Investor Relations, PBL Task 10
Open Task 10
Problem: How to create trust among inverstors?
Learning objectives:
LO1 What are the different investor types?
LO2 How to attract, maintain and recover investors?
LO3· How to communicate to/with investors?
LO4· How to manage company/brand reputation (trust)?
Personal Study:
LO1 What are the different investor types?
Types of Business Investors
Small business owners sometimes need to rely on investors for financing. Whether the company is introducing a new product, expanding operations or performing a capital upgrade on equipment to help lower production costs, investor resources can provide help. There are several types of business investors; in order to determine which kind is right for your company, become familiar with as many types of investors as possible.
Angel Investors
An angel investor is typically an individual with significant financial resources that invests in start-up businesses, according to Entrepreneur.com. An angel investor tends to follow his instincts and invest in businesses that may otherwise have a hard time attracting other kinds of investors. In some cases an angel investor may only want a percentage of return on his investment, and in other cases he may ask for partial ownership in the company and a say in management decisions. Angel investor arrangements typically range from hundreds of thousands up to deals worth a few million dollars.
Peer-To-Peer Lending
Peer-to-peer lending is typically arranged via websites that bring investors and small business owners together, says Consumer Reports.org. Entrepreneurs create a profile and post a business plan on a peer-to-peer lending website, and lenders bid on investing the business. The owner and the lender, which is commonly a private individual, negotiate an interest rate for the investment and the lender then supplies the funds to the entrepreneur.
Venture Capitalists
According to CNN Money, a venture capitalist is a funding organization that typically gets involved in companies that have already shown a history of returns. Venture capitalist organizations are rarely interested in risky start-up companies that may require a small amount of capital to get started. Venture capitalist organizations are typically interested in deals worth several millions of dollars, according to CNN Money. Venture capitalists normally ask to be placed in a position of partial ownership in the company in which they invest, and also expect to have a say in management decisions.
Banks
A bank loan works in much the same way as other business investments. Banks require the entrepreneur to describe his business and present a business plan, and then decides whether it is interested in providing funding in the form of a loan.
Personal Investors
Friends and family members with means can also be considered business investors. CNN Money points out that it is important to use an investment contract with friends and family members, just as you would with any other type of investor. The contract should outline the size of the investment, the rate of return and any ownership arrangements that may also be part of the agreement.
Defining The 3 Types Of Investments
The word "investment" has become muddled with overuse. Referring to a stock or a bond as an investment is still in regular use, but now people make "investments" in their education, their cars and even their flat screen TVs. In this article, we will look at the three basic types of investment as well as some of the things that are definitely not investments - no matter what the commercial says.
The Three Types of Investment
Investment, as the dictionary defines it, is something that is purchased with money that is expected to produce income or profit. Investments can be broken into three basic groups: ownership, lending and cash equivalents.
Investment, as the dictionary defines it, is something that is purchased with money that is expected to produce income or profit. Investments can be broken into three basic groups: ownership, lending and cash equivalents.
Ownership Investments
Ownership investments are what comes to mind for most people when the word "investment" is batted around. Ownership investments are the most volatile and profitable class of investment. The following are examples of ownership investments:
Ownership investments are what comes to mind for most people when the word "investment" is batted around. Ownership investments are the most volatile and profitable class of investment. The following are examples of ownership investments:
Stocks
Stocks are literally certificates that say you own a portion of a company. More broadly speaking, all traded securities, from futures to currency swaps, are ownership investments, even though all you may own is a contract. When you buy one of these investments, you have a right to a portion of a company's value or a right to carry out a certain action (as in a futures contract).
Stocks are literally certificates that say you own a portion of a company. More broadly speaking, all traded securities, from futures to currency swaps, are ownership investments, even though all you may own is a contract. When you buy one of these investments, you have a right to a portion of a company's value or a right to carry out a certain action (as in a futures contract).
Your expectation of profit is realized (or not) by how the market values the asset you own the rights to. If you own shares in Sony and Sony posts a record profit, other investors are going to want Sony shares too. Their demand for shares drives up the price, increasing your profit if you choose to sell the shares.
Business
The money put into starting and running a business is an investment.Entrepreneurship is one of the hardest investments to make because it requires more than just money. Consequently, it is also an ownership investment with extremely large potential returns. By creating a product or service and selling it to people who want it, entrepreneurs can make huge personal fortunes. Bill Gates, founder of Microsoft and one of the world's richest men, is a prime example.
The money put into starting and running a business is an investment.Entrepreneurship is one of the hardest investments to make because it requires more than just money. Consequently, it is also an ownership investment with extremely large potential returns. By creating a product or service and selling it to people who want it, entrepreneurs can make huge personal fortunes. Bill Gates, founder of Microsoft and one of the world's richest men, is a prime example.
Real Estate
Houses, apartments or other dwellings that you buy to rent out or repair and resell are investments. The house you live in, however, is a different matter because it is filling a basic need. The house you live in fills your need for shelter and, although it may appreciate over time, it shouldn't be purchased with an expectation of profit. The mortgage meltdown of 2008 and the underwater mortgages it produced are a good illustration of the dangers in considering your primary residence an investment.
Precious ObjectsGold, Da Vinci paintings and a signed LeBron James jersey can all be consideredan ownership investment - provided that these are objects that are bought with the intention of reselling them for a profit. Precious metals and collectibles are not necessarily a good investment for a number of reasons, but they can be classified as an investment nonetheless. Like a house, they have a risk of physical depreciation (damage) and require upkeep and storage costs that cut into eventual profits.
Houses, apartments or other dwellings that you buy to rent out or repair and resell are investments. The house you live in, however, is a different matter because it is filling a basic need. The house you live in fills your need for shelter and, although it may appreciate over time, it shouldn't be purchased with an expectation of profit. The mortgage meltdown of 2008 and the underwater mortgages it produced are a good illustration of the dangers in considering your primary residence an investment.
Precious ObjectsGold, Da Vinci paintings and a signed LeBron James jersey can all be consideredan ownership investment - provided that these are objects that are bought with the intention of reselling them for a profit. Precious metals and collectibles are not necessarily a good investment for a number of reasons, but they can be classified as an investment nonetheless. Like a house, they have a risk of physical depreciation (damage) and require upkeep and storage costs that cut into eventual profits.
Lending Investments
Lending investments allow you to be the bank. They tend to be lower risk than ownership investments and return less as a result. A bondissued by a company will pay a set amount over a certain period, while during the same period the stock of a company can double or triple in value, paying far more than a bond - or it can lose heavily and gobankrupt, in which case bond holders usually still get their money and the stockholder often gets nothing.
Your Savings AccountEven if you have nothing but a regular savings account, you can call yourself an investor. You are essentially lending money to the bank, which it will dole out in the form of loans. The return is pitiful, but the risk is also next to nil because of the Federal Deposit Insurance Corporation (FDIC).
Your Savings AccountEven if you have nothing but a regular savings account, you can call yourself an investor. You are essentially lending money to the bank, which it will dole out in the form of loans. The return is pitiful, but the risk is also next to nil because of the Federal Deposit Insurance Corporation (FDIC).
Bonds
Bond is a catchall category for a wide variety of investments from CDs and Treasuries to corporate junk bonds and international debt issues. The risks and returns vary widely between the different types of bonds, but overall, lending investments pose a lower risk and provide a lower return than ownership investments.
Bond is a catchall category for a wide variety of investments from CDs and Treasuries to corporate junk bonds and international debt issues. The risks and returns vary widely between the different types of bonds, but overall, lending investments pose a lower risk and provide a lower return than ownership investments.
Cash Equivalents
These are investments that are "as good as cash," which means they're easy to convert back into cash.
These are investments that are "as good as cash," which means they're easy to convert back into cash.
Money Market Funds
With money market funds, the return is very small, 1 to 2%, and the risks are also small. Although money market funds have "broken the buck" in recent memory, it is rare enough to be considered a black swan event. Money market funds are also more liquid than other investments, meaning you can write checks out of money market accounts just as you would with a checking account.
With money market funds, the return is very small, 1 to 2%, and the risks are also small. Although money market funds have "broken the buck" in recent memory, it is rare enough to be considered a black swan event. Money market funds are also more liquid than other investments, meaning you can write checks out of money market accounts just as you would with a checking account.
Close, but Not Quite
Your education is called an investment and many times, it does help you earn a higher income. A case could be made for you "selling" your education like a small business service in return for income like an ownership investment.
Your education is called an investment and many times, it does help you earn a higher income. A case could be made for you "selling" your education like a small business service in return for income like an ownership investment.
The reason it's not technically an investment is a practical one. For the sake of clarity, we need to avoid the ad absurdity of having everything be classified as an investment. We'd be "investing" every time we bought an item that could potentially make us more productive, such as investing in a stress ball to squeeze or a cup of coffee to wake you up. It is the attempt to stretch the meaning of investment to purchases, rather than education, which has obscured the meaning.
Not InvestmentsConsumer purchases - beds, cars, TVs and anything that naturally depreciates with use and time - are not investments. You don't invest in a good night's sleep by buying a foam pillow, or invest in entertainment by buying an mp3 player. Unless you're very famous, and even then, it's a stretch, since you can't reasonably expect someone to pay more for your pillow than the initial purchase cost. Don't take it personally, but there's very little demand in the second-hand pillow market.
The Bottom LineThere are three types of investments: ownership, lending and cash equivalents. There is no fourth category of consumer purchases. Admittedly, it's a clever piece of advertising that removes some of the guilt from impulse purchasing; you're not spending money frivolously, you're investing! The decisive test is whether there is a potential to turn a profit. The important word is "potential" because not every legitimate investment makes money. Making money through investing requires researching and evaluating different investments, not simply knowing what is and is not an investment. That said, being able to see the difference between an investment and a purchase is an essential first step.
Not InvestmentsConsumer purchases - beds, cars, TVs and anything that naturally depreciates with use and time - are not investments. You don't invest in a good night's sleep by buying a foam pillow, or invest in entertainment by buying an mp3 player. Unless you're very famous, and even then, it's a stretch, since you can't reasonably expect someone to pay more for your pillow than the initial purchase cost. Don't take it personally, but there's very little demand in the second-hand pillow market.
The Bottom LineThere are three types of investments: ownership, lending and cash equivalents. There is no fourth category of consumer purchases. Admittedly, it's a clever piece of advertising that removes some of the guilt from impulse purchasing; you're not spending money frivolously, you're investing! The decisive test is whether there is a potential to turn a profit. The important word is "potential" because not every legitimate investment makes money. Making money through investing requires researching and evaluating different investments, not simply knowing what is and is not an investment. That said, being able to see the difference between an investment and a purchase is an essential first step.
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LO2 How to attract, maintain and recover investors?
How To Attract The Right Investors For Your Startup
A good team of investors can be the foundation of your startup’s success, but a bad one can obliterate even the strongest ideas. Investors can provide more than capital to your business — they can become resources for organizing, marketing, and realizing ideas. Knowing what to look for in an investor and being able to attract the best kind of investors are vital skills for any new entrepreneur.
Attracting Investors
As a newbie with limited experience, how do you convince potential investors you are worth listening to — and get them to buy into your idea? Here are two qualities I strongly believe are key with any investor:
Communication: In a time when people are constantly connected online, it’s essential to be good at correspondence in its simplest form. People hate being relegated to your voicemail, and unanswered emails make it appear that you don’t have time or don’t care about responding.
Our investors know they can call me anytime, and I’ll always pick up the phone or get back to them quickly. Respond to phone calls and voicemail messages and make time — not just to read, but also to thoughtfully answer emails every day.
Honesty: Being truthful is obviously non-negotiable. If you misrepresent yourself or your business, you’ll be dead in the water.
Making cautious or even negative projections shows investors you’re honest with them and also capable of being realistic about your project’s potential problems. Underpromising and over-delivering is your best bet, and an honest assessment of a project’s strengths and weaknesses is crucial.It’s natural to think seducing investors with best-case-scenario figures is the most effective way to get funding for a new project. Actually, the opposite is true. Nothing will torpedo an investor’s confidence in you faster than projecting everything through rose-colored lenses.
How Can I Attract Investors for a Start-Up Business?
Attracting an investor, whether it's a venture capitalist or angel investor, is no simple task, especially for a start-up. According to venture capitalist Jim Casparie, investors want "Ideas that can change the world." It takes time and patience to develop solid leads for investors. You can attract investors for a small business with preparation, planning, strategy and proper research. Finding an investor may be the key to launching your start-up business successfully.
Step 1
Prepare a thoughtful, well-researched business plan. Don't simply make statements about how successful the idea will be. Back up your statements with proof in the form of case studies and research studies. Gather information about potential competitors, and how you can set yourself ahead of others in your industry. Hire a business consultant to help you draw up the business plan if you're not familiar with the process. A convincing and thorough business plan is key to attracting investors.
Step 2
Network with other business people in your community and general area. Attend networking events, business fairs, seminars in your intended industry, and similar functions to pass out business cards and start establishing these connections.
Step 3
Save a significant sum of your money to invest in the business before seeking investors for the rest. If you approach an investor after you have put your money on the line, he may take your idea more seriously. Technology entrepreneur Tim W. Knox calls it "having skin in the game." If you're not willing to invest in yourself, he asks, "Why should anyone else be willing to risk his or her money in your business idea?"
Step 4
Ask for face-to-face meetings with potential investors. Prepare a computer presentation, video or other resource to demonstrate and back up your business plan. Give a demonstration of how your product or service works to boost the interest of investors.
LO3 How to cummunicate to/with investors?
Choosing The Right Strategy When Communicating With Investors
Earlier this year, I wrote a post about the advantages of entrepreneurs having a strong communications plan for investors. The more engaged investors are in a venture the stronger and more beneficial the relationship can become. Of course every business and each investor is different. I have found that customizing my communications strategies to the unique wants of my investors and the needs of the company has been very effective. Here are a few strategies that I have used in the past.
First, you can’t go wrong with formal communications devices like written monthly reports. Monthly reports containing P&L information are a great way to inform investors about the status of your company and where funds are being allocated. This is especially helpful in entrepreneurial endeavors because investors can recommend course corrections if they see any “red flags” in the P&L report. They also might be able to suggest connections that can help your venture. This type of insight and guidance is invaluable when starting a company. One last thing to note regarding monthly reports is that they don’t need to be but so comprehensive. As I will discuss later, monthly reports should give a detailed snapshot of your company at that time. There are more effective ways to provide a holistic view of the status of a company.
A second strategy that I have used is monthly conference call updates with investors. Some of the investors that I have worked with in the past prefer having the ability to ask questions about the report. I still provide written documents containing financial information but instead of just sending documents to read at their leisure, I review the report on a conference call. This approach adds a personal touch to the process. It shows engagement and the willingness to answer any tough questions from investors. I also have found that starting a conversation with investors can be great for brainstorming ideas. We can share ideas and advice more freely than on email. Although I have used conference call updates frequently, one tactic that helps make the calls worthwhile is to create a script before so that I hit every point that I want to touch on.
A third strategy is in-person quarterly or annual meetings. This is probably the most effective communication strategy. Investors often expect that companies provide time for them to share their knowledge and provide advice because that is one of their responsibilities as an investor. When they have the opportunity to meet with you face-to-face and to see the operational side of the company, they have a better understanding of where improvements can be made or where successes are being had. I can recall a number of great experiences during in-person, collaborative meetings with investors because we have been able to brainstorm ideas and identify growth opportunities.
These are just a few different strategies that have worked well for me. The key to any communications strategy in business is honesty. Investors are genuinely interested in the success of their ventures so being honest about the status of the company is crucial to its survival. If you are interested in learning more about investor communications check out my New York Times Dealbook article on the subject here.
As I mentioned earlier, each company and each investor is different. What are some of the best communications strategies you have used?
LO4 How to manage company/brand reputation (trust)?
Online Reputation Management
- What is brand reputation?Brand Reputation = Customer perception of your company as well as its products and services.
- Why manage your brand’s reputation?If your brand reputation is bad, no one would want to associate with your company or buy products/services from you. A brand’s reputation can make or break the company. Just Google your company or brand name and see what comes up. If what you see is unflattering then you have a serious problem at hand because you will lose the majority of prospective customers who prefer to look you up on major search engines before even coming to your website and deciding to do business with you.
- Why monitoring is key to managing your brand’s reputation?Listening to what people are saying about your company, its products or services and key personnels is the key to managing your brand’s reputation. If people are complaining about your company or product/services on social media, you want to be able to find that and take action immediately to diffuse the situation. In a hyper-connected social world, the risk of not responding to negative comments or conversations could be huge. A negative tweet or Facebook post that goes viral will do unimaginable damage to your brand’s reputation. There are tons of cases of brands getting destroyed or permanently scarred by either not responding to complaints online or responding back in a negative tone.Let’s take the recent example of Delta Airlines. In 1985, they allegedly argued in a court case that they should pay less for a gay plane crash victim compared to a straight one. It was an old case but was recently covered by OMGFacts, a popular website, that publishes interesting and quirky facts every day. Their twitter account has 3.3 million+ followers so the Delta court case reached millions of users and thereafter, it was re-tweeted and re-posted hundreds of times across Twitter, Facebook and Blogs.
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