For those in the venture funding market, 2016 does appears to be very different from 2015. The cheque books seem to be locked solidly in the safe, and the so-called market leaders/potential unicorns are having to bite the bullet and lean on existing investors to construct their next funding rounds. Such lulls have happened before and it’s not an apocalypse. Nevertheless, this has come as a not so pleasant surprise to newer investors and first-time entrepreneurs in the eco-system who have not seen such cycles earlier.
I have been observing the engagement of founders who raised their seed rounds over the past 1.5 years with their investors. These were raised when things were much more hunky-dory, and the companies are now at a juncture where they want to cross the Series A hurdle if they could. Some examples of communication protocols followed that I have seen:
- Crisp quarterly update – which lasts for a couple of cycles and then stops altogether.
- Very detailed initial update – this is followed by a lull for ~ 6 months. Then there is a sudden reappearance of the detailed report, hinting that the company may be looking to raise a round — counting on the internal investors.
- No updates either on the business or even on material events such as when the company is raising top-up capital from existing angels. Then a couple of quarters after the investment, the investors are presented with a take-it or leave-it offer for sale of the company, when they are not even aware that the company pivoted and is out of cash.
- Lead will update the rest – Founder assuming that the lead investor is actively updating other investors, when the so-called “marquee” lead investor does not really bother at all.
- A few cases of sustained cadence with crisp updates.
- Almost no instances of any conference calls being set up to update investors.
As the fund-raising process develops, and prolongs- with little light at the end of the tunnel, there is a belated realization that founders might need to lean on their existing shareholders for the “proverbial” bridge. My sense is that most founders who got funded in the pre-Q3 2015 timeframe probably did not imagine that the markets could cool so quickly, and that they will need their angels on their side. I believe this is a fallacy because every company that goes the distance would likely go through more than one such down cycle over its lifetime. It is therefore important to respect the capital one has got and keep investors in the loop on what’s happening — as that’s what you sign up for when you take their money. Chances are, unless one is in the rare league where the business is skyrocketing and improving unit economics at the same time, one can never count out the possibility of leaning on existing investors for that little extra juice to survive a difficult market. I also think its more efficient to manage communication through a predictable channel and cadence, which allows setting the right expectation with individual investors to not impinge too much on founders’ time.
I would suggest ideally, a monthly written update, and a minimum of a concall every quarter to keep all in the loop, along with specific updates on major developments such as pivots, new raises, M&A and the like.
I would also say that being a “lead” investor places an obligation on the lead to ensure proper communication with all investors, and if the founder knows no better, the lead needs to step in. I would also ask the “leads” to reflect on whether they are really ensuring “effective” communication with investors, as that has short-term effects on access to capital for the founders and longer-term reputational effects.
I hope we learn quickly, else it might be the case of Communicate or Perish.
– Deepak Gupta