Monday, July 28, 2008

Keeping Your Investors Informed – Regular Communication from the Entrepreneur

I recently received a comment on this blog from an angel network that heartily agreed that keeping investors informed is a key element in the ongoing entrepreneur/investor relationship. This post outlines the key reason an entrepreneur should send regular, informational updates to the investors. In a nutshell, it’s to maintain the relationship so the entrepreneur can ask the investor for follow-on funding later.

I remember my first angel investment back in the 1990s. This was before I knew you were supposed to setup an agreement with the entrepreneur on how, how often, and what they would communicate to the investors. After several months of hearing nothing, I finally called the President of the company and asked for a written update including financials. A week later he sent me a short two paragraph email along with a spreadsheet attached showing the financials. There are several items to point out here:

1. The two paragraphs by no means filled in the details of the business. To this date, there are holes in their explanation of what went on in the business.
2. The financials of any company should not be in an Excel spreadsheet. They should be in Quick Books. Excel has no audit trails, no security or validation. Anyone can change the formulas. In fact, several of the columns of financial data didn’t add up in the bottom row.
3. I only received this after I demanded it and I never received another one. After that experience, the entrepreneur wanted to discuss over the phone and found excuses to not send out the financials again.

These are all red flags indicating that things are not going well. Later the company went bust. Needless to say I won’t be investing in their companies in the future.

Here is a list of best practices for entrepreneurs communicating with shareholders along with why and what should go into the report.

Best regards,
Hall T.

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