Building a startup is not a good project for people easily deterred by setbacks. Between growing a customer base, hiring, managing and retaining talent, striving to meet quarterly objectives, and reporting to investors, startup life is unpredictable at best.
As a founder, odds are good that you’ll have to deliver your fair share of bad news. Breaking it to your investors can be especially vexing. Whether you lost a significant client, parted ways with a key team member, or missed the mark on a financial target, four VCs weigh in on the best ways to tell your investors bad news:
Break the news early and honestly
“I want to hear bad news and I want to hear it early,” says Julie Sandler, managing director at PSL Ventures. “It allows me to be helpful in real time and it mobilizes your entire board to rally around you to turn around a bad situation as quickly as possible.”
Being up front about bad news tends to improve the outcome—and it helps you build trust with your investors. One of Sandler’s founders recently lost a game-changing sale, but with immediate support from the board, they turned it around.
“Some founders might have waited until the next board meeting to obscure the bad news amid other wins,” Sandler says. “By communicating the news early, not only did this founder build deeper trust with the board, but it enabled us to help in ways that moved the needle.”
Brad Svrluga, cofounder and general partner at Primary Venture Partners, agrees. “Once we’ve invested, we’re on the same side of the table,” Svrluga says. “We’d always prefer to know sooner than later if there’s really bad news. When you share early, we can be a part of the solution. If you hold things back and they begin to spiral, it can be a lot harder for us to react efficiently.”
Avoid telling all of them at once
Though investors prefer to hear bad news sooner rather than later, delivering it to all of them in a packed board meeting is a bad call.
“Bringing in key investors as co-owners of the problem is the best answer, but there’s a caveat. … You don’t want all of them in the kitchen at once,” says Svrluga. “With a complex problem to solve, you can end up with a nightmare on your hands if you’ve got too many cooks in the kitchen. Identify one or two trusted and reliable investors and bring them in right away. Work with them to construct and manage a communication strategy to convey the news to everyone else.”
Use the right medium
Jonathan Tower, a managing partner at Catapult VC, says email communication is too one-sided, impersonal, and passive for sharing bad news. “I recommend it be delivered to investors in person, or at least via phone or video conference. When a crisis is occurring, decisions need to be made and opinions need to be sought out quickly,” he says.
Sharing a failure over email can also come across weak and even inconsiderate. “Delivering bad news this way lends the appearance that the founder is hiding from the news, trying to devalue it or deny it,” says Tower. “Choose a mode of communication that strengthens the bond between founder and investor and underscores that both parties are partners collaborating on a long and sometimes rocky journey.”
Loop them in before reaching disaster territory
According to Heather Redman, cofounder and managing partner at Flying Fish Partners, acting preemptively can be the smartest move. “The best approach is to spot something that might go bad in advance—for instance, sales behind pace in month one of the quarter—and ask us for help.”
“The bad news that happens despite our help is partly on your investors, so providing this heads-up is a great way to ensure we’re a team in good times and bad. Ideally, bad news that you couldn’t foresee will be rare,” Redman shares. “When it does happen, write a quick email and call me at the same time. This provides all the details but also shows you have the courage to speak live about it. This builds my confidence in you and gives us a chance to plan disaster recovery together.”