One thing about high risk/reward entrepreneurship: no matter where the journey ends, you will encounter a lot of setbacks along the way. Managing your investors through the inevitable setbacks is a critical entrepreneurial management skill. If yours is like most entrepreneurial journeys, there will come at least one occasion when the goodwill of your investors will be mission critical to success – or even survival.
Probably the first rule of managing investors through bad news is being proactive. While it’s true that investors don’t like bad news, their distaste for the same is much more intense when they hear it from someone other than the senior founder or executive of the company. This one is easy, in theory if not always in practice: if you’ve got bad news to share, make sure your investors hear it from you first.
Rule two flows from rule one. When you share bad news with investors, you have a chance to take control of the narrative. Do it. Don’t stop with the facts; rather, put them in some context. That means (i) framing the significance of the news; and (ii) suggesting your initial thinking on how to recover from the news. This should be more or less scripted, and very much in terms of the “big picture.” Sort of like the Executive Summary of the business plan: hit the highlights. You can – you’ll likely have to – do a lot of filling in of details later. Don’t get dragged into that process until everyone has had a chance to hear and process your big picture take on the situation.
In terms of framing the significance of the news, you don’t want to be all doom and gloom, but neither do you want to be pollyannaish. Even if you are thinking, to yourself (I have on a couple of occasions) “it’s always darkest just before it turns pitch black,” don’t say that out loud to your investors. The best leaders excel in exuding grace under pressure.
The third rule is not to get dragged into the blame game. There will be enough time for a postmortem later. Don’t waste time and energy and intellect trying to figure out why the ship is in peril until you’ve dealt with the peril. That may include some immediate actions against obvious black hats, but it shouldn’t include broader searches for villains or system failures. Focus on saving the ship until it is out of danger.
Next, while it’s good to have an explanation for your investors (even if it will likely evolve over time) don’t make excuses. As the captain of your startup ship, you are responsible for everything that happens on it. My personal experience confirms that investors are really turned off by defensive, blame-shifting entrepreneurs. A dispassionate explanation is generally appreciated. An emotional casting of aspersions on subordinates or competitors or circumstances ... whatever ... isn’t. Stay cool.
Finally, if you’ve done a generally good job managing your investors, you will have a clear idea of who your prime investor contact is. Typically, it’s the lead investor in the last round, but it could be an earlier lead investor or, even now and again, some other investor. Get to that person first and make part of the initial call a discussion of how to roll out the news to the investors generally. Think of your lead investor as much as a potential communications ally as a communications target.
Communicating bad news to investors is no entrepreneur’s idea of fun. Unfortunately, it’s something most entrepreneurs will have to do more often than they’d prefer. So, do it right. Get on it sooner rather than later; control the narrative; and focus on recovery, not blame. Think of it as an opportunity to demonstrate leadership under pressure – something almost to be looked forward too.