Juan José Cervantes
Managing Partner
Trebol Capital
/
Expert Contributor

Why Should Startups Report to Investors?

By Juan José Cervantes Mena | Mon, 07/11/2022 - 13:00

After having analyzed several, perhaps dozens of startups, you have already invested in one, but what’s next? What can you expect?

If you invest in a startup that has been operating for a long time or where funds are invested, they surely have a formal or advisory board that helps supervise the direction of a company and guide the entrepreneurs. And you, as an angel or minority investor, expect someone to be doing that job and generate the reports they send to you.

A board must have a calendar, regular meetings (normally every three months), have timely information and keep track of important issues where the right questions are being asked and opportunities arise for entrepreneurs.

However, the timely delivery of reports is the most basic input for the investors and board to understand the current state of the company and to have the necessary information to make decisions. Usually, these reports must be shared with the rest of the investors.

Of course, every entrepreneur should determine which frequency of updates works best for the startup. Usually startups send them monthly, along with a quarterly report based on the meeting with the board. Sometimes the entrepreneur believes that updating investors once every three months is sufficient.

Investor reports are vital for any startup business in any stage of maturity. It’s important to update your investors on the changes your company experiences. Reporting to your actual investors helps build trust with them and can also be the basis to attract the new investors.

Investment updates not only keep investors in the loop about the startup’s progress, financial themes, market changes or other critical issues but they also help entrepreneurs see “the big picture.” 

Monthly investment reports, considered a good practice, keep investors briefed, assist the founder in maintaining a healthy relationship with investors and help in overcoming challenges and problems.

But as an investor, you must consider two very important aspects: the bases and terms of what you negotiated regarding how the report is going to be shared in terms of frequency, format, etc. and the characteristics of the metrics that you want to see in those reports to monitor the company and understand where you can help.

If you invested in a startup that is already reporting monthly or quarterly, good for you. But if the entrepreneur is not used to doing that, then you should work with him and define both periodic reports and establishment of a board of directors.

To achieve this, the entrepreneur must take it seriously. The most common problems are not being consistent in both the frequency and format of periodic reports, not having an agenda for board meetings, canceling meetings or not sending consistent information prior to the meeting, which reduces the formality of the exercise.

In the case of characteristics that will be in the report, we should define those that are appropriate for the type of business model in which we are investing, since they will not be the same metrics that are evaluated for a business selling a product or service, a subscription model or a transactional model.

Even though there are several metrics that are handled in the jargon of startups and that we certainly hear from the investment evaluation phase until the day-to-day operations begin, such as CAC, LTV, MRR and ARR, we must avoid falling into the temptation of vanity metrics that do not provide useful information about the business and focus on the important ones. For example, two of the “must” metrics are burn rate and runway. Burn rate is the amount of money your business needs in a certain period—usually a month—to cover all expenses, and runway refers to how many months your business can keep operating before it's out of money.

To help as an investor, deeply analyze the business model in which you invested and on which its value proposition is based. Working together and identifying along with the entrepreneur the key metrics to control the business and its performance, not simply to report, will help both of you to communicate better and to establish which metrics you want to report on a regular basis.

From your side as an investor, develop a simple scoreboard, especially at the beginning, and evolve your metric panel as the startup evolves, while doing a lot of reading and research to find other metrics that might interest you.

Once you have the report and you talk with the entrepreneur, that is when the investor can provide advice or proposals to correct or improve the startup’s situation. It is useless to demand a monthly or quarterly report if no action is taken on what is being reported.

Investors always will want to know what’s going on with their investment but they shouldn’t have to ask. We know that the entrepreneur has a difficult position because he needs to launch the startup, raise capital, attend events, etc. And if that was not enough, he also must generate the monthly or quarterly report. But more than a commitment or tedious thing to do, you as the investor should make him see that this is one of his duties. He should also understand it as something that allows him to see the broader picture and strengthen his relationship with investors.