Navigating Investor Relationships: Tips for Long-Term Seed Fundraising Success

Solid relationships with seed fundraising investors for long-term success can’t be understated; they are synonymous with subsequent funding rounds, valuable guidance, referrals, and stability during economic downturns. So, let’s explore the strategies for building and maintaining these positive relationships with investors that can mean the difference between a thriving startup and one lagging behind.

The Benefits of Leveraging Investor Expertise

Every interaction with an investor can be an opportunity to learn and improve. But did you know “just one out of 16 companies has instilled formalized feedback loops between shareholders, investor relations teams, and strategy teams”?

This means many businesses are not utilizing investor expertise or linking investors’ feedback to their strategy. Without this critical input, it’s even more difficult for companies to target potential investors who move stock or to tailor an equity story to investors in the future. This shareholder feedback can also be constructive for startups struggling with dropping profits or identity crises — and be the start of an extraordinary turnaround.

So, what kind of insights from investors can you apply to strategic planning?

1. Biases they’ve uncovered about your company and sector. Investors often find over-optimism in growth projections and underestimations regarding operational risks, among other biases. Their balanced and informed findings about a company’s strengths and vulnerabilities can aid strategic planning. Incorporating risk response planning into this process ensures that potential risks are systematically identified and managed, enhancing the overall strategy.
2. Guidance about risks. Investors can often provide unbiased insights about the risks associated with industry trends or a company’s operations. Incorporating this into strategy planning can mean a company tackles pressing challenges and adopts mitigation strategies.
3. Highlighting errors in messaging. Investors are always looking for the full picture, and they can notice breakdowns in communication. But by pushing to see milestones achieved through the strategy, companies can feel the pressure to reinforce their commitment to their growth path.
4. Access to networks and industry connections. Investors often have extensive professional relationships that can facilitate introductions with key players in relevant industries. Leveraging investors’ networks can create mutually beneficial opportunities.

Most importantly, to engage investors as strategic partners for long-term growth, you must build rapport and gain trust. To do this, ask investors thoughtful questions, action suggestions, and express appreciation for feedback. In other words, leave the pitching to one side and start listening.

How Can You Find a Seed Investor?

The first step is defining what your ideal investor looks like. For example, are you looking for pure capital or someone who will play a more active role at your startup? Also, an investor has a lot more worth beyond funding. So, look to see what kind of expertise or connections you would want to take advantage of.

The best source for investors is often other founders. Your peers have received investment before and could help with a warm introduction — peer referrals are a lot easier than a cold email to set up an initial meeting with an investor.

Still, many entrepreneurs leverage their existing business networks or accelerators to get access to active investors. Remember, there are open-sourced lists on AngelList and Crunchbase of seed-stage VCs who might be a match.

It is also worth doing due diligence and researching investors’ preferences: What share of their portfolio includes your industry? Do they spread their portfolio across numerous stocks or a select few? What is their track record of success? How long have they been working with startups specifically, and why? Then, tailor the pitch to align with the specific investor’s interests.

During the pitching stage and while you build rapport with an investor, also examine how they interact with you and your company to see whether you’d enjoy that working relationship.

Finally, it makes sense to have a CRM system in place to centralize communications and monitor conversations, leading to informed decision-making.

Managing Seed Fundraising Investor Expectations

The best way to set and share realistic expectations from the get-go is through an executive summary. It should be one or two pages and include vision, product, information about the team, market size, revenue, financial projections, and any fundraising, past or current. Including a product roadmap summary could indicate what an investment buys, setting even clearer boundaries.

During pre-closing activities, it’s a good idea to spend 60% of any investor meeting asking the investors questions and having a collaborative discussion. If you seem coachable and learn fast, it’s a solid signal of what a long-term relationship with your startup might look like.

You’ll also have to clarify with an investor what type of preferred equity they want to receive in exchange for the checks or funds wired into your company bank account. For example, convertible debt or a Simple Agreement for Future Equity (SAFE).

Convertible debt operates similarly to a loan. When your company secures a Series A round after seed fundraising, the borrowed funds convert into stocks based on the conditions listed in the term sheet. SAFEs entitle investors to future preferred shares whenever a startup does its initial full equity financing. But startups are not obligated to pay interest on the debt if things go awry. So, having these types of agreements in place can also help when setting expectations.

Then, after closing a seed funding round, you must commit to regular communication with investors to demonstrate progress towards meeting established goals or address any potential risks upfront. For that, it’s also vital to understand investor preferences for communication channels.

Providing Efficient Investor Updates To Secure Follow-On Funding

Proactive communication and regular updates automatically build trust. And when investors feel they are kept in the loop, they are more likely to help with introductions, expanding your investor base, and potential hires.

So, to craft a comprehensive and concise investor update, first collate your metrics and data in a Google sheet. If you aren’t even sure what metrics to include, just ask investors directly. For example, if you are a biotech company, investors will be looking for metrics like clinical trial progress (like number of patients enrolled), intellectual property (like patents granted), R&D expenses, product development, market size, regulatory approvals, and financial metrics.

Then, find a way to create charts that clearly represent these metrics in a dashboard. For example, you could choose to invest in a portfolio monitoring or reporting solution. Some companies even use a business intelligence layer to enhance metrics.

Now, the number one rule for metrics when providing updates is: Don’t be afraid to share a certain metric or KPI when it is down. Lowlights are normal, investors will value the transparency, and they may even offer help to turn things around.

For the actual update you’ll send to investors, you want to use images, charts, and tables and include bulleted or numbered lists. Then, include goals hit, customer feedback, new key hires, any good highlights, and how you overcame any struggles. Personalization is key, so if you can highlight a particular part of an investor’s network that you’d like to leverage — ask. Or, if you can give them credit where it is due in any way, do it.

Demonstrating your commitment to transparent communication, good governance, and high performance can proactively engage existing investors so they commit for the long run. And once you’ve built a good relationship at a seed round, the same investors could lead future follow-on rounds or step in to bridge financing.

Mitigating Risks in Investor Relationships

If you have a clear investment agreement that outlines terms and conditions, and you deliver thorough regular updates, you are well on the way to success with investors. These contribute to clearly defined roles and expectations that prevent ambiguity. But there are some other measures you can take.

1. Have the right insurance. By teaming up with a risk management partner to advise you on insurance, you can protect sensitive information and intellectual property and have safeguards to prevent conflicts. For example, shareholders and investors can sue a company’s directors and officers, putting their personal assets at stake. But don’t fret: D&O insurance protects executives and companies from claims made against them.
2. Discuss potential exit strategies with investors. Having a clear plan for how and when investors can expect to realize their returns — through IPOs or M&As — can reduce uncertainties.
3. Ensure investment activities comply with relevant laws and regulations. Stay updated with securities and data protection laws, hire compliance professionals, and perform regular audits. Also, make sure to deliver timely and accurate reporting to regulatory authorities.
4. Diversify your investor pool. Avoid heavy reliance on a single investor, as a wider range of investors will have varying expertise, skills, networks, and resources to bring to the table. A diverse investor base can enhance your company’s credibility and reputation too.

When nurturing long-term seed fundraising investor partnerships, there are many parts of the puzzle to consider. But most importantly, you need a partner to get you through. Founder Shield specializes in knowing the risks startups face when delving into seed fundraising and ensures you have adequate protection. Feel free to reach out to us, and we’ll walk you through the process of finding the right insurance policy for you.

Want to know more about insurance for startups? Talk to us! Please contact us at info@foundershield.com or create an account here to get started on a quote.