You have worked harder than ever before and secured your 'first financing'. You have completed the first step in creating a successful company. But you have never had investors before, and you have no idea what they expect from you. First and foremost, investors seek reliable, organized, and transparent founders. They must trust you. To gain their trust, you must communicate well with them.
As desirable as it is, the rapid growth of a company must also be controlled, so that its stability and balanced development are not compromised. In this sense, a carefully selected financing strategy is one of the crucial factors in maintaining a fast-growing company. On Lee, CEO of Global Digital Prima Lab, venture capital fund that invests in software and technology startups, stated that there are three challenges that startups will face after receiving their first round of investment: the challenges of technology, business, and management. Regarding management issues, almost all elements of startups will face escalating challenges, starting from internal and external communication problems, product development, to human resource management.
At the moment a company reaches the growth acceleration phase (sales growth, introduction of new products and markets), its main sources of financing become banks, international financial institutions, or strategic partners, and eventually the stock exchange. However, getting there requires finding other means of financing in the meantime.
First Stop – Venture Capital
A valuable role in non-banking financing of entrepreneurship is played by so-called entrepreneurial venture capital (venture capital), which is invested in new ideas, projects, and new companies that grow dramatically fast, the expertise of individuals, and the potential of projects. Venture capital (VC) investments are considered risky investments because when entering the ownership structure of a company, there are no additional costs for the company (as with bank loans) and no collateral, the investor fully shares their fate with the founder.
The very fact that the founder/owner must allow someone to become a co-owner of their company in exchange for money is one of the major obstacles and the reason why this form of investment has not taken off in Croatia. VC funds imply investing in a company whose value will grow, and by selling it at the time of exit (which is a period between three and seven years), they will achieve an appropriate return. Once a VC fund decides to exit the ownership structure, it must decide to whom it will sell its share (options include selling the share to the owner/partner, selling to a third party, or an IPO, i.e., going public).
Trust is there, but…
Even the youngest companies (startups) should regularly communicate with existing and potential shareholders. Investors need to understand the success of your venture (whether you are newly established or in some advanced stage) in order to make quality, balanced, and transparent decisions about whether to entrust you with their funds (invest), regardless of the size of your business. One of the challenges after fund financing is how to establish good communication with your investors. The first problem usually arises – startup founders are too busy developing the business and rarely share news about developments with investors.
The investors’ stance, when financing startups, is that they do not get involved in operational activities. If a startup has gone through the due diligence process and the 'equity investment phase', it means that investors have placed great trust in the decision-making of its founders. But that does not mean that communication between the founder and the investor becomes less important. Founders are expected to regularly report on the development of new products or services and new clients (within an agreed and reasonable timeframe).
Startup founders often promise their investors aggressive business growth and rapid product development. While this sounds positive, it can be a double-edged sword for startups. As the startup develops and more investors join in funding rounds, two things emerge as essential: one is that metrics and goals are of great importance. The second important element is the relationship of startups with partners and consumers/customers, which must not be neglected.
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Three Essential Categories of Communication
Clear: Is your startup not doing well? Pick up the phone and inform your investor, better sooner than later. They are there to help. In fact, they are more inclined to help when problems arise because that is when their true value comes to light. They do not like surprises (at least not negative ones). And when you achieve your KPIs, share that information and your success.
Concise: Investors do not need eight-page status reports; you are not the only startup they are investing in. They usually provide you with summaries (and tools) about what you need to present in reports. Be concise. It is so obvious that you are working in a fast startup world, so your communication should adapt to that style.
Consistent: It goes without saying that you should be consistent when it comes to contacting your investor. Avoid giving your investors irrelevant reports and wasting their precious time. If they tell you to reach out with updates every two weeks, then reach out with updates every two weeks! In reporting, if they ask for your break-even point, give it to them, not something else to make it look better.
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Data and Flow of Information
Initial (investment) capital and startup ecosystem are not just the most creative ideas and skills. Most quality entrepreneurs have a plethora of ideas, every day, every hour. Likewise, it is not just that every investor with capital sees opportunities before others and invests. The startup universe is a little larger and deeper than that. Its ecosystem implies a constant exchange of information, knowledge, and building long-term relationships.
In other words, it all comes down to people and communication. If it is lacking, problems begin. One of the most valuable assets of venture capital funds is their business network. The 'gold mine' that funds have is people (current or former top managers in corporations), connections with other funds, and an extensive network of business advisors, which places venture capital funds in a high position as desirable partners for startups in their first phase of seeking investments.
Since venture capital funds are responsible for investors’ money, they are particularly sensitive to the quality and reliability of exchanged information. Unlike any other business entity, business reputation and trust are considered the most important 'currencies' for funds in this case, and their loss will cause them to fall out of the game. However, there is one area that most funds pay special attention to: data collection and flow of information – both closely related to communication.
What Attracts Investors
Communication between the 'opposite' sides at the table (VC fund vs. startup) is equally important. Although the process of potential investment in a startup is a standardized procedure, each time it is unique. The decision-making process consists of assessing many elements such as the quality of the founders, the product, technology, market, potential, and others. However, quality communication, mutual understanding, and respect are gaining increasing importance.
The quality of prepared presentation materials (the pitch presentation) in the initial phase of project analysis and the responsibility of the founders are two fundamental elements of investors’ assessment for investing in a startup. The ability of the founders to gain trust has a direct impact on investment decisions in their business model.
According to a survey of 98 venture capital funds and 121 founders conducted by Henri Deshays from Newfund and Owen Reynolds from the University of Chicago, 'founders and shareholders conclude that the personal relationship and chemistry with the partner (investor) is the most important factor in decision-making'. Because, 'business is done by people'.
A Good Story Works Wonders
Startup founders must convince investors that they possess what often determines success or failure – the skills to present products or services. Even creators of extraordinary technologies can struggle with raising funds because they are unable to build a compelling story and vision. Some novice entrepreneurs believe that 'storytelling' is solely about raising funds from funds. This is incorrect. A good narrative is crucial for almost every aspect of building startups and relates to: recruiting the best talent, building an ecosystem around the company, acquiring first clients, and gaining business partners.
'Storytelling' is the ability to master one’s communication skills, adapting and reconstructing one’s story depending on the target audience to achieve specific goals. Although the story will always (more or less) be the same, the founder will send a different type of message to investors (in the fundraising phase), customers (when selling a product or service), and employees (to keep them motivated).
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Information to Share
Liquidity: the amount of funds in the account or cash-equivalent funds available to you, which should show that you could at least cover your obligations if the worst happens.
Current Financial Metrics: annual turnover, sales, profit, costs compared to the same period last year (if available), investment secured from your last announcements.
Other Metrics: number of employees, expansion of office or production space, projected growth.
Product and Service Development: customer orders and planning, relevant management appointments, introduction of new products, important partnerships.
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A Marriage with an Expiration Date
From the first moment the term 'marriage with an expiration date' appeared in the ecosystem of fund expression, such a term describes the relationship that connects the VC fund with its investment (company) in the portfolio. Just like in marriage, we sign investment contracts in good times and bad, hoping for the best, but aware of the uneven path ahead. Again, communication plays a decisive role. We all know (those who follow the startup and fund scene) the extreme case of Elizabeth Holmes, who raised hundreds of millions of dollars from investors using this method – the 'fake it until you make it' strategy no longer works. The value of reliable reporting and open, confidential communication must be emphasized.
It is valuable to report not only on successes and KPIs but also to share information about difficulties and failures. Being aware of the sources of failure is valuable in itself as it allows learning from failures. However, if a startup wants to leverage the full potential of 'smart money', the investor must know the complete picture of the business. Transparency is very important. The role of the VC investor is to be a sparring partner, to support, but also to challenge the founders. Based on the nature of the fund’s business, funds have a certain degree of 'helicopter view' of businesses and markets, and many investors have already been in the founders’ position. They often know which solutions or strategies work and which should be avoided.
When investing in a startup, the VC is aware of the risks and knows how many elements contribute to the success of the company. The founder has a regular opportunity to discuss the current situation of the company with investors. It often happens that startups skip the chapter 'what went wrong' in reporting. And this is yet another excellent opportunity for founders to gather feedback and find solutions while strengthening relationships with investors.
What After the First Round
You have worked harder than ever before and secured your 'first financing'. You are doing great and have received your first investment. You couldn’t be prouder. You have completed the first step in creating a successful company. You are no longer just you and your co-founder. There are some external, experienced people with whom you need to communicate. You have never had investors before, and you have no idea what they expect from you.
First and foremost, investors seek reliable, organized, and transparent founders. They must trust you. To gain their trust, you must communicate well with them. Will you trust a person you have never heard from and who serves you some utopian roadmap with a hockey stick growth forecast? Most likely not. When it comes to communication with investors, you must be clear, concise, and consistent in everything you say.
Good relationships with investors are key to future financing, and developing good relationships with investors is achieved through effective communication. One investor once said, 'the more frequent and transparent the communication, the more likely the investor will spot challenges before they become a disaster.' In most cases, effective communication will make you reliable, organized, and transparent in the eyes of investors.
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