Funders can handle lackluster reports when they haven’t been kept in the dark.
The data is clear: Angel investors are truly a blessing to entrepreneurs. According to the Angel Capital Association, angel investors funded 24,131 startups, 22,790 early-stage companies and 20,109 expansions in 2012. That’s compared with just 280 startups, 1,647 early-stage companies and 1,796 expansions that venture capitals funded in the same year.
Entrepreneurs, no doubt, are thankful for
angel investors’ support. But sometimes, new businesses encounter unexpected
problems. In the event that a business has to communicate a less-than-ideal
financial outlook, what is the best way to break to the news to an investor?
Beth VanStory, a principal at Washington
D.C.-based Thinkout Consulting, an executive consulting and coaching firm, has
sat at both ends of the table, first as an executive with bad news to share and
then as an angel investor. She believes that one of the worst things an
entrepreneur can do is catch an angel investor by surprise.
“All of the sudden, something really bad
happens, and investors are left wondering why because there hasn’t been any
indication prior to that that things were anything less than on track,” says
Don’t wait to share financial news with angel
Regularly with Shareholders
As a rule of thumb, VanStory recommends that
businesses backed by angel investors share performance-related news on a
regular basis. One company VanStory invested insent
sends regular shareholder communications
“[The emails are] extremely thorough and
provide a lot of information,” VanStory says. “[A previous email] talked about
each of their initiatives, and they proactively talked about things that hadn’t
gone as planned.”
VanStory says communicating the full scope of
your business’ situation makes it easier for investors to step in and offer
assistance when appropriate.
Performance with Expectations
It might look appealing to report that your
sales increased by 25 percent, but if they were projected to increase by 65
percent, that tells a much different story. Businesses should provide a
baseline for comparing performance to expectation so that financial information
isn’t misleading. “That really tells you if your performance is on track,”
Seek Help from
If your business is in jeopardy, your investors
may be able to assist by making introductions or providing suggestions to get
business back on track. So seek help from your angel investors early, keeping
in mind that clear communication shows how you’re addressing any problems.
“Investors want to make sure they understand
what happened, where the problem was and that the business owners are already
trying to address it,” VanStory says. For example, “key hires and employee exits are good
to know about as well as any open key positions,” she says. “Your angels may
have referrals for you.”
Face-to-Face When Possible
If, despite all your efforts, your business
is unlikely to survive, VanStory recommends communicating that news in
person–and she knows from experience how difficult it can be to come clean.
VanStory decided to shut down her tire business, AutoSquad, after seven years
of operation due to insufficient funding. She broke the news to her key angel
investors by personally visiting them to explain what had gone wrong.
“Not everybody was local, so I couldn’t do that with everyone, but the major people I contacted individually,” she says. VanStory encouraged questions from investors as it helped show the issues were not of incompetence. Communicating the news in person hopefully eased the blow of the disappointing news, kept the door open for future opportunities and prevented any bridges from being burned.