Investor relationships are pivotal to the success of any business. While important, these relationships are also notoriously challenging to navigate. A strong investor relationship fuels growth through access to capital, industry expertise, and a network of resources.
When these relationships fail, investors often begin exploring opportunities to exit their investments. Even if there isn’t a clear path out, discontentment can lead to a lack of cooperation that hurts the company in many ways–including the ability to attract new investors in the future. So, strong investor relationships are vital to the success of any business. Here are a few ways that you can build and maintain these relationships.
Navigating Investor Relationships
Building and maintaining strong investor relationships requires a clear understanding of what these stakeholders need–and how to provide it. Essentially, investors need trust in the company and its leadership. And, often, that trust is measured in financial strengths and weaknesses.
Building trust with investors requires:
In each of these areas, trust is tied to the financial health of the company. Investors want to see consistency in sales numbers. They want transparency in how money is spent and when they will see returns on their investments. They want communication–good and bad. And they want to see signs of hope that growth is on the horizon.
Let’s take a look at these four strategies in detail:
Strategy #1 - Prioritize Transparency
Most of the business world is in a state of digital transformation. Adopting new technologies to automate operations or engage customers is common. Unfortunately, it’s also common to encounter unforeseen hurdles when adopting new technology.
If a failed platform launch causes a noticeable dip in sales revenue, the impact on investor relationships depends largely on how those relationships are managed. Let’s say that a company invests in a failed platform transition that drops revenue by more than 15%.
It might be tempting to shelter investors from conversations about technical failures, but that would be a mistake that might harm investor trust. Instead, companies should prioritize clear, consistent communication and transparency to help investors understand what happened and what steps the organization is taking to remedy the situation, providing a reasonable timeline for recovery.
The right team of financial experts can help an organization navigate challenging conversations with investors, building trust through transparency and instilling confidence that the company–and their money–is in good financial hands.
Strategy #2 Provide Consistency
Few investors respond well to surprises. In fact, investors largely value predictability. When they make an investment, that decision is based on calculated risk. When a company lacks consistency in decision-making, quality, operations, or in how they demonstrate values, it changes the trust dynamic. Suddenly, a calculated risk is far less predictable.
Companies that provide consistency, especially in terms of investor communication and company performance, easily win trust. One effective way to deliver that consistency is by adopting standardized accounting procedures with strict adherence across the organization.
This provides consistency by:
- Creating and Managing Appropriate Expectations
- Ensuring Accurate Bookkeeping Practices
- Routinely Monitoring Financial Performance
- Implementing Controls like Separation of Duties & Audits
- Provide Transparent Reporting
Strategy #3 - Keep the Lines of Communication Open
Next to a return on their investment, communication is a top priority for most investors. How, when, and what a company communicates to its investors sets the tone for the level of trust in the relationship.
In 2015, German auto manufacturer Volkswagon was involved in a scandal involving the installation of devices designed to cheat admissions tests. While the US Environmental Protection Agency (EPA) pursued a criminal investigation related to the fraud, the company took measures to conceal the investigation and the evidence against them from investors. The scandal and resulting poor communication with investors resulted in losses totaling 37% of the company’s value.
In contrast, the 1982 Tylenol poisoning recall that included 7 fatalities and millions in losses as consumer confidence plummeted was met with a very different reaction from investors. While stock prices initially dropped, recovery was much quicker as Johnson & Johnson swiftly began communicating its priorities for consumer safety with added measures to all of its stakeholders. Rather than trying to conceal its involvement in the scandal, the company successfully navigated a sticky situation to regain consumer and investor trust.
The take-home message here is that there will be times when your company has to have tough conversations with investors and other stakeholders. When that happens, it’s important to make sure that you have solid financial expertise involved in that conversation. A fractional CFO can be a great way to bridge the gap, presenting a knowledgeable, polished financial executive to navigate the conversation with your investors.
Strategy #4 - Make Growth Visible
Growth is important to investors. It’s also a broad term filled with ambiguity. Don’t assume that your investors can see your growth. Make it visible by sharing data on current and planned future projects that put costs side-by-side with revenue projections showing the actual or anticipated return on investment (ROI).
This means sharing data with investors on:
- What You are Spending on High-ROI Research & Development
- How You are Exploring New Technologies to Improve Time-to-Market
- Where You are Adopting Data-Driven Analytics to Shape Customer Loyalty Strategies
- When You Pursue Strategic Alliances to Streamline Operations or Reach New Audiences
- How You are Actively Taking Steps to Diversify Products or Services
- Where You are Working to Expand Market Share (M&As, marketing campaigns, partnerships)
Here is what this looks like to investors. When you spend money on research and development, your investors see a commitment to becoming more competitive and the correlation of bigger profits. When you embrace technologies that enable speed and accuracy, your investors see better decisions, fewer risks, and bigger opportunities to capitalize on getting there first.
In 2011, two co-founders had an idea to disrupt the disposable razor market with a cost-effective subscription-based model that gave consumers a better option than the overpriced razors distributed through traditional retail chains.
DollarShaveClub was one of the first successful subscription models in consumer packaged goods. A combination of a strong value proposition, the right timing, and clever marketing propelled this startup to the front of the line. The company was later acquired by Unilever for $1B.
Strong support from dedicated investors makes fast growth possible.
Financial Expertise is the Common Thread in Building and Maintaining Investor Trust
Investors make everything else possible. From obtaining initial funding for a startup to financing later-stage growth strategies, these stakeholder relationships are important to the success of a company. Keeping investors comfortable and on board with the trajectory of the company requires a little bit of strategy and a lot of communication.
Set your company up for successful investor relations by prioritizing transparency, consistency, communication, and growth in a common language–finance.