Don’t Throw Your Investors a Curveball
I recently read a piece by Mark Suster, a VC from Upfront Ventures which advised startups to withhold some of their financial information from some investors. Although the piece has some great points, if a startup decides to take this path they are more likely to die of paranoia than anything else.
Why Stakeholders Deserve to Receive Updates?
It is common knowledge that companies which are publically traded on a stock exchange are legally bound to provide regular updates to their stakeholders. There is no such regulation in place for startups but investor relations are not to be underestimated, they are fundamentally important.
Most investors have put their money where their mouth is and invested in your idea and your business. More than this, they have invested in you. They understand that it may not all be rosy and you are very likely to go through some tricky patches. Of course, it is important to make sure you get a good fit for investment in your company, after all, money is money but skills and expertise in your field to help you through the dark days can go a long way.
Needless to say, one of the main points that I disagree with from Mark’s article is to not treat all your investors equally. The amount of investment made per VC fund / angel / syndicate shouldn’t matter. All of these investments were made to gain a stake in your company which makes them all involved in your business and entitled to regular updates.
Why Startups Should Give Stakeholders Regular Updates?
Being part of a startup isn’t easy. If you have managed to secure your first investment, congratulations! You have reached a point that most startups don’t even get to but the hard work just started. How do you balance working long hours making sure everything runs smoothly and also have the time to update your stakeholders. It is difficult. This is probably the main reason why most startups fail to hold down any sort of regular communications with their investors. These startups are missing a trick.
When working upwards of 16 hours a day on your startup, it becomes super easy to get shortsighted on what you are doing and micro-focused on the tasks that are your immediate concern. You are at a real risk of missing something super obvious which needs to be done or when looking at the bigger picture it may not all slot together in perfect harmony.
This is why you should give your stakeholders regular updates. The benefits are enormous. For one, it will make you take a few minutes out of your manic schedule to look back at what has been achieved over the past month. Taking this step back will help you reflect on the bigger picture, look at what has worked well and what hasn’t. I hear the term pivot a lot when discussing startups and of course, if something appears to not be working. You want to change it before too much money is lost.
There is also the input that your investors can have. Most investors will always say in interviews that they are there to help the companies that they invest in. This is somewhat a lottery and needs to be taken with a pinch of salt. From experience, some investors will be more than happy to get involved but some will appear silent once the money is in the bank. Nonetheless, giving updates to your stakeholders and being truly honest with how the business is going has the chance to ignite some deep rooted passion they may have and will draw them out of their caves to give you some assistance.
Of course, you shouldn’t have to rely on assistance from your investors but you shouldn’t be afraid to try and draw on it as a last resort. After all, these people generally have capital available for a reason and most of the time tend not to be idiots.
Industrial Espionage is on the Rise
With sites such as AngelList, and crowd funding initiatives like KickStarter and Indiegogo, investing in startups is becoming a lot more mainstream. With the obvious notion that not all people are good people, there are bound to be more and more incidences of malpractice and I predict a further rise in this sort of sabotage/espionage activity in the future.
Mark’s piece talked about an investor who was sharing all the company information with other potential investors. This sort of action can be suicidal for the initial investment. How does the investor know that the people he is sharing this confidential data such as startup pitch deck and all financial information isn’t involved with a competitor. He doesn’t and quite rightly, Mark had great objections to this.
AngelList is a site where startups can put their businesses online and look to seek investment. The site works by investors joining a syndicate and then making a larger investment in a company as part of the larger syndicate. This means that an individual can put in a relatively small amount of money, say $5,000 and have this entitlement to updates about the company.
Now, think of it like this. You are part of a company that has been operating in this space for the past year and you know about this new startup and the hype they are getting. You know they are looking for investment and join the syndicate. You are then entitled to updates about the company and it is a relatively small amount of money for all the nuggets of information you may obtain.
Most startups will want to gain investment almost blindly. Quite often it can be the difference between operating for the next six months and folding. It is important however to keep in mind that not everyone in the world is good and as Mark elegantly puts it; ‘Wolves operate. And not only on Wall Street.’
Of course, it would be brash of me to paint these sites with the same brush and say that they are not trying to get rid of the wolves. Minimising the risk of leaks can only be good for startup and investor and these sites do a great job of providing startups with the chance to get funding in quicker.
What Can a Competitor Really Do With Your Update?
I am not going to try and dress this up in any pretty way. If a competitor gets one of your updates, it is a bad thing but did the world end? No. Life still goes on and chances are they will mull over what you have said in the update and get distracted and lose sight of their own goals. It is always important to keep focus of what you are working on and whilst it would be pretty ignorant to not keep a loose eye on what the competition is doing every now and again. You should be confident enough in your own abilities to not have to be stalking them multiple times a day.
Most updates are also backward looking. They tell you what has happened over the past month with perhaps some targets for the month ahead. The majority of the information that a competitor could gain from your update would have already happened. I encourage companies I talk with to have a culture of transparency and keep their KPIs updated. If someone is to see your income and/or amount of customers. What can they really do with this information? Sure you would probably not want it to be public but what is the worst that can happen if this is public.
Can This be Prevented?
Of course there are ways you can limit the likeliness of your company information getting into the wrong hands. For one, you should make an effort to introduce yourself to your investors. Try and find out what makes them tick and just write them a personal introductory email. Often the ones that will reply, you will have nothing to worry about and it is the ones who don’t it might be worth being a little more wary of although people are busy. If you use a tool such as Streak which works within GMail you can see when and how many times someone opens an email giving you some insight.
It is of course possible to put your investor updates online behind a secure login. Through working with pitchXO we have developed landing pages which can be used for this purpose. Simply put, you can put your monthly updates and KPIs behind a social login which puts you in control of who you grant access and then you even get reports on when they log in and how many times. If you notice an investor has an irregular login pattern then call them out on it and ask them.
In an ideal world, I would also mention to only take investments from people that you know or who have been introduced to you. As stated previously, if you have real cash flow problems and your startup is staring death in the face this isn’t always possible.