Investor Update

What is an investor update?

Investor update (German: Investoren-Update) refers to the regular, usually written report from the management to the shareholders and investors of a company. Investor report and shareholder update (German: Investorenbericht) are also in common use. The report provides information on the development of key figures, liquidity, targets achieved and missed, and the company's need for support.

Investor updates form part of ongoing investor communication between two funding rounds. They serve two functions at once. First, they satisfy the contractual information obligations under the participation agreement or shareholders' agreement (information rights). Second, they build among existing investors the trust that helps decide whether they take part in the next round. The figures come from the company's internal reporting (management reporting); the update is its condensed extract for investors. At the investors, it feeds into investment controlling, that is, the ongoing evaluation of their holding.

Investor update and contractual reporting obligations

An investor update is not required by law. The German Limited Liability Companies Act (GmbHG) gives every shareholder a right to information and inspection on request (Section 51a GmbHG), but no claim to regular reports. That arises only by contract. Participation agreements commonly oblige the company to provide monthly or quarterly reports with defined content and fixed deadlines, and also to submit the annual budget and annual financial statements.

The update can satisfy these obligations if it contains the contractual content in full and goes to all entitled parties on time. If the contract requires, for example, a monthly business management evaluation (the standard report from bookkeeping) with a liquidity overview, an update with selected key figures is not sufficient. A division into two parts is therefore usual: a short update with context and commentary and an annex with the figures owed under the contract.

Structure of an investor update: content and template

An update is useful if it is structured the same way each time and can be read in a few minutes. The following building blocks have proved their worth in practice:

1. Key figures: a fixed selection of five to eight measures in the same order, each with the previous period and the plan,
2. Liquidity: bank balance, monthly cash outflow and runway, that is, the number of months for which the liquid funds last at the current cash outflow,
3. Progress: two to three specific developments, such as customers won, product milestones or hires,
4. Problems: two to three points that are not going to plan, each with its cause and planned measure,
5. Requests: specific requests to the recipients, such as contacts at particular customers, candidates for an open position or experience with a market,
6. Outlook: the priorities until the next update.

One to two pages are enough. Longer updates are skimmed, and what is essential gets lost in the detail.

Reporting problems openly

What determines the effect of an update is above all the section on problems. An update that reports only successes loses credibility after a few issues. Those who report plan shortfalls early, themselves and together with a measure create the basis for investors to stay on board even in difficult phases. In the following update, this includes a sentence on what became of the announced measure.

Specific requests

Existing investors have networks that they can use only if they know what is being sought. A request for an introduction to two named target customers or for candidates for a head of sales with industry experience leads to responses more readily than the general remark that contacts are welcome.

Frequency, recipients and confidentiality

A monthly rhythm is common for fast-growing companies and a quarterly one for steadier business; the contract often prescribes a minimum frequency. More important than frequency is reliability. A fixed date, for example ten working days after the month end, presupposes an orderly monthly closing and shows the recipients that the finance function is sound. A missing update is itself read as news.

Recipients are generally all shareholders, occasionally in two versions: a detailed one for investors with contractual information rights and a shorter one for business angels and smaller participants. If individual shareholders receive more detailed information than others, the basis for this should be set out in the shareholders' agreement, which all shareholders have usually approved.

Updates contain confidential information and are easily forwarded. They should be marked as confidential, and the investment documentation should oblige the recipients to maintain confidentiality. Towards strategic investors from the same market, competitively sensitive information such as prices and customer names is left out.

Investor updates in a follow-on round and due diligence

In preparing a follow-on round, the updates of recent months evidence the management's reliability against plan. New investors speak to the existing investors and ask whether plans were met and problems reported openly. The willingness of existing investors to take part in the new round is an important signal to new prospects.

In due diligence, reviewers compare the figures in the updates with the bookkeeping, annual financial statements and data room, and deviations require explanation. Key figures in updates should therefore be derived from the bookkeeping, forecasts expressly marked as such and definitions kept the same across all issues.

Practical example: monthly investor update of a software company

A software company sends its monthly update to all shareholders ten working days after the month end. The issue for June contains, among other things:

• Monthly recurring revenue (MRR): EUR 189,000 after EUR 180,000 in the previous month, an increase of EUR 9,000 or 5%. The plan was EUR 195,000, so the deviation is EUR 6,000 or 3.1%.
• Cancellations: 3 of 120 customers at the start of the month, that is, a monthly churn rate of 2.5%.
• Liquidity: bank balance EUR 2.1 million, monthly cash outflow after deduction of receipts (net burn) EUR 140,000, runway 2,100,000 / 140,000 = 15 months.
• Progress: contract signed with a retail company with an annual contract value of EUR 60,000.
• Problem: The appointment of the head of sales is delayed by three months. Measure: a recruitment consultancy has been engaged; until then the management takes over the tasks.
• Request: contacts to purchasing managers in food retail.

The update runs to one page. The monthly evaluation owed under the contract, with income statement and liquidity overview, is attached as an annex. In the July update, the management reports whether the recruitment consultancy has presented candidates, and thereby closes the point from the previous month.

For the recipients, a clear picture emerges within a few minutes: growth is slightly below plan, the open head of sales position is named as the cause and linked to a measure. With 15 months of runway, enough time remains to prepare the next round without time pressure. Follow-up questions are hardly necessary, because plan, previous month and deviation are already in the text.

Distinction: investor update, management reporting and board meeting

• Information rights: the contractual and statutory basis of reporting. The update is the form in which a company serves these rights on an ongoing basis, and often goes beyond them in content.
• Board meeting: The meeting paper is addressed to the advisory board and prepares resolutions. The update goes to all investors and serves to inform.
• Management reporting: the complete internal reporting for management and advisory board. The investor update is a condensed extract from it that goes to all investors.
• Investment controlling: the evaluation at the investor. The update supplies it with part of the data it needs for this.
• Pitch deck: addressed to prospective investors and presents the opportunity. The update reports to existing investors on actual development.

Common mistakes

• Changing key figures. If each issue shows different measures or changes how they are calculated, no comparison is possible, and the suspicion arises that the most favourable measure was chosen each time.
• Only good news. An update without problems does not reassure but looks incomplete. At the latest in the next round, developments that were left unmentioned come up.
• Irregular dispatch. Updates that appear only in good months say more by their absence than by their content.
• No runway. The reach of the liquid funds is the figure investors look for first. If it is missing, follow-up questions come.
• Contractual content missing. If the update does not contain what the participation agreement requires, the company breaches its information obligations even though it reports regularly.
• Forecasts not marked. If expected contracts are presented as if achieved, deviations arise in due diligence that damage the credibility of the entire reporting.

Frequently asked questions

What belongs in an investor update?

A fixed selection of key figures with the previous period and plan, bank balance, cash outflow and runway, the most important progress, problems with the respective measure, specific requests and a brief outlook. It must also contain what the participation agreement requires as a report, if necessary as an annex.

Is an investor update required by law?

No. The obligation to provide regular reports arises only through the participation agreement or shareholders' agreement. Without a contractual rule, shareholders can only demand information and inspection in individual cases.

Should an update appear monthly or quarterly?

That depends on the contract and the pace of the business. With fast growth or tight runway, a monthly rhythm is common; for steadier business, the quarter is often enough.

Who should receive the update?

All shareholders, if appropriate in differing levels of detail. Whether advisory board members, observers or lenders also receive it follows from the respective agreements.

How should a bad quarter be handled?

Openly and early. The update states the deviation, explains the cause, describes the measure and takes it up again in the next issue. This last step is often omitted but contributes particularly to trust.

May earlier updates be passed on to prospective investors?

Yes, if a confidentiality agreement is in place and no confidentiality obligations towards customers or partners stand in the way. In a follow-on round, the updates of recent months often belong in the data room.

The Roemer Capital view

The updates of the past one to two years are among the first documents we request when preparing a follow-on round. They show how reliably the management plans and how openly it reports setbacks. New investors gain this impression from conversations with the existing investors, and it can no longer be corrected shortly before a round.

In fractional CFO mandates, we also take on investor communication, including the set-up and preparation of the updates. We define key figures and definitions once, derive them from the monthly closing and link the update with the contractual reporting obligations, so that one report serves both purposes.