Investment capital is a critical component for any company to achieve their long-term goals and to create value. While most organizations and management teams understand the importance of investors and investment capital, how organizations communicate and construct business narratives to attract and maintain a healthy investor base, commonly known as investor relations (IR), is not well understood by early stage and growth companies. A company’s IR strategy is a critical component to creating value for the organization and investors, and the importance of a strong IR department continues to grow. Often IR takes a very complex business strategy and simplifies it so investors can understand the company’s growth strategy.
The most important impact of IR directly affects management and all investors. IR can impact the company’s valuation and stock price. Various research studies show that the quality of an organization’s IR program is associated with a premium or discount to the stock price. One publication suggests that poor IR can result in a discount in the company’s stock price of 15% to 40%.
To add, management’s credibility is significantly affected by the story and financial reporting presented to investors. If a company posts earnings that continuously fail to meet guidance and Wall Street expectations, the company’s stock price will drop. Companies that fail to meet communicated strategy initiatives will lose face with investors quickly. Never forget, investors remember their investment losses longer than their gains.
Another reason why IR continues to grow in importance is because of how instantaneous and impactful new news and data are transmitted. How management teams interact with these rapidly informed stakeholders goes well beyond face-to-face interactions and into various media platforms such as Twitter, Facebook and LinkedIn.
A well-conceived and proactive IR program can potentially prevent an organization from running into trouble. There are certain sophisticated investor strategies implemented by fund managers known as shareholder activism that can alter the way an organization is run and managed.
Shareholder activism and the term activist investor is defined as “an investor that acquires a non-controlling minority stake of the voting class of a public company’s equity securities to effect changes within the target company.” Usually activist shareholders see value to be unlocked in a company’s stock price but see corporate governance and lack of execution by the company as a hindrance to success. Given the record highs we are experiencing in the stock markets, value is difficult to find and shareholder activism has been on the rise.
A strong IR department can proactively identify disconnects and tensions that arise within the shareholder community and an organization. We will discuss in a future article, how an IR department can look to solve and mediate issues before the activism occurs, thus potentially saving $10 million+ (the average activist campaign cost) in activist campaign costs!
While some view the IR function as a large corporation need, IR can actually be of critical importance in smaller organizations too, whether they are private or public. Publicly traded companies with smaller capitalization are often under followed by Wall Street and institutional investors. They lack significant analyst coverage and have poor trading volume, creating greater stock price volatility and bigger disconnects between the underlying value and stock price. Such volatility reduces the liquidity of the company’s most valuable currency: its publicly traded stock. Thus, it also hurts a company’s ability to do acquisitions with that stock. The ability to attract sell side analysts, published investment research and institutional investors can improve liquidity and the company’s valuation.
While private growth-stage companies are not held to the same financial reporting standards as publicly traded companies, they do have existing investors and usually want to attract new investors. Likewise, premium valuations are also critical going into a transaction or a sale. All corporations need to make sure they are outlining proper growth milestones and communicating regularly with their existing investors. A content group of existing investors can help to complete future funding rounds and will become references for new investors. No management team wants their largest shareholders to be upset going into their next funding round or going into a transaction, such as an acquisition, IPO or sale. Development and communication of unrealistic or difficult to obtain company milestones can lead to disgruntled investors and potentially a lower valuation than the previous round (i.e. the proverbial “down round”).
Whether a company is raising new capital or not, there is a benefit to going out on the road and setting up non-deal road show meetings and conference presentations. No management team ever leaves their first meeting with a venture capital firm or family office investor with a check in hand. It takes time to build a trusting relationship with the investment community. Investors each have their own due diligence and investment process that can take several months to complete. Making sure your compelling story is on their investment radar screen is critical to securing future funding. They need to know your company’s story. They need to know what makes your product or service unique and compelling to justify a premium valuation.
Investor relations has significant importance to organizations and a strong IR program can lead to increased value. Companies from early stage to publicly traded should consider implementing an IR program whether that is through an internal professional or through an outsourced IR firm.
Commenda Capital provides capital, advisory, investor relations and operational support to optimize the value of organizations for all stakeholders, including shareholders, employees and customers.