Hey founders, today I’m going to address a crucial topic: When to update your investors with bad news. If you’re an entrepreneur and running a business, you will have to give bad news at some point.
There are many ways to give bad news. One of them is not to give any news at all, let everything go down, and then explain why you have only ruins and not a building on fire. This method isn’t recommended, but some people choose it – I don’t.
There are minor issues or bad news that can be managed in your monthly and quarterly updates. Like missing your quarterly numbers by 3-4%, or if you’re having a tough time recruiting people, or if a particular distributor who was contributing a large part of the business dropped you for reasons unknown or customer complaints. These are the kinds of things you can manage in your monthly and quarterly updates.
However, certain kinds of news shouldn’t be neglected. These should be communicated to the investors immediately. If a co-founder has left, or one of the co-founders has been diagnosed with severe disease and will not be available for the next 6-8 months, or your fundraising efforts are falling through, or a significant client that contributes a substantial chunk of the profit has left. These are the kinds of situations that need to be communicated to the investors immediately, preferably not on e-mail.
What I recommend is organizing a conference call or an in-person meeting. Explain what is going on to the investors face to face, in a way that is direct with no sugar coating. Be humble about the fact that things have gone wrong. Don’t try to play up things to avoid the investors being angry at you. If the situation is terrible, investors have a right to be irritated and will point out things that could have gone better. You should take criticism in your stride as you’re expected to execute successfully. Take responsibility, be direct, and you’ll find that investors will probably come back with solutions for you to manage the mess.
In adverse situations, you should have a turnaround plan. I would recommend having one if you’re going to have a face to face meeting. If you don’t have one, let the investors know and get back to them in a few days or a few weeks. There may be some questions the investors have, for which you may not have the answers. I would recommend not making up turnaround plans on the spot. If you don’t have the answers, tell them. Mention that you’re going to get back to them in 5, 7 or 10 days (or whatever number of days you believe you need) but ensure that you keep those promises.
Delivering bad news should not be difficult. It’s only tricky when you don’t want to give bad news, and you feel hiding is the best way forward. But it doesn’t solve anything. In fact, it only leads to the problem of getting bigger. If hypothetically, the company shuts down, and investors find out that you knew in advance, you could find yourself in a hot legal soup.
I’ll leave you with that, and I would love to know how some of you guys have shared bad news in the past. Also, if you have tips for other entrepreneurs, do share them in the comments.