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How to Communicate Bad Financial News to Your Angel Investor

Author: Ashley Devick Date: February 26, 2014

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 VanStory.

Don’t wait to share financial news with angel investors.

Communicate 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 via email.

“[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.

Compare 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,” VanStory says.

Seek Help from Investors

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.”

Talk 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. 

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