrollment, safety events that must be disclosed and interactions with regulators in a form that is accurate and appropriately confidential. Cash runway should be stated against the milestone it funds, because a company with 12 months of cash and a 15-month trial has a funding gap that investors need to know about early. Companies with patient data should also describe how that data is protected.

Frequently Asked Questions

How often should a startup update its investors?

Monthly is common for early-stage companies, and quarterly is acceptable for later-stage companies with a board that meets regularly. Consistency matters more than frequency. Send the update on a predictable schedule, to all investors at the same time, and include bad news as well as good news.

What should an investor update include?

A good update includes a headline, key metrics, cash and runway, progress against goals, the hardest problems, specific asks and next month's goals. It should fit on one page. In the example above, $1.24 million of cash and $96,000 of monthly burn gives 12.9 months of runway.

What are information rights?

Information rights are contractual entitlements, usually granted to larger investors in the financing documents, to receive financial statements, budgets and sometimes inspection of the books. They set a minimum for reporting. Most founders go beyond the minimum with regular updates, because informed investors help more and surprise less.

Related Reference

Communication habits formed early carry into the reporting expected at the growth stage of growth equity. Related entries: Seed Funding Rounds, How to Raise Venture Capital and Venture Capital Portfolio Management.