Managing Investors in a downturn

My March column in Mint

If you are running a VC or an angel funded start up, it makes sense to pay special attention to managing your investors in a meltdown of the kind we are facing today. When a financial bubble bursts, those who invested at the peak, get really edgy. So, if you raised money any time in the last two years chances are you have a very nervous investor on your board, whose shareholder agreement with your company gives him powers that are disproportionate to the size of his shareholding.

While you are extremely unlikely to be able to raise more money in the near future, what you don’t want is your current investor pressing the trigger and putting a bullet into your head.
So what is it that you can do to manage your investor better.

Investor commitment is very important. If you already have an investor on board it is too late to raise this issue. You should have considered this when you were raising the money. When the going is good you will find that your compatibility is high with all kinds of investors and everyone expresses faith in the India story and your business. When the chips are down is when the investor’s mettle will be tested. In the last meltdown many VCs simply wound up shop and left India. Only very few stayed the course and rode out the bad times. It’s a good idea to have an investor who has a long term commitment to staying in India and doing business.

Spend enough time talking to your investors. Remember there is no such thing as overcommunicating in a crisis. Involve your investors in any key strategic decisions that you need to make. Explain to them the future that you can see clearly, but they perhaps cannot. Recognise the business reality and deliver any bad news early. Investors hate unpleasant surprises and being informed late about anything important.

Remember it is not your company alone. Once you have taken external investment you have to do what it takes to protect the interest of minority shareholders. You cannot jerk your investors around just because you have a majority shareholding. This is what lies at the heart of good corporate governance.

Manage expectations. Try to exceed investor expectations. In general it is a good idea to undercommit and overdeliver. So always be conservative in your projections. Don’t exaggerate to get a higher valuation or to look good today. When we raised our first round of funding we had made extremely conservative projections. Later even during the meltdown we exceeded our projections several times over – partly because we performed well and partly because we had made low projections.

Keep a frugal mindset. Be very careful how you spend money. Demonstrate to investors that you are as cautious with their money as if it had been your own. Lead from the front when it comes to cost cutting. Make a personal sacrifice – take a salary cut yourself before asking others to do so or before downsizing and asking people to go. Shift to cheaper offices to cut costs.

Focus on cash efficient growth and profitablilty. Nothing gives investors more confidence than a business that is turning the corner and is growing fast. What is equally important is cash efficienct profitability. Investors don’t just want to see revenues they want to see profits. And they don’t want to see profits rising along with receivables. They want to see money that is collected and in the bank. So focus on free cash flow.

Regard the investment as debt not equity. While an investor may have taken an equity risk by investing in your company, you must regard the obligation as if it were debt. The investor has put money in your company because he believes in you. You must treat the investment with the responsibility it deserves. If you display this attitude investors may be unhappy with business performance in a slowdown but they will not be unhappy with you.

Finally work on building trust. Spend time on the relationship. Don’t lie - tell it like it is. Never mislead investors. Remember institutional shareholders get more hassled if they learn they have been lied to than if they are told that they may lose some money.