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How to Deliver Bad News to Investors

Even the best companies will eventually face one of the unfortunate inevitabilities of startup life—the investor update that’s littered with bad news. But delivering dissatisfactory results doesn’t make you unique. How you handle adversity, on the other hand, can make you stand out and serve as a test that separates the strongest founders from those that crumble under the pressure.

 

The irony of investor updates

Entrepreneurs on a hot streak tend to be better at keeping investors up-to-date than those struggling to hit KPI goals. Makes sense. We’re happiest to show our work when we’re assured accolades for our hard work. But it’s the entrepreneurs missing their goals that need to be the most transparent with investors—even if the next report resembles an S.O.S. message.

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You can’t lose sight of the fact that investors are bought into the company’s future as well and willing to assist. Let them help. Shielding a group of experienced mentors from chipping in with their expertise on issues they’ve likely faced before is a lose-lose scenario for investors and founders. So regardless of company performance, keep investor updated early and often. “Transparency is the foundation of all great companies,” Entrepreneurial coach CJ McClanahan says. “Everyone is going to figure out what’s going on eventually—your team, investors, the marketplace, everyone. So live by this adage: tell the truth fast.”

 

How to avoid the big blow up

Hit your investors with some unpleasant news after months of radio silence could be seen as a sign of disrespect. Thus, an unnecessary blowup could ensue, taking everyone’s eye of the ball of what’s really important: turning the company around.

Regularly send your investor reports. There’s no reason a bad quarter has to turn into a company crisis, but slumping numbers will shock investors if they haven’t been able to track the company’s progress in months. This approach is also a great strategy for securing future funding. Early stage VCs tell me they are twice as likely to invest again in later rounds with companies that kept them up-to-date on performance.

When it comes to the bad news, don’t be afraid to get specific. If there’s been a plan or decision that you’ve executed that didn’t work, walk your investors through your process. Explain why it didn’t work. And always justify. Even if you’ve made the wrong choice, backup your decision making with what you knew at that time and what you expected as a result. You don’t want your investors thinking you’re acting careless with company strategy. A Columbia study showed people are much more likely to empathize with poor results if they understand the process. By doing this, you’ll also preemptively answer many of the questions your investors will want to know about the company and use the moment as an opportunity to showcase your preparedness.

Plus, the extra level of detail will help investors identify where you may be able to improve or how they may be able to help. After you explain your process for previous decisions, let your investors share how they would’ve done it different. If you allow the room to debate the merits of a decision, investors will feel more confident that their voice will be considered in the future.MAR15_30_Kenneth-Anderssond_delivernews

Finally, as Joshua Margolis, a professor of business administration at Harvard Business School, explained to HBR.org admitting that you’ve made a strategic mistake can help you maintain credibility as a founder and provide a rallying point for everyone to work harder on making the business a success.

But your message won’t motivate unless it’s delivered well. It’s essential to walk into a meeting ready to deliver bad news without ambiguity. Don’t make investors guess which metrics underperformed or what efforts didn’t work. Outline the problem right away. Make sure you’ve prepared your remarks before you give them and practice, practice, practice. Go over your updates with a co-founder or a friend and double-check that you’re clearly conveying the information you want to get across. Even if you’re not a natural presenter, rehearse enough to allow yourself to stand in front of room full of investors and speak with confidence. You don’t want your body language to say something more negative than your underperforming numbers.

 

How to turn the ship around

Now it’s time to move on to the future. Like Don Draper said, “If you don’t like what’s being said, change the conversation.” That’s not always easy when you’re looking at hard numbers, but a shifting the conversation to a strategic focus on the future can get all investors onboard. Don’t just beg for help, get into specifics. Assign tasks to individual investors (based on their strengths) and share with the group what you expect in return.

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Then show what you and your team are going to do to solve your biggest problems. Much like walking through the process that lead you to poor results, show the specifics of what you plan to do to jumpstart your KPIs. Open the floor to questions and feedback after. Allow your investors to tweak the process. Strong collaboration will create additional buy-in and get everyone excited for what’s coming next.

You’re in a great position to turn this situation into a big win for you and your company. Never forget that adversity is a necessary ingredient in all great startups.

 

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