Securing financing from one or more committed investors is a real cause for celebration in a seed-stage company. There's no harm in taking some time for high fives and champagne once the company has met or exceeded its goals for an initial round of financing, but don't get too comfortable. Convincing investors to believe in an idea for a startup is a tall task, but keeping them engaged and excited several months or years down the road may be just as challenging. And while much of this depends on whether the company can live up to expectations, investors also need transparency to make those calls. Transparency is achieved through accurate, informative and timely financial insights.
Startup founders and executives who don't follow through on a successful seed round by keeping investors informed will find their long-term growth prospects in jeopardy. Indeed, it could be a major contributor to the ultimate fate of most startup companies - by some estimates, as many as 75% of investor-backed businesses don't survive more than a couple years. That's why it's crucial that regular reports to shareholders go beyond what's legally required, and that necessitates an expensive, time-consuming effort without the right people and processes involved.
Too much, too little or too confusing?
Time and again, seed- and growth-stage companies commit the same mistakes in reporting finances to investors, even if they are fully within the letter of the law. This often takes the form of some kind of communication breakdown, but the causes of and solutions to the problem are much more complex.
"How much is too much when it comes to updates to investors?"
Easiest fix: Miscommunication from executives to investors
It should come as no surprise that investors can easily feel left in the dark without regular financial updates. But even if a startup has been sending quarterly reports and other information as expected, investors may still feel uncertain if these communications are little more than perfunctory. The best seed and growth companies take an active approach to reporting, using these findings to trigger new discussions about future plans, strategy shifts and how investors can leverage their experience and network.
A bit more difficult: Aimless communication
On the other hand, it's entirely possible to communicate too much with investors, particularly if done aimlessly. As much as investors want to stay informed, nothing drains enthusiasm like a constant stream of longwinded emails that serve little or no purpose. Like the leaders of the companies they finance, investors are very busy, too. Without a way to compile the most important information and deliver it in a concise way, funding sources may quickly sour on a company.
Harder still: Inconsistent reporting to investors
As if this spectrum wasn't already confusing enough, startup leaders must also stay consistent in their reports to investors. A slew of updates at the beginning that turns into only a trickle later on tells backers that either there's no good news to report, or the company isn't managing time and resources effectively.
Reporting priorities: Finding a happy medium
As most business heads can attest, finding the sweet spot in this Goldilocks situation isn't easy, and neither is it simple to gather the right resources to execute on a solid financial reporting strategy. The space between "too hot" and "too cold" can be very wide depending on the situation, but there are some good rules to abide by and get investor reporting "just right":
Speak their language
Just like in standup comedy, you need to know your audience when compiling great financial reports (unlike standup, however, it's best to save your favorite jokes for another time). For example, top-line revenue is a standard metric in nearly all reports. But depending on the type of business, investors might expect this to be determined from gross sales (for retail or similar companies) or as annualized recurring revenue and recent period bookings (as with subscription-based or seasonal companies). Use business speak rather than overly complex accounting lingo.
Keep it simple
Focus on high-level, standard metrics first, then drill down into specifics where needed. Always know when a chart or graph can convey information more clearly than bullet points, or even worse, a block of text. Provide a financial summary and narrative so they have information at a glance. This allows them to make intuitive evaluations.
Financial reports should arrive at predictable intervals but also should maintain a cohesive format every time. Even if minor details change from one report to the next, investors will assume the worst more often than chalk it up to an honest mistake. It's important to make a good first impression, but don't over-commit by supplying weekly updates if your team can't deliver a quality report on time, every time.
By partnering with a team of experts like those at Consero, it's possible to see real ROI from a greater focus on reporting efforts, not only from time and resources saved but also in the confidence gained from investors who have transparency and access to key insights. By wrapping the right people, processes and technology up into one package, Consero helps growing business gain access to actionable information. The result is finance & accounting that efficiently provides clarity and scalability.