TRC 003: How to give investors bad news

Read time: 4 minutes

Every founder has had to give their investors bad news at some point.

There are so many variables in running a startup that is inevitable that some of them will go against you at times.

Tougher markets raise the probability of this happening.

Whilst it can be tempting to go all ‘Theranos’ and hide the uncomfortable truth, here are the reasons why it’s better to be upfront with your stakeholders and tips on how to communicate when it happens.

Here’s why you should share:

1. Build trust - Transparently sharing the downs as well as the ups is one of the the best ways of building trust. Conversely, finding out about things you should have been said earlier is the fastest way to destroy it.
2. Get help - It’s highly likely that investors will have more experience of things going wrong - maybe even your specific issue. Not sharing means the potential of losing out on the fastest solution.
3. Know who to turn to - Not every investor is going to react the same way to bad news. Some will grab a shovel and climb into the trench with you. Some won’t reply. And, if we are being honest, some might resort to blame. Sharing bad news helps you work out who is genuinely helpful in finding solutions.
4. Stress - Keeping things bottled up can become a cognitive weight to carry around. Sharing problems and band news with others is a great way of lessening the burden on your mental health.

That’s the why, what about the how?

Day to day, month to month issues are best shared in regular investor updates. These help to establish an atmosphere of transparency between founders and investors.

Many great updates we receive use the ‘Good, bad, ugly’ approach to reporting to investors.

If you have a more substantial problem to report that you want specific help with, this framework can be helpful:

1. Introduction: Begin by briefly summarising the current situation and the main points you will be discussing. Start by acknowledging the seriousness of the situation and the importance of the investors' support. Share your appreciation for their trust and investment, and explain that you will be discussing a challenging topic that will require their attention and collaboration.

2. Background: Provide some context and background information on the specific issue in question and how it came to light. Share any relevant information about the circumstances that led to the issue and how it has been impacting the business. Be transparent and honest in your communication, and provide specific details on the challenges you have faced.

3. Metrics: Present any metrics that provide insight into the problem. Share any data that is relevant to the issue at hand. Use graphs and charts to help illustrate the data and make it easier to understand. Be clear about what the metrics mean and why they are important.

4. Analysis: Analyze the metrics and explain why they may be underperforming. Share any relevant data or qualitative insights. Explain the reasons behind the underperformance, and offer any possible solutions. Be honest about the limitations of the analysis, and be open to feedback and suggestions from the investors.

5. Plan of action: Outline the steps you are taking or plan to take to address the problem. Be specific and provide a clear and realistic timeline for when the actions will be taken. Explain the steps you will take to address the issue and who will be responsible for each step. Share any resources that will be needed to execute the plan, and be realistic about the results that can be expected.  Don't over promise or be overly optimistic.

6. Next steps: Summarize the main points discussed and the next steps for moving forward. Leave time for discussion and be open to feedback and any suggestions that investors may have. Reiterate your commitment to transparency and collaboration, and share how you will continue to keep the investors informed. Finally, thank the investors for their time and support.

Whatever the problem - not sharing it is a lose / lose for investors and founders.

It’s always better to have the pain of the truth now than the pain of the lie later.

TLDR:

Sharing problems:

• Builds Trust
• Brings help
• Reduces stress

Sharing can be done in investor updates or with a simple framework:

• Introduction
• Background
• Metrics
• Analysis
• Action Plan
• Next steps