Investor relations work or raising money for a company, whether it’s a startup, series A or series B, or even pre-IPO, is different from general public relations. Nevertheless, EASTWEST PR has worked on both big and small deals on a large number of investment documents with companies and helped them get noticed in and amongst the finance community. There are a number of considerations when creating a fundraising document. The first is identifying the right investor, because they’re all looking for slightly different sectors and verticals. An investment company will have a portfolio based on a particular area of specialisation, since different specialisations require different amounts of knowledge and competence on the investment manager side. Certainly, investors will focus on their industry of interest, whether it be mining, gas, technology, clean tech, or the like.
Begin by looking at potential investors, and they could be categorised as angel investors. These are people who have got money and are investing on their own account, and therefore they contribute money, expertise, and networks. Those are then complemented by some venture capital companies, and then by some larger funds, like 3i was in the previous UK administration money or Temasek Holdings is in Singapore government money.
Why investors care so much about the ROI
Different-sized funds have different motivations, but what they are all looking for is ROI or return on investment. Kevin Whelan of the WealthBuilders, on their podcast, talks about the different kinds of returns on investment that are important for potential investors. When people invest their money in a business, they want to make sure that that they are going to get it back. The earlier the stage of the investment, the bigger the risk, and therefore, investors look for a greater return, because they’re probably going to invest in, say, 10 companies that are early-stage, and statistics say that a large number of those companies, around eight or nine, may fail in the first year. In the messaging being put together in the documentation, it’s imperative to explain how the return on investment will happen or at least how the risk will be mitigated if in case the investment doesn’t come back. The second factor to consider is the possible upside in the investment. An important criterion for investors is the possibility of a long-term investment or an exit of greater magnitude when the company is sold. If there were less than 10, it might not be worth their while.
Another ROI Kevin Whelan talks about is the return on the relationship with the investors, especially the angel investors, and how to assure them that the company is worth investing in. In fact, it can actually be quite an incestuous business, because most VCs and entrepreneurs know one another and deals get shopped around, so the company needs to stand out. Giving advice and reassurance that the investors and the management team are trustworthy is key. In any documentation, always include details about the individuals involved and their commitment to the business in terms of their investment.
Key considerations for your and your potential investors
One of the main things to include in the document itself would be the reason the business was put up in the first place or the problem the business intends to solve, and most importantly, the competitive advantage of the product or the service being offered. It’s not enough to say there’s a market opportunity. It’s not enough to say you have a problem-solving product or service, because often, it’s the second mover, not the first, that is the company that survives. Take Yahoo as an example; it was the first search engine, but it’s Google that now dominates. So, talk about the source of competitive advantage. It could be a trademark, an IP to the formula, code that no one else can repeat. Whatever it may be, the sustainable competitive advantage then leads into the multiple on the exit.
Don’t forget to include the money being raised. The old rule of thumb is double the initial amount, because it’s easy to get through it, but take note that a rounded off amount like $1 million or $2 million is not convincing. Investors want to see a line-by-line or almost an accountant’s view of what the money is going to be spent on. The next things to look at are the margin and the revenue, because these drive the profits. The cost of production, the sale price, the scale of the issue or market being addressed, and how the product or service fits into the investors’ portfolio are also important points investors will look into, because one aspect of what they’re looking for is the the absolute return on the business, but another can be that they’ve got a portfolio of companies and that product or service can somehow add value to their other businesses.
The next part is when the money is going to be needed, because it’s possible to get it in tranches. If you get all the money up front in one valuation, that dilutes the equity to what is more than necessary, so it’s possible to have some milestones in the business plan. Once those milestones are reached, the valuation on the business can increase, and then funds can come into the business but at a higher price. Definitely, the timing of when the money will come in is worth thinking about as this can the business’ value.
Another aspect is the market validation. Other companies in other sectors or other geographies could validate that what you’re proposing is a good business idea, and this can lay the groundwork for the exit strategy, which many business owners forgot to plan. People talk about raising money and what they want to spend it on, but they don’t think about the exit strategy, and so this is where the media relations and PR coverage really come into its own, because the value of articles written by third party editors is to give credibility to the business idea or the entrepreneur. Investors may not know you or your business, but if they have read an article, listened to a podcast, or seen somebody on television talk about the business, there’s validation from a third party media that creates a level of reassurance for the investor. Being seen in the media can be a key part of investor relations and its preparation strategy, so try and get into some media, because it creates some context for you and the business.
How to keep investors happy
Once the money has been raised, investor relations doesn’t finish there and then. Providing weekly summaries on the business and management logs in different categories like sales, marketing, technology development, and human resources reassures investors of what’s going on and where their money is being spent. If they get nervous, that’s understandable, since they took a financial risk by investing in your company. Earnings calls which take place within listed companies are actually similar to these summaries or updates. They’re a scheduled setpiece communication with investors and analysts, so that those people can take away the news and the views of the CEO, the CFO, and whoever else and give reassurance to the asset managers, fund managers, pension managers, and so on. That same work can be done for a small company as it’s being done for a big company, and it really is well worth its weight in gold. Fundraising is often not done just once but repeatedly, so it’s important to keep the existing investors happy, because if they’re not happy, when trying to raise more money, if they don’t want to invest a second time as a tagalong rights, then getting money from other investors can be even harder, because they’ll want to know why the current investors are not interested to continue investing in the business.
From a relationship perspective, investor relations can actually become one of the most important roles of a CEO or founder of a business, because without that mission critical vote by the current investors, no matter how big or small, it can cause a bottleneck and road block for raising future funds. With that said, keep in mind all these points if you are thinking of finding investors.
Cover Photo from Harris Bricken