Fundraising is incredibly important, but it’s only part of the equation. To make your vision a reality, you need to sell your potential to investors and continue to prove your worth down the road. This requires consistent communication before, during, and after your initial round of funding. Below is your guide to working with capitalists after the initial funding phase to ensure that you have the tools and knowledge to land repeat investments.
The Power of the JOBS Act
The JOBS Act has transformed investor relations from a necessary evil to an incredibly powerful tool in the entrepreneur’s arsenal. Before the JOBS Act, companies couldn’t advertise the fact that they were raising money. With the elimination of that ban, they were given permission to market their worth and financial needs to investors.
In the past, the s
cales were tipped heavily in favor of investors, who took a long time to get back to entrepreneurs, do due diligence, or fund deals. The investment options were plenty, but the market lacked efficiency and effectiveness.
All that changed with the rise of crowdfunding. With the rise of online funding platforms, new prospects are accessible to more investors, and savvy funders know they have to move quickly to gain access to the hottest companies. In addition, potential investors who might have only considered the public market before can now explore the private sector from the comfort of their homes.
This increased awareness translates into more investing in private companies, potentially making it easier to raise substantial amounts of funding without having to go public. But it also means the market is flooding, forcing entrepreneurs to stand out from the swells of startups online.
The Investor Communication Checklist
Investors who provided initial funds can be a resource for more capital as your company grows, but only if you give them the information they need and provide updates on how their investment is performing. Consider these necessities:
1. Updates on company progress: Provide updates on a monthly basis to engage your investors. Giving investors dire news at the last minute is not just unprofessional; it’s bad for business. The less time they have to absorb the news, the less motivated they will be to help. In my investor updates, I always include a section titled “Things Keeping Me Up at Night” that lays out the issues that most concern me. This gets everything on the table. Frequently, investors reach out to offer assistance if they can.
2. Monthly financial reports: It’s a reality in today’s startup environment: Nearly every company will need to ask current investors for more money. If you’re upfront, investors will understand your situation and might be more willing to help. Financial reports guarantee that everyone is on the same page.
3. Changes in capitalization: If you raise more money or set up an employee stock option pool, current investors will be affected. Typically, they need to approve anything that affects changes to their shares. Again, clear and consistent communication can smooth these transitions.
4. Tax information: If your company is an LLC, you will need to provide a K-1 form to each investor to indicate his or her share of the earnings for tax purposes. Organization will be key as more and more investors are added to the company.
5. Major ownership changes: Major transactions, such as selling the company, may require the approval of all shareholders. You need to inform your investors efficiently and get signed documents, approvals, or votes from shareholders to complete negotiations.
Reputation is everything. You’re only as viable as your funders believe you to be, and the suggestions above will strengthen your company’s brand in the eyes of current and potential investors. Present information that is organized, accurate, and digestible.
The first thing a potential investor will do is call current investors for feedback. If those experienced investors feel uninformed about your company, they will likely convey a negative message to the newcomer. Moreover, new investors will check to see if current investors are putting up more capital for your company. If a new investor feels that older investors are abandoning ship, you have a communication problem and potentially a much more disastrous financial problem in your future.
Every communication to your investors is building a foundation for future investment. Investors saw promise in you and your ideas — it’s your responsibility to keep them educated about your goals, operations, and finances.
As it turns out, being the boss requires a lot of talking. Be proactive by connecting with your investors on a regular basis. After all, they’re the ones funding your dream.
Rachael Qualls is the founder and CEO of Venture 360, a platform that provides investors and investor groups with a great platform to manage their portfolios. Venture 360 also provides entrepreneurs the support they need to manage their relationships with investors so they can focus on running their businesses. Connect with Rachael on Twitter and Google+.