IR Tips for the Later-Stage Start-Up • Use public communications to both drive and support your financing efforts • Maintain a regular flow of news releases, with an emphasis on business and financial implications rather than marketing spin • Build a database of current investors, venture capital firm partners, buy-side money managers that invest in private companies, and sell-side analysts following your space • Distribute all news releases and other important communications to this database • Keep your investor presentation up to date, as though you were perpetually out for financing • Identify and pursue presentation opportunities at investment conferences for private companies • Target entries in your database for meetings on a geographic basis or around your presentations at investment conferences • Solicit investor feedback on your meetings and use this to improve your presentation and other communications

IR IS FOR PRIVATE COMPANIES, TOO
By Deborah B. Demer

If you’re like most people, you associate the term investor relations with companies whose stock is traded on the public equity markets. However, there is a pragmatic private-company correlation to IR: start-ups need to raise capital and build relationships with their investors, so that they will invest again and/or lead the way to other investors. In this sense, the practice begins—or should begin—long before the initial public offering. Whether their exit strategy calls for an IPO, an acquisition or another value-driven outcome, the managements of private companies have little to lose and much to gain by thinking, acting and communicating—selectively but consistently—as though they were public.

“Clearly, the content of the business plan and management’s presentation are key to the investment decision,” said one institutional portfolio manager whose firm manages nearly $50 billion in assets, investing in private as well as public companies. “However, the style and tone of the delivery are also very important. You can tell when managements have done this before successfully and when they’ve gotten professional help. There is a certain sophistication and audience sensitivity that sets some entrepreneurs apart from the mainstream.”

“We were a tough sell to begin with, and the economic downturn has only made us tougher,” added a general partner in an East Coast venture capital firm invested principally in healthcare start-ups. “One of my personal benchmarks is a company’s news releases. I want to see a regular flow of news, not excessive, bad news as well as good news. And, if it’s bad news, I don’t want it dressed up as good news or, worse yet, buried under a torrent of good news. I’ve gotten in more than one CEO’s face about that kind of amateurish stuff. It’s like, ‘I’m funding your company; don’t insult my intelligence.’”

DISCLOSURE: OPPORTUNITY VS. REQUIREMENT

Formal disclosures of material news aren’t required for private companies. But, are they desirable? The answer is yes, if the news can be broadly disseminated without negatively impacting the company’s business—e.g., tipping off the competition or damaging employee morale. Also, the private company has the option of selecting which material news it discloses, provided that the selection methodology is consistent. In other words, if you’re planning to start reporting your rounds of financing, appointments to your board of directors and senior management team, or your occasional acquisitions (to name three examples), don’t report some events and not others, unless you have strong business reasons for making exceptions. To the extent possible and practical, be consistent, underscore trends, and you’ll enhance both your credibility and a sense of momentum in the business.

The private company may also give an outlook on expected future events or trends, as long as management can sustain the practice without risk to the business. As many public-company CFOs know, clamming up in mid-stream is like trying to get the proverbial horse back in the barn. Investors and analysts have carried part of the mosaic forward from prior outlooks and may be modeling the business on incomplete or outdated information. It’s a lose-lose situation for the company and the investment professional. Here, too, consistency is paramount for the private company: talk futures or stick to the historical, but be consistent. Optimally, any forward-looking statements would be delivered in full disclosures or other public forums, even though private companies are exempt from SEC rules and regulations.

“Management beliefs and expectations come in many different forms, both verbal and non-verbal, in body language and facial expressions,” commented a Southwest-based money manager who has spent more than 30 years grilling the CEOs and CFOs of public and private companies. “What turns me off are enthusiastic, egocentric entrepreneurs who bound into your office and tell you everything is wonderful, they created the market, they have no competition. Well, you know what? If you have no competition, then you probably have no market. Is your product a ‘nice-to-have’ or a ‘can’t-live-without’? In today’s market, if you want my money, it had better be the latter.”

Added a West Coast sell-side research analyst who has followed enterprise software companies from the bull market of the late 90s through the recent bear market: “What really gets my attention is when a CEO levels with me about the challenges in his business. Every company has its issues and problems, and I’m not talking about the global economy or continued weakness in IT spending, which are universal and therefore impersonal. It’s when a CEO has to turn over his sales force because of low productivity or redirect his R&D efforts around a shift in market demand or lay off 20% of his work force to accelerate break-even. It’s fine if he tells me about it after the fact, after the problem has been solved. Just acknowledge that you had these issues, you identified them, you isolated them, you took these actions. That shows me how you make the tough operating decisions and then execute them.”

INVESTING IN INVESTOR RELATIONS

How much time and money should the private company invest in investor relations before it becomes a necessity? That depends on a variety of factors, including management’s financing requirements and plans, as well as its exit strategy, and its ability to leverage existing internal and external resources. Clearly, efforts and expenses become more concentrated around successive rounds of funding and perhaps during M&A activity. Successful IPOs tend to take on a life of their own—all-consuming in terms of time, but a life funded by the offering proceeds. However, except for these event-driven spikes, the IR investment should remain at a low maintenance level and may, in fact, piggy-back on marketing, corporate communications and/or public relations programs already budgeted and under way.

Which brings us to the matter of resources and, more appropriately, skill levels. Contrary to popular opinion, perhaps, IR is not about marketing the features and benefits of your company to investors as though it were a hot new product. ‘Spin’ and ‘buzz’ may be fine for motivating your sales force and catching the attention of the trade media, but professionals who invest and manage other people’s money for a living need steak, and plenty of it, to back up the sizzle. To meet this demand, their corporate contacts need to be able to provide them with facts—financial and other business information—on a regular, consistent basis. They also need to be able to exercise judgment in all communications and build mutually viable relationships that balance the best interests of the investment community and the company. The analytical, editorial and presentation skills and experience required to do this effectively may exceed those of the marketing communications staff or the public relations agency, which are used to dealing with very different audiences.

“Unfortunately, many young companies delegate day-to-day investor contact to PR people or administrative assistants with elevated titles,” said a Boston stockbroker who manages accounts for small institutions and high-net worth individuals. “When you need information, you get a sales pitch instead. Or, the admin has to take down your questions and then go and get the answers from management. Either way, you can’t have an ongoing, interactive dialogue about the business. It’s very frustrating. Eventually, you lose interest in the company because you can’t keep your clients up to speed, and you look bad. Worst case, you have to redirect them to other ideas that you can get behind and stay behind.”

“A slick sales pitch—you know, form over substance—absolutely turns me off,” said the manager of a Midwestern hedge fund that is active in private placements. “All I want is someone who can give me the facts—about their business model, their markets, their products, their channels, their customers, their competitors, their management team. I don’t care if it’s scribbled on a cocktail napkin, as long as I can read it. Then, I want them to be prepared to answer my toughest questions with additional information. And, if they don’t know the answers, I want them to tell me that. No tap dancing. The next time we talk—if we talk again—I’ll ask those same questions and expect them to have the answers.”

COMMUNICATING INFORMATION, MANAGING EXPECTATIONS

The consensus is clear: IR is not only for public companies, but also for private companies in need of financing. A thoughtful, articulated approach to business content and a sophisticated professional delivery are the common denominators of a private company’s corporate communications program that can evolve into a public company’s investor relations program. Respect the intelligence of your audience, its appetite for information, its aversion to puffery. The 1990s are over; ‘The Next Big Thing’ is as passe as it is meaningless. Aside from pure performance, one of the best ways to demonstrate quality of management is to plan and execute an IR effort that differentiates the company from its peers or competitors, wins the acclaim of the investment community and, most importantly, enhances valuation and lowers cost of capital.

If management needs help with the IR mission, find the right people, either inside or outside the organization, to do the job—people who can read financial statements and provide color commentary on the business drivers behind the numbers. Give them access to management and information. Actively involve them in communications strategy development and decision-making. Empower them to ‘own’ certain relationships with investors, analysts, brokers, and stockholders, as appropriate. It’s probably not a full-time job, which gives you the option of assigning IR part-time to a member of the finance and accounting staff with the requisite interest and aptitude. Or, outsource the function to a pay-as-you-go consulting firm, which provides access to the best practices of other companies. You can even use specialized temporary staffing to off-load the management burden.

Last but not least, learn to manage whatever investor expectations you have set.

“My advice to private companies that want to maximize their visibility with potential investors is to focus on profits,” said a portfolio manager at a Manhattan-based investment advisory group managing assets of more than $3 billion. “The worst sin a private company seeking funding can commit is overpromising. Beyond that, if a company doesn’t know specifically what it’s going to do with the funding it’s seeking, then it’s not going to get any money. You have to have a plan. It’s pretty simple—it’s gone back to the basics.”