Keeping your investors informed: 7 dos and don'ts

By Joanna L. Krotz

When it comes to updating the folks who finance the enterprise, you'd think business owners would be weighing whether to write e-mails versus scheduling lunches. Or send them unvarnished reports versus rosy pictures.

But the real challenge is way more basic. Most small-business owners don't bother to stay in touch with their investors at all.

"The biggest mistake entrepreneurs make is not communicating with investors," says Tom Taulli, an expert on business finance and investing who teaches at the University of Southern California, UCLA and the University of California-Irvine. "Owners get so wrapped up in day-to-day business that they forget about investors and don't tell them anything."

Yet smooth, ongoing relationships with investors can definitely boost your opportunities for growth and sales.

Below are some good reasons why you should keep investors in the loop — and some strategies for how to do that.

Your brand evangelists

Financial backers can take a variety of forms, of course, from traditional equity holders like angel investors or professional venture capitalists to critical stakeholders such as bank loan officers, key employees or independent contractors and advisers. Typically, family and friends also invest significant financial and emotional capital in your launch.

You may worry a lot about these backers looking over your shoulder too much. But if they have invested in the success of your business — and you have accepted their money — you need to get beyond that (see my tips below).

Building solid relationships with every member of that group lets you create (unpaid) marketing ambassadors for your efforts. They're bound to talk up your company wherever they go. So you benefit from making sure they're on-message with the right story.

Who knows how many fish they might hook with your tale?

Been there, done that

In addition, most investors get involved in small companies because they have experience in that industry or they're veterans who know what it takes to build businesses.

Frequently, they can offer a wealth of contacts, knowledge about new markets or access to more capital. They likely also know how to unravel business knots better and faster than you can.

Taulli, who has also been a serial entrepreneur and now consults on investments for a venture capital fund, says his over-the-top experience occurred a few years back. "I invested in one company and never heard a thing from the CEO until six months later, when I got a notice saying they were going out of business."

Had the chief executive kept in better touch, perhaps the investors could have helped arrange a new round of financing or guided him around fatal missteps.

It's shortsighted and foolhardy not to leverage backers' skills and experience. Some savvy entrepreneurs even ask angel investors, who tend to be the most experienced, to work in the office every once in a while, so they develop an informed overview and can mentor the owner.

Sarbanes-Oxley spillover

There are now legal and competitive reasons to keep investors informed as well.

In 2002, as you've no doubt heard, Congress passed the Sarbanes-Oxley Act, the most sweeping legal overhaul of corporate reporting and securities regulations for publicly traded companies in a half-century. Even if you run a small, private company, don't think that you're immune to the impact of Sarbanes-Oxley (SOX).

In fact, two of the Act's provisions do apply to private companies (as well as to nonprofits). One regulates the destruction of certain financial and legal documents and the other prohibits retaliation against whistleblowers. (For more about SOX and private companies, see this story.)

Increasingly, private companies are voluntarily adopting the stringent SOX oversight that only applies to public companies. That is the finding of a 2005 survey of 9,000 senior executives and board directors from public, private and nonprofit organizations by Chicago-based law firm Foley & Lardner.

Generally, private organizations that responded to the survey believed that by complying with SOX regulations, they signal to customers and potential investors that their business is transparent and well managed. One typical comment: "We feel that although SOX does not apply to private businesses, professionals who are involved with our business will insist on our compliance as a condition for association."

A majority of the private companies that responded said that while the standards they adopted were self-imposed, pressure from board members or auditors had influenced them.

Foley & Learner predict that more private companies will adopt SOX-style oversight in order to woo investors and gain their confidence.

7 dos and don'ts

Nonetheless, it is your company to run (assuming investors don't have majority control). So while you want to keep backers in the know, you also want to keep them at an appropriate distance.

Here are seven dos and don'ts that encourage investors to stay involved while you run the show.

1. Don't involve investors in operational details. If your backers wanted to be in business for themselves, they would have launched their own company. Certainly it's important to keep them up-to-speed, but stick to big-picture news.

2. Know your numbers. While you're not expected to be a financial wizard, you should be able to knowledgeably discuss the company's financial status, including sales and growth projections, cash flow, servicing debt, and so forth.

3. Don't compromise the chain of command. "Investors should not be speaking with anyone other than their contact at the company," says John Reddish of Advent Management, a management consultant for small companies based in Drexel Hill, Pa. Even when the investor is a board director, if he (or she) intervenes with staff, you need to rein in the investor and remind him of his appropriate role.

4. Don't withhold or sugarcoat bad news. Most investors have experienced the same roller coaster you're riding. They're prepared for dips and curves and their antennae are sensitive to false notes. You don't want investors surprised by the departure of a big-deal client or the need for more cash. Maintain frequent contact and be timely about news, good and bad.

5. Be conservative about projections. "You can talk about your numbers for the last quarter, any deals in progress and new hires, but stay away from forecasts and forward-looking statements," Taulli advises. Don't make promises, like: "We expect to do $1 million a month next year." He also suggests that you have an experienced attorney look over your disclosures before releasing them — again, so you don't run afoul of Sarbanes-Oxley or other reporting standards. "It's a good idea to operate as if you were a public company."

6. Set up a regular communications channel. It takes little effort to create a password-protected channel for investors and other stakeholders on your Web site. You can periodically post insider news, financial statements, K-1 filings, sales agreements and more. (See Microsoft's SharePoint Services for info on how to set up a password-protected extranet.) You can also set up online appointment scheduling with software such as Microsoft Appointment Manager, so investors can access your calendar and check in with you at convenient times. Alternately, send out a quarterly e-mail report (easily done with Microsoft Office Publisher templates or Word templates).

7. Be yourself. Investors thoroughly evaluate business plans and markets before any commitment, of course. But they make their real bets based on management. It's your ability, skills and experience to grow the company that won their confidence. That's worth remembering as you stay in touch. In the end, if you think of investors as potential partners rather than on-guard critics, you'll make the most of their support and experience.