January 08, 2020

Have Investors? Here Is How To Manage Investor Relations

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FF

Fora Financial

Staff

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• Small Business Ideas

• Small Business Tips

After all, no investor is going to give you money for your business and walk away. It’s on you to keep your investors confident in your ability to run and grow your business. While that might sound simple, effectively managing investor relations can make or break your business.  In this post, we’re going to dive deep into investor relations. From understanding its importance to strategies for managing your investors, we’ll cover it all.

What are Investor Relations?

Investor relations (IR) are a bit like public relations but targeted solely to investors.  The job of Investor Relations is to “keep the lines of communication open between investors and the company.” IR departments are generally tasked with achieving the following goals:

• Communicating with the company on behalf of investors and vice versa.
• Reporting relevant financial and nonfinancial information to investors.
• Maintaining compliance with regulations.
• Building relationships in the capital markets.

In essence, IR acts as a communication link between company executives and investors.  Without it, executives would quickly become overwhelmed with information requests from investors. In addition, since not all business owners speak investors’ language, IR is a critical go-between. For example, investors tend to be concerned about very specific financial measures of the business plan. IR professionals can help executives understand how to frame their communications based on these concerns. In large companies, the IR department might have several dozen employees. However, for a smaller business, there may be no formalized IR department. Still, that doesn’t mean investor relations isn’t important for small business. Since small businesses may not have robust internal resources to manage investor relations, it’s the job of the owner.

Understanding The Importance of Investor Relations

Finding new investors for your business depends on the effective management of IR. Just about any company you’ve ever heard of has taken on investors at some point. Had they lost (or never found) those investors, they’d have had no money to fund their aspirations. That said, investor relations isn't just important because you need money.  In addition, it’s important because what your investors are interested in is the success of your business. Since you’re interested in that too, there’s plenty of reasons to understand their perspective.

Liquidity Concerns

For review, “liquid” funds are cash or cash equivalents, which can be spent easily. So, your business’s liquidity is measured by how much cash you have on hand to spend. Money that only exists on paper won’t get you far in the long run. Successful investor relations ensures that you have sufficient liquidity to — at a minimum — pay off your debts.  Of course, liquidity isn’t just about getting by. It also helps you grow more quickly while adhering to your budget. However, it can’t happen unless you find investors.  In short, establishing good relationships with current and potential investors ensures your business has the liquidity to invest in promising opportunities.

Access to Capital

The better your access to capital, the more easily and affordably you can raise money. For entrepreneurs, access to capital can mean the difference between success and failure. After all, your ability to find investors for your small business affects how quickly your business can grow. In addition, improving your access to capital through IR makes your company a more attractive investment. In this way, good IR builds on itself and becomes a critical financing tool for your business. For example, private investors will be more attracted to your business because they know you can raise the necessary capital.

Increased Visibility

In IR, besides communicating key financial factors, it’s important to establish transparency for investors. This is easier said than done because accredited investors will use specific metrics to evaluate your business.  If you’re unable to communicate properly with investors about your business, they’ll struggle to get comfortable enough to invest. However, if you can communicate in a way that appeals to investors’ interests, you’ll attract positive attention to your business. This positive attention will also lead to increased credibility for your business. When customers evaluate your services and products they’ll notice that you’re backed by real investors.

Aiming For Fair Valuation

One of the most fundamental roles of investor relations is to aim for fair business valuation. By “fair valuation” we mean the business's value worth is based on its fundamentals. For public companies, this is one of the toughest tasks. World events and local news alike swing public company valuations by the millions each day. Even for small businesses, getting a fair valuation isn't easy. However, by keeping investors aware of all factors, you’re more likely to get a fair valuation.

Properly Managing Investor Relations

Investor relations isn’t something that can ever be finished. It’s something you manage for as long as you have investors. As you can see, though, properly managing investor relations comes with significant benefits for your business. The first step towards getting investor relations right is knowing your audience. 

When Dealing With Private Investors

As a small business, you’re most likely going to start with a few private investors. It’s important to note, though, that there are a wide variety of types of private investors.  Since different types of investors have different needs, there isn't just one approach to investor relations. Small private investors likely have specific, personal finance goals. For example, they may be looking to invest in your company to generate passive income. Conversely, a larger private investor such as an equity fund may have very specific investment profiles they need to match.  Regardless of the type of private investor you have, the concepts of IR remain the same. You (or your IR department) must tailor your communications based on these different types of investors. For example, with individual investors who want passive income, you’ll want to highlight the stability of your dividends. Similarly, with equity funds, you’ll want to highlight the risk and return metrics that they care about. Beyond communicating about the fundamentals of your company, you should also seek to build relationships. How investors perceive you as a business manager is as important as any financial metric. Actively building relationships helps you control that perception.

When Dealing with Institutional Investors

When we talk about institutional investors, we’re referring to insurance companies, pension funds, banks, mutual funds, and hedge funds. Institutional investors invest on behalf of a group of people who have pooled their money together. Due to this, institutional investors tend to have predictable characteristics.  Typically, they'll only invest in large projects and companies with conservative risk profiles. Of course, there are exceptions, especially with certain types of institutional investors like hedge funds. Also, since institutional investors are investing on behalf of a group they usually have stringent investment requirements. Where private investors can choose to invest in just about anything, institutional investors have clear mandates. As a small business, your challenge with institutional investors is to provide a large enough opportunity. For example, if you’re looking for a few hundred thousand dollars, institutional investors will look elsewhere.  In this case, a better option is to apply for a small business loan. However, for smaller businesses, big one-time ventures can provide a large enough opportunity to attract institutional investors. With that said, whether you’re dealing with institutional or private investors, a constant stream of transparent communication is key. Communication is what allows both institutional and private investors the ability to make well-informed decisions.

Methods To Improve Investor Relations

As you’ve seen, improved investor relations can unlock all sorts of new advantages for your business. Fortunately, as with any type of relationship, investor relations can always be better.  Of course, it helps to know a few tricks of the trade. In this section, we’ll review a few methods to improve investor relations.

Ensure They Understand Dynamic Markets

Above all else, investors want to avoid losing their money. Even if you run a wildly successful business, though, there will be fluctuations.  You can’t avoid these fluctuations. Therefore, it’s critical that you know how to manage investor relations during tough economic conditions. The good news is, as the expert on your own industry and business, you have a unique, valuable perspective. By providing your perspective, you can reassure investors and explain that changing markets are no reason to panic. Similarly, you should ensure that investors understand dynamic markets as they relate to the volume and timing of your financing needs. 

Encourage Involvement From The Board

The function of the board of directors is to oversee the activities of your business. However, unlike you—the small business owner—the board isn’t involved in day-to-day operations. This gives board members an invaluable perspective on your company’s overall strategic direction.  So, when board members get involved, your investors benefit from additional unique insights. Moreover, by involving board members in IR, your investors get to see who’s involved in the governance of your business. As mentioned earlier, the people guiding your business (including board members) are as important to investors as any financial metric.

Provide Information Flow

As you know, in business, change is constant. Due to this, providing a constant flow of relevant information is critical for investor relations. If you run a public company, the Securities and Exchange Commission (SEC) requires several, regular financial reports. In this way, public companies are forced to provide an information flow to their investors. However, whether your company is public or private, the information you provide to investors must go beyond the bare minimum.  If you can’t manage this by yourself, you should hire or designate someone who can. The improved liquidity and access to capital will be well worth the hiring expense.

Meeting Goals and Targets

To build trust in a relationship, you must do what you say you’re going to do. The same goes for investor relations. If your company consistently meets its financial goals, you'll investors will be confident in you. As a result, when you approach your investors with new opportunities and projections, they’ll be more receptive to your ideas. Still, there’s a balance to strike. While it’s good to meet your targets, you don’t want to be overly conservative with your projections. Otherwise, you’ll struggle to attract new investors. Similarly, your existing investors will wonder whether you’re doing enough to drive growth. To ensure you’re never at a loss for new growth strategies, sign up for our newsletter filled with expert small business advice.  [cta-newsletter]

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