Christian Elmes provides tips on post fundraising communication between entrepreneurs and their investors.
This post will look at post deal communication and is thus useful for both entrepreneurs and investors alike.Enterprise Investment Partners (EIP) pride ourselves on our investor relations, and for all tax efficient investments where we are fund manager we provide investors with quarterly reporting giving an overview of the respective businesses performance. There are several milestones during the investment phase, and here we will discuss these and what we believe to be sensible communications around them.
From an investors perspective it is crucial that before you put your money into a company during fundraising, you ask what the reporting expectations are from the entrepreneur or business. Too often this is the thing that gets forgotten! There are too many small company investments where investors don’t receive any communication and this can lead to feelings of detachment and frustration. From the entrepreneur’s perspective, this is your way of showing your investor(s) how professional you are, while managing their expectations of the performance of the company.
The first milestone once investment has been made is the issuing of shares. A nice way to do this is send out a welcome letter, thanking the investor for their funding and attaching the share certificates. This gets both parties comfortable that the investment has concluded to their satisfaction.
Tax relief is the next step in the process, where applicable. EIS or SEIS qualifying companies have to trade for 4 months before investors receive their EIS/SEIS 3 certificates which enable the investor to submit to HMRC to claim their tax relief. Again, send out a trading update at the same time as the EIS/SEIS 3 certificates. If they are held up for any reason, explain to your investors why this has happened.
Communication and reporting
Once you have the admin sorted then it is a case of providing regular management reports to your investors keeping them informed of performance and progress. Either annually or bi-annually should suffice for most investors and this will enable them to gain a sense of involvement in the business. From the entrepreneurs perspective these reports will typically raise some questions, but they are usually relatively straightforward to deal with.
If you are seeking additional finance for your business (a second round of fundraising for example) it is extremely important to give your existing investor base the right of first refusal. This will then enable them to purchase more shares if they are interested. More importantly it will give them an understanding of if, and, how much dilution their shareholding could be subjected to in the event that additional equity capital is injected into the organisation.
Realising (or not realising) the end goal
As the company matures, hopefully successfully, investor’s and the entrepreneur’s thoughts will naturally begin considering an exit strategy. Selling a business is a stressful process for all parties involved. Whilst an entrepreneur will be excited about approaching a potential payday, there will no doubt be frustrations from investors over the time that this takes and also the price that is paid.
This can lead to a lot of friction between investors, entrepreneurs and purchasers of businesses. The best way to manage this in our experience is to get into advanced negotiations with multiple parties, and hopefully have several offers on the table, subject to due diligence, then articulate this message to your backers.
Obviously if the business is not successful, which unfortunately can happen, then as the entrepreneur you need to stand and be counted. This means sending regular communications regarding the status of the company and being clear and transparent about where things are heading. This will naturally provoke a response, however it’s usually better to get these things out in the open rather than hiding under the proverbial stone!
From the investors perspective clearly it is very frustrating to lose money, no-one makes an investment on that basis. Unless the entrepreneur has been negligent they will be hurting as well, so at this point it’s important to maintain some humility – easy to say I know!
The key for investors is making sure that their expectation of reporting is aligned with the entrepreneur’s expectation of what the reporting process will be. Each investor is different with some wanting to be more hands on, and others due to time pressures being more passive.
In our experience, the more information that the business owner or entrepreneur can provide the better, but at the same time, reporting and information gathering should not be to the detriment of the day-to-day running of your company.
The content of this post is up to date and relevant as at 17/04/2016.
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