Why investors should worry when founders go quiet

As an angel investor for over a decade, and more recently as a VC, I’ve ended up becoming a direct and indirect shareholder in a number of startups. I’ve been able to see first-hand how founders share the news of their business to their stakeholder community and have concluded something very simple, yet very telling – that the strength of founder communication is very often directly correlated to the health of the founder’s business.

When founder communication drops off, it’s like the veritable “canary in the coalmine” and a big warning sign for investors to take note. As famous angel investor Jason Calacanis bluntly puts it, “If your startup isn’t sending you monthly updates, it’s going out of business.”

Through the lifecycle of a startup, founders will experience numerous cycles of highs and lows. With the highs of a business, I’ve seen that founders are very quick to promote, even shout out, to their stakeholders about something great that is happening in or to their business. Conversely, when things are not going so well, founders don’t properly tell their stakeholders about the challenges they are facing. They hide behind a wall of silence.

What many founders have not worked out is that an investor is usually there for the long haul, so not sharing the issues of the business is to the founder’s detriment. Investors want to know what is going on in the business they have invested into, and communicating frequently with them keeps them engaged and supportive.

If you are a startup founder and are not sending your investors monthly updates, you are ignoring a massive opportunity to improve your business and build up relationships with your stakeholders. Frequent investor updates will keep you accountable, demonstrate your execution capability, and allow you to stay top-of-mind for one of your (hopefully) most important allies.

In our own investment fund, we require what is called “information rights” from every company we invest into. Information rights force a startup to provide its investors with financial statements and other company information as requested, usually on a prescribed timeframe. Many startups do not comply 100 percent with information provisions, especially the time periods for the delivery of financial data and information, resulting in investors continually having to “wield a stick” in this area.

If we are not granted these rights, it’s almost certainly a deal-breaker for us and we will continue looking for our next opportunity. While many founders agree to providing information about their business, the actual execution of this and the quality of the information provided varies greatly between businesses.

Best practice is a monthly update to all investors, usually including a basic summary of the highlights and lowlights, key metrics of the business, very simple profit and loss information with length of runway (time until cash runs out), and a request for specific help that investors might be able to provide. Consistency is key. Sticking religiously to the update schedule demonstrates that a founder is disciplined and executing well.

For founders, it’s not that difficult to provide an investor update, as most of the data and information for the update can be taken directly from documents that would be prepared for the Board.

One of our portfolio companies recently missed a monthly update and could have easily brushed it off. They didn’t. In fact, I was surprised to see two monthly updates sent out together as a catch up. Despite the missed month, I was greatly impressed with the discipline of the founders in the way they corrected themselves.

Through my time in working with founders, I have repeatedly stressed the mantra “no surprises” – particularly to the chairman and rest of the Board, but also extending out to investors. Unfortunately, this guidance is often ignored and I have been on the receiving end of near-catastrophic news more than once. Founders should be transparent with their investors and never sugar-coat problems.

I also encourage investors to meet with their founders in person from time to time. While this can be an onerous task for founders and a big drain on time, the most effective founders I know will bring their non-Board investors together at least every six months, with regular electronic updates in-between. Face-to-face updates also provide a great way for investors to gauge the emotional state of founders. We recently met a founding team who looked tired and worn out, and their facial expression confirmed the news they communicated about the state of their business.

What founders don’t stop to consider is that as the communication gap widens with their stakeholders, the relationship gap gets bigger and bigger. It then sets the scene for founders to lose all of their credibility with their investors. I’ve been involved in businesses where my co-investors have literally “written off” the business ever succeeding because of the communication vacuum created and sustained by the CEO. Great founders realise that timely communications with investors on the progress of their startup will keep investor engagement high and preserve their interest in being a supporter and ambassador for the business.

Untimely, founder communications sometimes begin before the investor cheque is dry. In our own investment fund, we occasionally see the beginnings of poor founder communication during our due diligence process. This is a sure-fire way to erode confidence in the founding team and – if serious and sustained – could result in investors quickly disengaging.

At this stage of the investment process, investors are continually monitoring and building up a picture of the business and founding team from many data points. Outstanding communication and execution are two skills that successful founders should exhibit throughout the due diligence process.

U.S. VC Mark Suster has a now-famous blog post where he proposes the idea that “investors invest in lines – not dots”. I would suggest that frequent, reliable and honest communications will help your investors quickly find the lines in your business amongst the many dots.

Garry Visontay is a partner at venture capital firm Right Click Capital, investors in high-growth technology businesses. He curates a list of resources for Australian founders and tech investors at visontay.com.